Qc Backs Income Taxes To Ease ‘Rich/Poor Divide’

AN outspoken QC is backing the introduction of corporate and personal income taxes as a way to reduce “the gulf between rich and poor” in the Bahamas.

Fred Smith QC, the Callenders & Co attorney and partner, has added his voice to those urging the Government to use the European Union’s (EU) ‘blacklisting’ as a means to undertake wider reforms leading to “a more progressive and equitable” tax structure.

He told Tribune Business it was especially “ironic” that foreign investors and developers were able to repatriate their Bahamian-generated profits 100 per cent tax-free at a time when the Public Treasury needed every cent of revenue it could earn.

And, with exchange control and other restrictions inhibiting the ambitions of many Bahamian entrepreneurs, Mr Smith said wealth was becoming increasingly concentrated “in a small black and white oligarchy” as the divide between themselves and others grew.

“It is regrettable that the EU has blacklisted the Bahamas, but perhaps this will help to focus a conversation about whether or not there should be a drastic reform of taxation in the Bahamas,” Mr Smith said.

“I support income and corporate taxation. The gulf between the ‘haves’ and ‘have nots’ cannot be allowed to continue to expand in the Bahamas. The Bahamas is a country with a vast amount of wealth which has been accumulated more and more in a small black and white oligarchy and foreign investors.

“This, coupled with exchange control restrictions, lack of access to Bahamians to the millions of US dollars in our local banks, and the general procrastination against Bahamians investing in foreign entities makes for a very skewed economy.”

Mr Smith added that it was “perverse” for foreign investors, developers and corporations to be taxed on their Bahamas’ profits and income in their home countries without being taxed here, suggesting the Public Treasury was missing out on a potentially lucrative revenue source at a time when the Government is severely cash-strapped.

“The fact none of the owners, foreign real estate developers, hoteliers or foreign individuals pay corporate or income tax means their profits are generally 100 per cent repatriated abroad,” he told Tribune Business.

“All the developers in the Bahamas pay corporate or income tax in their home countries, which is why it is perverse that the Bahamas does not capitalise on the EU demands and introduce corporate or income taxation to benefit from double taxation treaties.

“In this fashion, the Bahamian economy would boom, our Treasury would have funds to provide for proper education, technical development, greening the economy and medical facilities, all of which would make the Bahamas a far more attractive place to live and invest,” Mr Smith continued.

“With our current investment structure we give away real property taxes, Customs Duties, Business Licence fees and Crown Land to foreign investors and get nothing in return, except for a couple of menial jobs. When they repatriate all their profits they pay taxes in their home jurisdictions.”

The Bahamas’ taxation system has long been viewed as regressive, with the dependence on consumer-related taxes – chiefly Value-Added Tax (VAT) and, before it, Customs duties – effectively acting as a levy on the cost of living that has no relation to ‘ability to pay’.

As a result, the burden of taxation falls disproportionately on poor and lower income Bahamians, who spend more of their income paying taxes than higher-earning Bahamians. This was acknowledged in the run-up to VAT’s implementation, with increased social security spending identified as the best mechanism for easing the tax’s impact on the former.

Apart from making the Bahamian tax system more ‘progressive’, with those earning more paying more, many observers have also argued – like Mr Smith – that the Bahamas needs to use the EU ‘blacklisting’ as motivation for comprehensive reform that repositions the economy for sustainable future growth.

It has long been suggested that introducing a low-rate corporate tax would enable the Bahamas to shed the ‘tax haven’ label and enter into a network of ‘double taxation’ and bilateral investment treaties with other countries, opening up entirely new business markets and niches while taking this nation beyond EU/OECD clutches.

“The regressive Customs duties and other consumer taxes, including VAT, could be reduced,” Mr Smith said of the corporate/personal income tax rationale. “I encourage the Government to engage in an urgent public debate about getting rid of regressive taxation, conform to the EU’s demands and release the Bahamian economy from the centralised control and grip of exchange controls, which are stagnating the economy and preventing Bahamian entrepreneurs from growth and opportunity.

“In every way, income or corporate tax would benefit the Bahamas, benefit the economy and ensure the wide gap between rich and poor is reduced. Otherwise we are going to continue to stagnate as a pariah tax haven, and with none of the huge profits generated by foreign direct investment sticking in the Bahamas, and a bankrupt Treasury unable to properly sustain economic and social development.

“Right now, the less fortunate in the Bahamas are probably bearing the greatest tax burden, which they cannot afford to do.”

But the introduction of a corporate and/or personal income tax is unlikely to be a ‘zero sum’ game, and will require careful analysis, negotiation and consultation to avoid the many pitfalls and unintended consequences should the Bahamas decide to head in this direction.

Income taxes are largely ‘alien’ to Bahamian culture, and they were rejected in preference to VAT in 2015 because of the extra administrative costs and bureaucracy required to collect them. Such taxes would likely spawn a new industry, while also offering easier opportunities for avoidance and evasion than VAT.

And while the Bahamas’ foreign direct investment model has always traded taxes for jobs, this nation’s high-cost, inefficient economy likely makes the repatriation of profits 100 per cent ‘tax free’ a vital attraction for investors.

This, though, could be offset by double taxation treaties, which would enable such profits to be taxed at a lower rate in the Bahamas and avoid a higher rate in their home countries.