The flurry of activity recently by the Government in connection with new pressure from the European Union (EU) against so-called tax havens is an indication of the continuing fundamental importance of the financial services industry to our nation’s economy.
We escaped the EU’s newly-unveiled 17-nation “blacklist” mainly because of its recognition of the damaging effects of the last hurricane season in The Bahamas, even though we were largely spared the wrath of the two major storms, Irma and Maria, which devastated the eastern Caribbean during September.
As part of an eight-nation group, we have been given a further year to meet the EU’s demands for fairer taxation, transparency and compliance with EU standards in the struggle against tax avoidance and evasion as well as money laundering. This means, in effect, The Bahamas is “on probation” while we decide what action to take in order to meet the concerns of the EU as well as those of the Organisation of Economic Co-operation and Development (OECD) and be regarded by them as a co-operative jurisdiction.
The EU blacklist is based on the drive to eradicate what are termed harmful tax practices which mainly enable multinational companies as offshore entities to avoid tax or enjoy special tax concessions in certain jurisdictions that are not available to similar domestic operations; so the EU seeks, in particular, to stop preferential treatment for non-resident foreign entities. For its part, the OECD wants countries to sign on to its Mutual Administrative Assistance in Tax Matters convention in order to achieve automatic tax information exchange.
In the face of this, some people question the EU’s and OECD’s authority to determine tax standards for others, in particular smaller countries that lack the resources to resist their demands while larger transgressors like the USA, or EU member states like Ireland and Luxembourg, are ignored.
Our Deputy Prime Minister has suggested it might be an overreach for these bodies to dictate to sovereign nations what their tax structures ought to be. He conceded, however, that it was not in the interests of The Bahamas to be perceived as facilitating tax avoidance or evasion. It is clear that to be placed on the blacklist would have had serious negative consequences for our financial services industry and for the wider economy because of the adverse effect on foreign direct investment.
We believe that, in reaction to growing external pressure and in order to remain competitive, we need to ensure our tax practices and the exchange of information are in line with best international practice. In these circumstances, Dr Minnis’ government deserves praise for grasping this particular nettle and taking urgent action to push through the necessary legislation to enable The Bahamas to sign on to the OECD’s convention on multilateral tax information exchange and thus comply with that organisation’s Common Reporting Standard which has become the global model for such exchange.
This is a significant step towards what the Attorney General has described as “a giant leap further away from blacklisting”. Equally, he has spoken of our country’s poor record in implementing and enforcing legislation to combat financial crime that is already on the statute book.
Reportedly, there has been a slippage in our performance during the last decade to the extent that in 2017 The Bahamas was rated compliant in only eight of the 40 recommendations of the Caribbean Financial Action Task Force. Moreover, it has become clear that over the last few years the PLP government failed to meet its obligations in relation to tax information exchange agreements.
The new FNM government has shown a commendable willingness to be proactive as a compliant jurisdiction and has drawn up an action plan. While new legislation is promised, poor implementation has been a long-standing issue and will now become a key factor in its efforts to avoid the blacklist.
All this fits in with its wider strategy of liberalizing and deregulating the Bahamian economy, the first step of which is the Commercial Enterprises Bill. But it also provides an opportunity for comprehensive tax reform including an overhaul of our corporate tax structure, which has already been advocated by the IMF, together with removal of the ring-fencing for non-resident companies. Tax reform will anyway be required for WTO membership - for example, the elimination of certain import tariffs.
As a nation we need to free ourselves from the tax haven label. Given our small size, we have no option but to play by the international rules. Since we depend on foreign investment for our prosperity, we cannot risk the damaging consequences of standing alone and refusing to comply. The Government has made clear its intent to bring The Bahamas into full compliance with international requirements in a measured way and this is surely the right approach for this country.
Nonetheless, while accepting many international standards may be mutually beneficial in a globalised economy, as a proud sovereign nation we do not like to be bullied. So, in the longer term we should not rule out joint action by the Caribbean countries affected – based on CARICOM solidarity and utilising the potential protection deriving from WTO membership – to challenge the EU’s and OECD’s authority in deciding our tax rules and standards, or at least to negotiate some of the provisions being foisted on us. While, in light of our history, realistically the prospect of this may be remote, some discussion regionally about such an important issue would be useful.