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Imf's Corporate Tax An Oecd 'Trojan Horse'

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James Smith

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The International Monetary Fund (IMF) may be acting as a ‘Trojan Horse’ for the G-20/OECD in pushing for the Bahamas to implement a corporate income tax, a former finance minister has warned.

James Smith, who is also an ex-Central Bank governor, expressing “surprise” that the IMF would advocate such a move without any evidence to support it, said the Bahamas would remove a key defence to the G-20/OECD’s drive to make tax evasion a criminal offence if it followed such advice.

Pointing out that the Bahamas would have to exempt the international financial services industry from a corporate income tax, otherwise it will “run out of town”, Mr Smith said its implementation would leave this nation “on all fours”.

He added that the Bahamas would soon have to take a stand against G-20-led initiatives that constantly “moved the goalposts” and “have no regard” for the negative impact they have on the Bahamian economy.

Other private sector executives also echoed Mr Smith’s concerns, one describing as “self-serving” the IMF’s call for the Bahamas to implement a “simple, broad-based income tax”.

Apart from the impact on the Bahamas’ financial services industry and status as an international financial centre (IFC), many in the private sector are also likely to question whether a corporate income tax would impose an unsustainable cost burden on business.

It would levy tax as a percentage of a company’s earnings/revenues, acting as a further drag on private sector earnings in a high-cost economy still recovering from recession. And Winston Rolle, the former Bahamas Chamber of Commerce and Employers Confederation’s (BCCEC) chief executive, pointed out that following the IMF’s advice would undermine a key pillar of the regime used by this country to attract foreign direct investment (FDI) – no corporate, or any other forms, of income tax.

Rick Lowe, an executive with the Nassau Institute think-tank, told Tribune Business that the IMF appeared to be pushing the Bahamas to adopt the Barbados taxation model. The Bahamas’ southern Caribbean neighbor already has a VAT and corporate income tax regime, but Mr Lowe said this had made precious little difference to its debt-to-GDP ratio – which remains at around 100 per cent.

Although Michael Halkitis, minister of state for finance, did not return Tribune Business calls seeking comment, the Government has given no indications it is prepared to follow the IMF’s promptings. The Christie administration’s current focus is on the smooth implementation of its Value-Added Tax (VAT) by July 1, 2014, and has made no mention of a corporate income tax – thus making its adoption in the Bahamas highly unlikely.

While income-based taxes were often seen as more progressive and equitable, Mr Smith said of the IMF’s corporate income tax advice to the Bahamas, contained in its latest Article IV consultation report on this nation: “That’s kind of a new one.

“For the Bahamas, which has a long history of no direct taxation, particularly on income, this turnaround of almost 180 degrees might also reflect something rather than tackling the deficit or battling the debt. The cynic in me suggests the IMF might be unwittingly or expressly carrying out the agenda of the OECD.”

Mr Smith said the IMF had conducted no technical studies he was aware of to arrive at its corporate income tax conclusion for the Bahamas. “I’m very surprised an international agency of which we are a member, without doing the necessary technical studies, would make that recommendation,” he added.

Admitting that he might be “ascribing motives” to the IMF’s corporate income tax advice that did not exist, Mr Smith said the Bahamas would be unable to take the position that “tax evasion or avoidance is not a crime” if it implemented such a regime.

“They know the OECD is moving to make avoidance of tax and tax evasion a criminal offence,” he told Tribune Business. “A tenet of international law is that a crime must be the same in both countries, and if we have a direct taxation regime, we no longer have that counter-argument.”

The Bahamas could implement a corporate or other form of income tax solely on its domestic economy, the OECD having dropped ‘ring fencing’ as criteria for determining whether a country is a so-called ‘tax haven’.

“You can do an income tax, but you would have to do it on Bahamian dollars,” Mr Smith said. “If you apply it on the offshore market, they will run out of town. There are 50 offshore centres they can move to almost immediately by shifting balance sheets around.”

But, in a nod to the potential burden that would be imposed on the Bahamian business community, the former finance minister added: “If we do it on Bahamian dollar activity or companies that trade in Bahamian dollars, we will have to look at the implications of that against whatever indirect taxation they have to pay.”

But, setting that aside, Mr Smith said the main question was “what is motivating the IMF?” He added that the Fund, as far back as 2002, “had accepted the Bahamas’ position that direct taxation is off the table – we won’t look at that”.

He based that on the contents of a November 2002 report by the IMF to the Bahamas government, which he read while talking to Tribune Business. Asked about the implications of a corporate income tax, Mr Smith said: “It’ll place the Bahamas on all four corners with other countries in the world, and set it up for the automatic exchange of tax information.

“The Bahamas is not a member of the European Community, and at some point we have to decide where we are. They seem to have no regard to what they’re doing to our economy. They keep moving the goalposts and increased costs are imposed on companies that operate in the Bahamas and the Government of the Bahamas.

“No one is looking at the harmful effects on the economy and the companies that operate in it. We have, at some point, to take stock and say while we appreciate the need for co-operation and obligations to other countries, we have to look after our own interests, which are being steadily eroded with no compensating mechanisms in place.”

Mr Rolle joined Mr Smith in questioning whether the IMF had conducted the necessary studies to support implementing a corporate income tax in the Bahamas. Noting that “a balance needs to be struck” between generating government revenues and not overburdening the private sector, Mr Rolle said the Bahamas had to consider the impact a direct income tax would have on its investment model.

“One of the things we’re looking at is the importance of a business climate that is conducive to both local and foreign investment,” the former BCCEC chief executive told Tribune Business. “One of the things that has attracted investment to the country for a very long time is the absence of a corporate income tax.

“When you change that model, it not only impacts local investment but foreign investment as well.”

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