‘Low Level’ Corporation Tax Studied
The Deputy Prime Minister yesterday revealed the Bahamas “may have to look at” implementing a low-rate corporate income tax, as global regulatory pressures force “hard decisions” upon it.
K P Turnquest, while emphasising that such a move was a long way off, agreed that compliance with the OECD’s Base Erosion and Profit Sharing (BEPS) initiative presented a dilemma for the Bahamas.
This nation has to inform the Organisation for Economic Co-Operation and Development (OECD) by next month how it plans to comply with BEPS, and adopt four out of ‘15 actions’ to meet the minimum threshold for compliance.
The four standards that the Bahamas will likely select, according to a Bahamas Financial Services Board (BFSB) statement, are:
(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.
However, financial services industry sources told Tribune Business that compliance with Action 5 was especially problematic for the Bahamas, given that BEPS is designed to counter tax avoidance by large multinational companies.
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.
As a result, and with the OECD and its G-20 and European Union (EU) members threatening ‘blacklistings’, Tribune Business understands there is significant concern over how the Bahamas will comply and whether it will be forced to adopt a corporate income tax.
“When we start talking about taxation people get their knickers in a knot, so I’m a little concerned about making a specific statement in that regard,” Mr Turnquest replied, when Tribune Business put the BEPS and corporate income tax issue to him.
“But it’s reasonable to assume we’re going to have to make some hard decisions in the future.” Mr Turnquest suggested the Bahamas could look at Cyprus as a model to follow, with that island nation having adopted a 10 per cent flat-rate corporate income tax.
“If they’re able to get away with a flat 10 per cent, maybe it’s something we have to look at, but until we do the research I cannot say.”
Some financial services executives, including Paul Moss, principal of Dominion Management Services, have long argued that the Bahamas should introduce a low-rate corporate income tax, as this would enable the country to shed its ‘tax haven’ image and break into the market for investment and double taxation treaties.
And the International Monetary Fund (IMF), in its recent Article IV assessment, suggested that the Bahamas introduce a low-rate income tax over the medium term as means to replace revenue that will be lost as it lowers/eliminates import tariffs to comply with international trade rules.
Others, though, have argued that the implementation of such a tax must be assessed in terms of its impact on the wider Bahamian economy, and that this nation should do it on its own accord – not be forced into it by the OECD and others.
Mr Turnquest agreed, saying that any discussion on tax reform, whether involving corporate tax or other levies, had to be informed by analysis on the “macroeconomic effects” and other parameters.
The BEPS initiative, which aims to ensure that the profits of multinational companies are taxed in the country where they are generated, could mean that time is running out for the Bahamas to do that.
A Bahamas Financial Services Board (BFSB) release, drawing on the OECD’s own language, explained that multinational companies were using often-legitimate tax avoidance strategies to “exploit gaps and mismatches” between different countries’ tax rules and “artificially shift profits” to low or ‘no tax’ jurisdictions. This enables them to minimise their tax exposure by paying a lower rate.
More than 100 countries are working together to implement ‘15 actions’ to combat BEPS, which is viewed as depriving developing countries of much-needed tax revenue, while also undermining confidence and compliance with national tax systems.
Mr Turnquest, meanwhile, accused the former Christie administration of “dropping the ball” on the Bahamas’ compliance with the BEPS initiative. He added that he was in possession of a document showing the Bahamas was “actually invited” to be a member of the committee dealing with the issue, but never took the offer up.
“It’s like any number of issues when we come to financial services,” he told Tribune Business. “We continue to be led instead of getting out in front, participating in international fora so we know what’s coming down the pipeline and get ahead of it.
“We’re always under the pressure to respond to blacklists, and we know the OECD has given some indication they’re reviewing what they consider non-cooperative jurisdictions with reference to another possible blacklisting.
“We don’t have any reason to believe we’re being considered for another list but we certainly intend to get ahead of any initiative they have, and to the extent compliance with the minimum standards doesn’t affect our core business base, we certainly want to signal co-operation and commitment to international best practices and what is considered standard worldwide.”
Mr Turnquest said the Bahamas would inform the OECD of its plans to comply with four of the ‘15 actions’, adding: “We’re committed to complying with those four because the rest of it doesn’t apply to us.
“We can’t do what we don’t have. We can’t do more than we can do by policy and law.”