Ibcs Face ‘Much Damage’ Through Blacklisting Bill

THE Bahamas’ ‘blacklisting’ response threatens to “cause a lot of damage” to its IBC business and create “much less certainty” for the financial services industry, a top attorney is warning.

Michael Paton, a former Bahamas Financial Services Board (BFSB) chairman, told Tribune Business that the proposed Multinational Entities Reporting Bill was likely to produce adverse ‘unintended consequences’ – especially through its repeal of the Stamp Act exemption for IBCs.

The new Bill removes a host of tax exemptions for IBCs, including their freedom from Stamp Duty on transactions involving their shares, debt and security, and Mr Paton urged the Government to address how this tax will apply going forward.

He also warned that the Bill, in seeking to address the European Union’s (EU) rationale for ‘blacklisting’ the Bahamas through the elimination of ‘ring fencing’, and preferential tax regimes for foreign investors and non-resident entities, was introducing significant uncertainty for the financial industry and its clients when it came to using multiple products. The Bill enables the Minister of Finance to decide and implement, through regulation, a chosen method of corporate taxation on the likes of IBCs, Foundations, Executive Entities, Exempted Limited Partnerships and Investment Condominiums (ICON).

While this appears designed to give the Government flexibility, and avoid the delays associated with amending/repealing laws via Parliament, Mr Paton said the ability to introduce or change tax forms at a moment’s notice would likely disrupt market and industry confidence.

The Lennox Paton attorney and partner also suggested that the Bill be split into two, given that it was simultaneously seeking to address both the EU’s concerns and compliance with the Organisation for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative.

This made for an extremely complex Bill, and he argued it would be “more elegant and cleaner to deal” with BEPS and the EU’s demands in two separate pieces of legislation.

Mr Paton, who is due to lead a BFSB ‘working group’ review of the Bill this week, told Tribune Business that its “repeal and replacement” of Part XII of the IBCs Act seemingly removes all tax exemptions currently enjoyed by IBCs.

Instead, as revealed by this newspaper last week, it paves the way for the imposition of “corporate taxation” on IBCs…. “as shall be prescribed by the Minister in regulations”.

#“The effect of that, to me, is it immediately repeals the Stamp Act exemptions,” Mr Paton said of the implications for IBCs. “That’s very useful in planning today, as you’re not subject to Stamp Tax.

“If you repeal that, and don’t address how Stamp Tax applies on a range of transactions, that raises issues for domestic and international IBCs. I would caution repealing the Stamp Act exemptions in the IBCs Act without addressing how you want the Stamp Act to apply in both sectors.

“We’ve got Stamp Act provisions tailored towards domestic IBCs, and you’d cause a lot of damage in the international IBC market because they’re exposed to Stamp rates on transactions. You can’t repeal without considering the consequential amendments to other Acts.”

Mr Paton’s comments indicate that the ‘unintended consequences’ of the Multinational Entities Reporting Bill, and what the Government is trying to achieve, need to be better ‘thought through’ before any legislation is brought to Parliament and passed.

Bahamian IBCs are a key component in many corporate and high net worth families’ financial structures, due to their flexibility, little to no taxation and ‘light touch’ regulatory requirements. The Bill’s proposed “corporate taxation” and tax exemption eliminations thus threaten to disrupt this market, deter potential business and reduce the Bahamas’ competitiveness.

Mr Paton, meanwhile, called on the Government to provide “clarity on the tax environment” for all Bahamian financial services products listed in the Bill – not just IBCs.

“What it’s doing is taking away the ‘ring fencing’ and opening up opportunities for the Minister to prescribe taxation of any type,” he told Tribune Business. “It gives us a lot less certainty as an industry as to what these products can be used for.”

Mr Paton is not alone in his concerns on this issue, given that the Multinational Entities Reporting Bill appears to give the Minister of Finance extremely wide discretion to impose any form of corporate taxation on key Bahamian products at a time and rate of his choosing.

Another financial sector executive, speaking on condition of anonymity, told Tribune Business that the Bill appeared to be focusing on products as opposed to beneficial ownership when it came to taxation.

“What translates as flexibility for them [the Government] looms as uncertainty for the market,” they told Tribune Business. “The market has no certainty, and the market does not know where this is going. You can introduce a new tax with the stroke of a pen. The messaging is not very good.

“It’s [flexibility] a laudable objective. The consequential fall-out is you create uncertainty in the market. The market doesn’t know where this is going other than the Minister has wide powers.”

Mr Paton summed it up thus: “You can’t leave us in the interim period with that uncertainty or with the negative impression that the Stamp Act will apply [to IBCs].”

He also called on the Government to address the EU’s ‘harmful tax’ issues and the OECD’s BEPS initiative in separate, rather than the same, pieces of legislation to reduce complexity.

“It’s cleaner to have a BEPS piece of standalone legislation, than deal with the [EU’s harmful tax] measures in separate legislation,” he told Tribune Business. “We’re going to be going down having to implement additional BEPS measures as time progresses, and it’s cleaner to keep BEPS in one silo and ‘harmful tax measures’ in another silo. It’s more cleaner and elegant to deal with.”

The back half of the Multinational Entities Reporting Bill deals with the EU’s ‘ring fencing’ and ‘economic substance’ concerns, which were the two issues the 28-nation bloc used to ‘blacklist’ the Bahamas for allegedly being non-cooperative in the fight against tax evasion.

The first half, though, aims to make the Bahamas’ compliant with BEPS, which is the OECD-led anti-tax avoidance initiative that this nation has already committed to. The Bill mandates country-by-country reporting for Bahamas-based corporate entities that are part of multinational corporate structures with an annual combined turnover of more than $850 million.

Corporate vehicles that fit this criteria, and are either the ‘ultimate parent’ or ‘surrogate parent’ of such a multinational network, will have to file an annual report with the Ministry of Finance that breaks down their profits and losses according to each jurisdiction where they are earned.

Entities that are not the ‘ultimate parent’ or ‘surrogate parent’ in multinational networks will be required to inform the Ministry of Finance of “the identity and tax residence” of the vehicle responsible for doing the reporting by the final day of their financial year.

Mr Paton said the Bahamas “doesn’t have much room to vary at all” from the OECD’s model BEPS legislation, and added that “the closer” it got to international standards and implementing this version, the “better the position” it will find itself in.