The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A prominent QC yesterday agreed that the Government’s call for Freeport businesses to seek renewal of their tax breaks was a “back handed” attempt to amend the Hawksbill Creek Agreement, with the move representing “the worst formula for business”.

Fred Smith QC, the Callenders & Co attorney and partner, told Tribune Business that the March 6 deadline for Grand Bahama Port Authority (GBPA) licensees to apply for key tax exemptions had only created “confusion and uncertainty” in Freeport.

He argued that GBPA licensees now faced being treated “worse than investors anywhere else in the Bahamas”, who were not being subjected to “a statutory regime as demanding as this”.

Despite not having gazzetted the accompanying regulations to give them effect, the Government on Monday moved to implement its Grand Bahama (Port Area) Investment Incentives Act 2016 by demanding that the GBPA’s 3,500 licensees apply to it for the granting of renewed tax breaks.

A newspaper advertisement on February 20 called on licensees to obtain, complete and submit an application form for continuation of the real property tax, income and capital gains tax exemptions that expired on May 4, 2016, last year.

They were given just two weeks until March 6, 2017, to accomplish this, the date having been chosen because it corresponds to the 10-month application deadline set out in the Act (see other article on Page 1B).

However, one Freeport private sector source, speaking to Tribune Business on condition of anonymity, argued that through this application process the Government was really trying to obtain the necessary ‘80 per cent’ licensee threshold to change the Hawksbill Creek Agreement.

Freeport’s founding treaty requires the consent, or permission, of fourth-fifths or 80 per cent of GBPA licensees before it can be amended in any way - an obstacle that successive administrations have sought to circumvent by passing other legislation.

The business source argued that the ‘tax breaks application’ represented another attempt to achieve this by the “back door”, and without openly telling GBPA licensees what the Government was doing.

They explained that if 80 per cent of licensees were to apply to the Government for renewal of their tax breaks for a five-year period, then they were effectively consenting to giving up these rights - which are enshrined in the Hawksbill Creek Agreement - and placing them in the hands of the Minister of Investments and his Cabinet colleagues.

“If four-fifths of the licensees go ahead, fill out that form, submit it and pay the $100 fee, they have effectively agreed to amend the Hawksbill Creek Agreement in this fashion, transferring the power from the GBPA and the Agreement to the Government,” the source told Tribune Business.

“It’s de facto giving them your consent as a licensee if 80 per cent sign that thing. The Government will have its legitimate grounds to amend the Hawksbill Creek Agreement in that way with these stipulations and directions; that your rights and concessions are not granted under the Hawksbill Creek Agreement any more, but subject to the whim of the Minister.”

Backing this analysis, Mr Smith told Tribune Business that the Grand Bahama (Port Area) Investment Incentives Act 2016 had created “discrimination” between GBPA licensees “who may or may not be entitled to these exemptions”.

He added that himself and fellow Callenders & Co attorney, Carey Leonard, had been approached for advice on the issue by several GBPA licensees “who are simply confused about where they stand”.

Implying that legal action might soon follow once the duo had reviewed their clients’ options, Mr Smith added: “This is going to cause confusion and uncertainty in the business community.

“That is the worst formula. Confusion and uncertainty have been compounded by this.”

He added that the Act had delivered “a slap in the face” for GBPA licensees by automatically giving the Port Authority and Hutchison Whampoa, and all their Bahamas-based companies, a 20-year ‘blanket’ renewal of the same tax breaks.

This, Mr Smith argued, had placed “the tax burden” for financing Grand Bahama and Freeport’s infrastructure development, maintenance, social services and government costs squarely on the smaller, Bahamian-owned GBPA licensees as opposed to the licensor and Hong Kong-based conglomerate.

Pointing out that Hutchison Whampoa had “billions of dollars in equity”, Mr Smith argued: “This is a very discriminatory and arbitrary construct, which unfairly burdens the smaller licensees and residents inside and outside of Freeport.”

The QC also questioned the criteria that the Investments Board would use in determining which GBPA licensees received the incentives, adding that this would result in some receiving preferential treatment over others.

“This has created the opportunity for very arbitrary decision-making with no accountability and transparency, and leaving it up to the whim and favour of ministerial diktat,” Mr Smith told Tribune Business.

“This gives a massive opportunity for victimisation, favouritism, and unfair competition between one licensee and the next is going to be horrendous.”

Mr Smith said this may breach the Hawksbill Creek Agreement’s own anti-discrimination provisions contained in section 26 (2), arguing that the stipulation that Freeport be treated no less favourably than anywhere else in the Bahamas for investment purposes also applied to the city’s internal affairs.

The application form attached to the Act’s regulations divides GBPA licensees into two categories; those planning a business expansion within the next 12 months, and those who “expect to operate as a going concern and maintain current staffing levels for at least the next five years”.

All businesses, when applying for their real property tax, income and capital gains tax exemptions, have to supply ‘the estimated market value’ of their real estate holdings and number of staff employed.

Those planning expansions in the next 12 months, though, must provide extra details such as the number of jobs created and the timeframe over which this will take place; any land development and associated timelines; the amount of capital to be invested; and the source of financing.

These businesses are then also asked to “provide evidence that the investment is sufficiently financed”, “the manner and period within” which the investment will be made, and its projected impact on the Freeport compliance.

Evidence of Value-Added Tax (VAT) compliance, along with site plans, plus economic and environmental impact assessments, are also being demanded by the Government.

The Government’s argument has been that GBPA licensees need to apply for their investment incentives, rather than be given the previous blanket exemption, because too many pocketed the savings rather than undertake job-creating expansions and investments.

The Christie administration also believes the Treasury spends more in Freeport than it earns from the city, despite providing no conclusive evidence yet to support this, further increasing the need to get the necessary ‘value for money’ from the tax breaks on offer.

Yet while the application form appears innocuous, several potential pitfalls emerge for the private sector when it is read in conjunction with the Act.

The legislation applies to both Bahamian and foreign investors and landholders, although the former are exempted from real property tax come what may - something that is in accordance with how Bahamians are treated in the Family Islands.

The Act, though, allows the Investments Board and Minister to determine the extent of the tax breaks granted to each GBPA individual licensee, and for how long.

They can also “stipulate conditions for inspection” to check that GBPA licensees are fulfilling the commitments they made on the ‘tax breaks’ application form.

The real issue for the private sector, though, is section six, which allows the Minister for Investments to “reduce or revoke in full” the tax breaks granted, and even “demand payment in respect of any money that would have been payable had no concessions under the Act been conferred”.

This effectively “locks in” GBPA licensees to maintaining employment levels for a five-year period regardless of whether there are further market or economic downturns outside their control.

Should a licensee be forced to downsize in those five years to survive, the Act’s section six, would appear to come into play, allowing the Government to demand retroactive or ‘back’ taxes from GBPA licensees that fail to meet the promises they make on their application form.

Mr Smith agreed that this was “abusive” and “retroactive”, and essentially made Freeport and GBPA licensees “subject to a statutory regime more demanding” than anywhere else in the Bahamas.

He argued that Baha Mar and other projects that had entered into Heads of Agreement with the Government were not subject to such ‘employment lock-in’ and ‘tax break clawback’ provisions.

“They’re treating Freeport licensees worse than investors anywhere else in the Bahamas,” Mr Smith told Tribune Business.

Another private sector source, speaking on condition of anonymity, said no foreign investor would agree to ‘lock in’ employment levels for five years, given the “fluctuations” caused by market and economic cycles.

“That’s business suicide,” they said simply.