The Tribune

• Pintard: Don’t view corporate income tax ‘in isolation’

• Warns The Bahamas has ‘very small margin for error’

• Calls for ‘fulsome reform’ of Business Licence regime

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Opposition’s leader yesterday urged the Government to avoid “a piecemeal approach” to reform in the FNM’s response to the corporate income tax proposal, warning: “We have a very small margin for error.”

Michael Pintard told Tribune Business that corporate income tax must not be viewed “in isolation”, but instead be one element of a comprehensive review and reform of the entire Bahamian tax system, otherwise the country could suffer “unintended consequences” when change is implemented.

Speaking after detailing the Free National Movement’s (FNM) position on the Government’s corporate income ‘green paper’ in a letter to Simon Wilson, the Ministry of Finance’s financial secretary, he added that The Bahamas has an “obligation to get it right” on tax reform through wide consultation, conducting the necessary empirical studies and seeking expert advice.

Mr Pintard, in yesterday’s letter (see other article on Page 24B), did not oppose a corporate income tax in principle given the international pressures and The Bahamas’ commitment to the G-20/OECD 15 percent ‘global minimum tax’ drive. However, he added that the implementation of such a tax must be accompanied by “fulsome reform.... that would abolish” the current Business Licence fee regime that is levied on companies’ gross turnovers as opposed to net profits.

The Government is proposing to do exactly that in three of the four ‘green paper’ options or, at the very least, undertake far-reaching Business Licence fee reform. Mr Pintard, though, told Mr Wilson that Bahamian companies generating $1m per year or less in turnover should have the option to “pay a set fee based on a structured and tiered system” as opposed to a Business Licence fee or corporate income tax.

Also calling for a system of tax credits and incentives to be created for Bahamian firms that hire more workers, or invest in expansion, under a corporate income tax, Mr Pintard argued that should such a levy be implemented it must “respect” Freeport’s free trade zone status and not be imposed on the city’s businesses.

And the Opposition leader added that any tax reform, whether corporate income or otherwise, needed to align with the Government’s fiscal targets and objectives of eliminating the annual deficit and cutting the debt-to-GDP ratio to 50 percent by generating sufficient revenues. 

And, turning to the other side of the Government’s income statement, he added that it also needs to address its spending given that total expenditure for 2023-2024 - while largely capped at just over $3bn year-over-year - remains some $804.5m higher than the pre-COVID and Dorian outlay.

“We should be careful with the piecemeal approach,” Mr Pintard told Tribune Business, arguing that corporate income tax is one piece of a much larger reform puzzle. “We’re not minded to support a piecemeal approach because that will not give us the best opportunity to confront the multiple challenges facing the country.

“If it’s deeply compartmentalised, you can miss critical things that we ought to be factoring in to our considerations. This is a recurring theme for us. We continue to see the Government make decisions and do things that may make sense in isolation but often end up with unintended consequences because they’re not taking into account the macroeconomic view of what they are doing.”

Mr Pintard argued that the Davis administration has too often rushed into hasty “judgment calls”, and added of his party’s response: “We are not taking a chance in waiting to find out. We wish to set the broad context in which the Government should be engaged in consultation and approach the best minds it has available to advise.

“We wish from the beginning to lay out a broad framework that we believe they should be following because, if you judge them on the basis of what they’ve done so far they will come with a compartmentalised approach and then there will be a rushed decision. We wish to guard against that.”

Mr Pintard told Tribune Business it was “absolutely critical” that The Bahamas get the decision on whether to adopt a corporate income tax, and the rate, structure and its execution, right first time so as to avoid disrupting a Bahamian economy that has “come roaring back” from COVID restrictions led by the tourism sector.

Warning that the country “cannot afford” any mistakes, or to take a “trial and error approach”, he added: “We can benefit from best practices in other jurisdictions, and good advice from people doing positive things in the economy. We really have an obligation to get it right by true stakeholder consultation, taking advice and doing the studies that are being conducted.

“We have a small margin for error given the limited resources we have, the limited space we have in which to operate. We have to bring our debt-to-GDP ratio down drastically to give us more space to do things to improve the economy, to capital development works that are important. Too much is at stake.

“We have to look at how we’re managing debt, taking on new debt and reducing existing debt. Again, small margins..... The sooner we get on with the business with a sense of urgency and commitment, the sooner we can arrive at a shared position. The sooner we can get on with this business, the better for the country.”

A corporate income tax will be the first such income-based levy in the country’s history, apart from the National Insurance Board’s (NIB) payroll-based contributions, and is intended to ensure The Bahamas complies and fulfills its obligations as one of 140 countries that have signed on to the G-20/Organisation for Economic Co-Operation and Development (OECD) drive for a minimum 15 percent global corporate tax.

In the first instance, this initiative applies only to corporate groups and their subsidiaries that have a minimum annual turnover in excess of 750m euros. The Government’s ‘green paper’, which is dated May 17, 2023, sets out the first option as merely introducing a 15 percent corporate income tax for all Bahamas-based entities that fall into that 750m-plus turnover category, while maintaining the Business Licence status quo for all entities which are not affected.

The second and third corporate income tax options, described as “more nuanced” because of the better balance they strike between tax revenue and economic impact, are those the Government indicates it is giving more serious consideration to. The second, labelled as “a soft introduction”, would introduce the same 15 percent rate for all those caught in the G-20/OECD net and also levy a 10 percent corporate income tax on all other businesses “to maintain regional tax competitiveness”.

The third option, branded as “simplicity driven”, would exempt or carve-out small businesses earning less than a $500,000 annual turnover to leave them still paying the existing Business Licence fee. Bahamas-based entities in groups that meet the G-20/OECD threshold would pay a 15 percent corporate income tax, and all other companies generating more than $500,000 would pay a 12 percent rate.

The final option, which will generate the greatest revenue increase for the Government but also inflict the harshest economic impact, is to simply impose the 15 percent corporate income tax rate on all businesses with a turnover greater than $500,000 per annum and a 10 percent on small and medium-sized enterprises earning less than that.

This would result in an economic contraction of 1.7 percent, or around $200m, the ‘green paper’ projected, with the unemployment rate rising by 0.9 percent. FDI would fall by 10.2 percent, and its domestic investment counterpart by 2 percent. However, government revenues under this scenario are forecast to rise by 96 percent compared to the $140m collected from Business Licence fees in 2019.

The more favoured options, according to the ‘green paper’, would see government revenues rise by 36 percent and 62 percent from implementing the second and third scenarios, respectively, compared to those same 2019 Business Licence revenues. Just levying 15 percent corporate income tax on those groups targeted by the G-20/OECD, though, would only produce a 4 percent revenue rise from business community taxation.