Bahamas ‘Failed To Read Tea Leaves’ On Corporate Tax
THE Bahamas’ failure “to read the tea leaves” and introduce a corporate income tax “for ourselves” has contributed to Europe’s planned ‘blacklisting’, a financial executive argued yesterday.
Paul Moss, Dominion Management Services’ president, told Tribune Business that implementing such a tax would mean the European Union (EU) “cannot accuse us of being a tax haven” that siphons off revenue from its 28 member states.
With the EU set to confirm today whether it will make good on threats to ‘blacklist’ the Bahamas for being non-cooperative in the fight against tax avoidance, Mr Moss said the move stemmed from the Government’s inability to act when it received “a shot across the bows” last year.
The EU Council, in announcing its original ‘blacklist’ in early December 2017, gave the Bahamas and seven other Caribbean nations a reprieve to allow them to recover from the devastation caused by Hurricanes Irma and Maria.
Suggesting that this had lulled the Minnis administration into a false sense of security, Mr Moss said the Deputy Prime Minister’s comments about being ‘blindsided’ by last week’s EU move “would be laughable if not so serious”.
He warned that a ‘blacklisting’ could result in the Bahamas losing corporate and high net worth financial services business, especially if European-owned banking institutions started to apply “greater scrutiny” to transactions originating from this nation and thereby delayed their completion.
“The Bahamas and our guys did not read the tea leaves,” Mr Moss told Tribune Business. “When they got that reprieve they thought they were doing something exceptional with their actions, not recognising that if it were not for the hurricanes we would be on that list.
“Their inability to do what they should have done has landed us where we are now. They’re [the Government] going to move heaven and hell to get us off that list, but this is something they should have done when they got that shot across the bows.”
Mr Moss said he had “no doubt” that the EU will proceed with ‘blacklisting’ the Bahamas despite the last-ditch visit to Europe by the Deputy Prime Minister and minister of financial services, K P Turnquest and Brent Symonette, respectively, to plead this nation’s case for an 11th hour reprieve.
He then reiterated his frequent calls for the Bahamas to implement a low-rate corporate income tax, which many observers believe the EU wants to force upon this nation and is its ultimate goal.
Mr Moss, one of the few local owners of a Bahamas-based international financial services firm, again argued that implementing such a tax would enable the Bahamas to shed the ‘tax haven’ label and open up the way to agreeing double taxation and investment treaties with other countries.
“I have said the Government ought to do things for themselves, and had we done it – implementation of a corporate income tax – which captures revenue from the Bahamas, no one would accuse us of being a tax haven siphoning off revenues from countries in Europe,” he told Tribune Business.
“I think they have not thought out a tax regime for the Bahamas that would ameliorate the situation. We introduced VAT when we had the opportunity to do something innovative and creative for the economy. We will eventually get off the list, but it’s not going to take the Bahamas out of harm’s way.”
The threatened EU ‘blacklisting’ of the Bahamas is tied directly to the Organisation for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative. Compliance with that is one of three criteria being employed by the EU to determine whether a country is co-operative in the fight against tax avoidance.
At its simplest, BEPS aims to ensure that the profits of multinational companies are taxed in the country where they are generated.
Multinational companies often use legitimate tax avoidance strategies to “exploit gaps and mismatches” between different countries’ tax rates and rules, and “artificially shift profits” to low or ‘no tax’ jurisdictions despite conducting no or minimal business there. This enables them to minimise their tax exposure by paying a lower rate than they otherwise would in countries where they do conduct business.
The Bahamas has elected to meet the minimum BEPS requirement by complying with four standards: (Action 5): Countering Harmful Tax Practices; (Action 6): Treaty Shopping; (Action 13) Transfer Pricing Documentation and Country-by-Country Reporting; and (Action 14) Dispute Resolution.
Yet financial services industry sources told Tribune Business that compliance with Action 5 was especially problematic for the Bahamas. This is because the OECD considers a corporate tax rate of 10 per cent or less to be a ‘harmful tax practice’, but the Bahamas – with no income taxes of any kind – has an effective corporate tax rate of ‘zero’ because it simply does not have this system.
Therein lies the problem for the Bahamas in meeting both OECD and EU demands, and some believe the Bahamas may have no choice but to eventually implement a corporate income tax to address such concerns.
Mr Moss yesterday urged the Bahamas to “leverage” its relationships with the US to obtain “protection” against the EU, basing its argument on the negative impact of a ‘blacklisting’ to US-bound investment flows that pass through this nation.
“Our leaders are so intimidated by Europe they are frightened to act properly,” he blasted, arguing that complying with BEPS and automatic tax information exchange would not be enough to satisfy the EU.
“What it means is the scrutiny that goes into a transaction with Europe is going to very tough to overcome,” Mr Moss added of a ‘blacklisting’s’ impact. “It could mean that European institutions say to a Bahamian institution we really have to scrutinise your transaction.
“Things that take minutes to get done take hours to get done. Things that took days to get take weeks. That’s not good for business. That is the difficulty of being ‘blacklisted’. Companies and people may close accounts because they cannot bear the scrutiny.
“People doing business in today’s world want to do it quickly and discretely. With this kind of focus it’s not going to happen. People have legitimate reasons to be incognito; they don’t want to attract prying eyes. That’s not going to happen with being blacklisted,” he continued.
“Our legislature and our leaders have not, in my view, begun to understand what’s at stake and they misread the initial warning. People like me saw this was coming, and we need to get on with it. There is nothing wrong with the Bahamas implementing a tax for itself.”
Mr Moss’s position was echoed by Arinthia Komolafe, the Democratic National Alliance’s (DNA) deputy leader, who yesterday said the EU threat provided “an opportunity to carry out comprehensive tax reform with due regard for the introduction of a more equitable and progressive tax system for our people”.
She added: “Tax reform in the Bahamas should not result in an increase in the overall tax burden on Bahamians. The overall net effect of this reform should not complicate the ease of doing business or increase the cost of doing business in the Bahamas for Bahamian businesses.
“We are already burdened by several taxes, fees and levies without the necessary prudence, accountability or improved infrastructure to show taxpayers. Due consideration should be given to the reclassification or modification of existing taxes. A prime example is the Business License tax, which is currently assessed on gross revenue rather than net profit.”
Mrs Komolafe added: “The evolving and shifting goal posts for compliance with international standards have nurtured a reactive rather than a proactive approach to our nation’s financial services industry over the years. We have found ourselves in survival mode rather than being strategic in planning for the repositioning of the financial services industry. It is time to turn this around for our own benefit.
“Rather than just focusing on the short-term goal of avoiding blacklists, a Financial Services Growth Action Plan (FSGAP) should be developed. This plan must be holistic while leveraging our strengths and the expertise of Bahamian professionals.”
