Use Eu’s Demands To ‘Set Our Own Table’

The Bahamas must now focus on leveraging the European Union’s (EU) demands to “set our own table” and boost GDP growth and employment, a well-known attorney is urging.

Michael Paton, also a former Bahamas Financial Services Board (BFSB) chairman, said this nation has the opportunity to design an “economic substance” regime targeted at the types of real business it wants to attract following its removal Friday from the EU “blacklist”.

With the 28-nation EU yet to specify the criteria for meeting its core demand, the Lennox Paton partner told Tribune Business: “I would say we need to design this economic substance regime in such a way that benefits us as well as meets the EU criteria and BEPS (Base Erosion and Profit Shifting) criteria.

“The OECD (Organisation for Economic Co-Operation and Development) criteria is essentially the BEPS criteria. It’s open to us to design the regime in a way that hopefully benefits the Bahamas and creates GDP growth as well as meeting that criteria. We have the opportunity to set our own table provided we meet the basic criteria of BEPS 5.”

BEPS 5 refers to that portion of the OECD-inspired initiative designed to eliminate so-called ‘harmful tax practices’. The EU’s own anti-tax avoidance measures, running in parallel to the OECD’s, are effectively adopting the same criteria in assessing whether the Bahamas has met its demands to establish an ‘economic substance’ regime by December 31, 2018.

Both the EU and OECD want corporate profits, revenues and assets to be taxed in the jurisdictions where they are generated. They are thus aiming to prevent companies, especially multinational corporations, from exploiting gaps in tax types, rates and rules to artificially shift profits from jurisdictions where they are generated to low or ‘no tax’ jurisdictions, thus lowering their tax bill.

This has prompted the EU’s demands for all nations, including the Bahamas, to impose ‘economic substance’ regimes that prevent this – effectively requiring companies to do ‘real business’ in a jurisdiction. While this appears onerous, K P Turnquest, the Deputy Prime Minister, echoed Mr Paton’s call for the Bahamas to turn the situation to its advantage.

“Some people will look at this glass as half-empty but, in truth, it’s half-full,” he told Tribune Business. “There are opportunities for us to take advantage of the situation and encourage some of our clients to domicile here with their businesses and second homes. This may well, at the end of the day, turn out to be beneficial for us.”

Ryan Pinder, a former financial services minister, told a recent BFSB-sponsored seminar that family offices, intellectual property, information technology and regional distribution/trade hubs, the latter with World Trade Organisation (WTO) membership in mind, were among the industries the Bahamas could target via a transparent, preferential tax regime associated with ‘economic substance’.

“The development of economic substance regimes can be an opportunity for the Bahamas,” he said. “We can define regimes and what constitutes economic substance that are beneficial and relevant to the industries we want to develop.”

Mr Pinder said preferential tax regimes could be established for headquartering; distribution and services centres; fund management; financing and leasing; shipping and banking and insurance. He added, though, that transparency was key, along with the exchange of information on rulings by Bahamian tax authorities.

“This is still a wonderful place for headquarters,” Mr Turnquest told Tribune Business. “Any kind of industry that takes advantage of our location, the professionals we have available, the professional services we have and the environment we have are likely targets.”

This, he added, held the potential to generate more lucrative, “career-based employment” for Bahamians with both Shell and Wynn Group having already committed to establishing head offices in this nation. However, to fully turn ‘economic substance’ into an advantage the Bahamas will have to address its ‘ease of business’ and ‘cost of business’ deficiencies.

Mr Turnquest, meanwhile, described the EU’s ‘economic substance’ demand as “a very technical standard” with no set criteria to guide nations in crafting regimes that meet its demands. He added that a working committee, featuring Ministry of Finance officials and financial services industry executives, had been created to address the matter.

He acknowledged that Friday’s removal of the Bahamas from the EU’s ‘blacklist’ was merely a ‘first step’ in addressing the 28-nation bloc’s demands, with this nation’s delisting removing any “reputational risk” – at least for now.

“While there were no economic penalties attached to that listing, we did suffer a bit of reputational risk or potential reputational risk, so it’s important we got off as soon as possible to avoid any disruption,” Mr Turnquest told Tribune Business.

“The fact we reacted as quickly as we did, and comprehensively as we did, was a good thing in terms of showing to the international community our commitment, and that we are a well-regulated, compliant jurisdiction.”

The EU, in documents accompanying its decision to remove the Bahamas, revealed that it received a satisfactory commitment to addressing its demands from this nation on March 9, 2018 – four days before its finance ministers confirmed the country’s ‘blacklisting’.

This raises questions as to why the EU followed through in treating the Bahamas in this manner, with its actions likely to spark concerns that it was seeking to ‘make an example’ of this nation or seeking to avoid ‘loss of face’ on its part.

Still, the Bahamas’ de-listing, following two-and-a-half months on the EU list, effectively reinstates the ‘status quo’ that existed in early March. This nation’s removal will be for nought unless the 28-nation bloc’s demands are addressed within the next seven months, or the Bahamas could be ‘blacklisted’ again come year-end.