Bahamas Faces Major Tax, Exchange Control Shake-Up

The Bahamas may have to completely overhaul its corporate and taxation structure to escape European Union/OECD ‘blacklisting’ threats, the Attorney General revealed yesterday.

Carl Bethel QC told Tribune Business that the Government was “looking very carefully” at whether compliance with European (EU) demands will require this nation to eliminate the exchange control ‘ring fencing’ between the economy’s domestic and ‘offshore’ sectors.

He explained that countries had to eradicate “preferential tax regimes”, such as the Bahamas’ exchange control exemptions for companies deemed non-resident, if they were to satisfy the 28-member EU’s that they were a ‘cooperative jurisdiction’.

Mr Bethel also acknowledged that the Bahamas may have to implement some form of corporate income tax, given that the EU and Organisation for Economic Co-Operation and Development (OECD) both consider a “no or nominal tax rate” to be a so-called ‘harmful tax practice’.

The Bahamas currently has no form of income tax, but the Attorney General emphasised that any reforms would not impact individual Bahamians – only the private sector and corporate entities.

Mr Bethel was speaking after the Bahamas made “a giant leap further away from blacklisting”, following the OECD’s formal invitation for this nation to sign on to its Mutual Administrative Assistance in Tax Matters convention.

He said the Deputy Prime Minister, K P Turnquest, and minister of financial services, Brent Symonette, were now “making an unscheduled trip” to the OECD’s Paris headquarters to sign the Bahamas on to the convention – a key move in ensuring this nation is fully compliant with its Common Reporting Standard (CRS) for automatic tax information exchange.

The legislative package passed by Parliament, and brought into effect on Monday afternoon, was vital to facilitating the Bahamas’ signature and compliance with the multilateral information exchange approach. And, in turn, compliance with the CRS will enable the Bahamas to meet the first of the EU’s three ‘blacklisting’ criteria.

“We are one giant leap further away from blacklisting,” Mr Bethel told Tribune Business. “The Bahamas has been invited to join the Multilateral [Mutual] convention by the OECD. We’ve completed the amendments made to the laws last week, and brought into legal force from yesterday afternoon.”

He conceded, though, that the Bahamas “had a lot of work to do, and little time to do it” in meeting the two other criteria essential to avoiding the EU’s ‘blacklist’. These are compliance with the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, designed chiefly to prevent tax avoidance by multinational companies, and the EU’s own ‘fair taxation’ benchmark.

The EU, in exempting the Bahamas and seven other hurricane-devastated nations from its ‘blacklist’, said it would resume contact with these territories come February 2018 with a view to deciding their fate in 12 months’ time.

“We’re not waiting until February,” Mr Bethel told Tribune Business. “We’re looking very carefully at it. The basis principle of one of the minimum criteria is this question of ‘ring fencing’, and the elimination of ‘ring fencing’ and elimination of preferential tax regimes; offshore versus domestic companies, and full transparency and equal treatment across the board.”

The Attorney General added that a “system based on no or nominal taxation” would also run afoul of the EU/OECD ‘harmful tax practices strictures, as he foreshadowed a potential shake-up of the ‘walls’ that separate the domestic Bahamian economy from the international or ‘offshore’ sector.

“We have to look at the overall scope of corporate governance, and incorporated entities that have been created to perform various financial services requirements. The whole structure of the corporate world will have to be looked at in the context of removal of ‘ring fencing’, and transparency and equal treatment across exchange controls,” he told this newspaper.

“On the one hand, you have offshore entities that do not have problems with exchange controls. That’s, in effect, a preferential structure for them. You can’t have a preferential structure under your corporate governance. The question is how that’s resolved.”

The Government is rightly concerned with the issue of ‘ring fencing’ or preferential tax regimes, as these are the issues that resulted in the EU ‘blacklisting’ the likes of South Korea, Panama and Barbados, thereby threatening their financial systems and ability to participate in trade and international commerce.

The Bahamas itself has several ‘preferential’ regimes for non-resident foreign entities, such as Business License fees as well as exchange controls, where domestic businesses have to obtain approval to obtain foreign currency and transact outside this nation’s borders.

Mr Bethel’s comments indicate that 2018 could see economic and taxation reforms occur at a rapid pace, and help explain why the Minnis administration is so anxious to rework the Bahamas’ economic model – via initiatives such as the Commercial Enterprises Bill – and do so for this nation’s own sake rather than just to satisfy the EU/OECD.

The Attorney General used the example of International Business Companies (IBCs) as one product that was still largely ‘ring fenced’, saying these “can be domesticated in a limited way” under the current regulatory framework, but that more may need to be don.

“Either all companies or incorporated entities have the same rights or they won’t,” Mr Bethel explained. “We can’t have some with one set of rules, exchange controls, and others not having it.”

He added that a personal income tax was not being considered, adding: “Whatever we do is to do with corporate governance, not personal.

“It’s a lot of work to do and little time to do it, but we’re going to move as quickly and expeditiously as possible, and benchmark whatever we do with what is going on in the world. We don’t want to ride too far ahead, but want to be level with what is considered the acceptable minimum.”

Mr Bethel said “the pace will pick up” in terms of the Bahamas converting existing Tax Information Exchange Agreements (TIEAs) to the automatic variety, or agreeing new ones under the CRS standard, following this nation’s signing of the OECD convention.

He added that four existing TIEAs had been converted into automatic ones so far, with two done so far, and the Bahamas would now press forward with further countries – especially G-20, OECD and EU members – to ensure it met the September 2018 deadline for it to begin automatic information exchange.

The Bahamas was also simultaneously pursuing “the next step” of compliance with the OECD’s BEPS initiative, with this nation having already indicated its willingness to join the organisation’s “inclusive framework”.

Mr Bethel said EU “emissaries” will arrive in the Bahamas in February 2018 to provide “technical assistance” in meeting these objectives, and help the likes of the Central Bank and other regulatory agencies “make the system work”.

“It is enormously important for the well-being of the Bahamas and its financial services sector,” the Attorney General said of yesterday’s convention signing and compliance with other EU/OECD demands.

“It is the way of the world, and we must either play by the new or emerging rules or suffer very dire consequences. This government has made clear its intent to bring the Bahamas into full compliance in a measured way, but also proactively addressing concerns.”