By NEIL HARTNELL
Tribune Business Editor
The Attorney General yesterday expressed confidence that The Bahamas can both meet EU demands and enable financial services to recover from "two decades of punishing losses".
Carl Bethel QC, speaking as the Government unveiled its legislative response to the European Union's (EU) "economic substance" and "ring fencing" requirements for wide industry consultation, said it was aiming to "strike the correct balance that will enable the industry to regain its footing".
He told Tribune Business that the Commercial Entities (Substance Requirements) Bill 2018, which was discussed at yesterday's financial services industry briefing, was intended to fulfill The Bahamas' international commitments while repositioning the sector for future growth.
"This is something that we want a good consensus position on across the board," Mr Bethel said of the bill, "which addresses international concerns but preserves, to the extent possible, the space for growth in our industry as we reposition ourselves in the international financial services community.
"It's a balance that has to be struck. We have given our commitment to best practices and to adhere to international standards; to adhere to all commitments. Our industry understands that, and our industry is prepared to adapt as required and to grow.
"That's our intention: To have space for our industry to grow. After two decades of punishing losses we hope to strike the correct balance that enables the industry to regain its footing and grow. I'm confident it can be done, and I hope others - if they don't already - come to share that confidence."
Mr Bethel's reference to "two decades of punishing losses" refers to the Bahamian financial services industry's contraction, and subsequent growth struggles, following the onslaught of international regulatory initiatives that culminated in this nation's 2000 "blacklisting" by the Financial Action Task Force (FATF).
The comprehensive overhaul of this nation's financial services regulatory regime, enacted by the then-Ingraham administration, resulted in the number of licensed Bahamas bank and trust companies dropping from 410 to today's figure of around 250 - though some would argue it got rid of many marginal players, while the "blue chip" institutions stayed.
The Bahamas was ill-prepared for the new global financial services environment, one based on transparency and non-tax driven business, with its reliance on this industry as the second "economic pillar" and source of high-paying jobs resulting in reduced incomes and economic activity, plus higher unemployment.
While the FATF 'blacklisting' was related to anti-money laundering and terror financing, the basis of the initiatives facing the Bahamas and other international financial centres (IFCs) soon shifted to tax-related concerns advanced by the likes of the US, EU and Organisation for Economic Co-Operation and Development (OECD).
The EU's demands, which the Commercial Entities (Substance Requirements) Bill is intended to address, is merely the latest offensive that the Bahamas has to defend itself against. It has until December 31 to address the EU's anti-tax avoidance demands if it is to avoid ending up on the 28-nation bloc's 'blacklist' again.
Mr Bethel yesterday acknowledged that the Bahamas was working to a tight industry consultation timeline of "a matter of weeks", given that it ideally needed to have its legislative reforms enacted and in place by December 1.
He said the Government was talking to the financial services industry "a high level to address any questions, and take on any concerns" they have with the Bill. Legislative changes would be assessed, and possibly incorporated, into the Bill so long as they did not undermine the concepts behind it.
"The important thing is that while there appear to be questions there's no outright objection to the draft," the Attorney General told Tribune Business.
He explained that, based on industry feedback, the Government had decided to address the EU's "economic substance" and "ring fencing" demands in one Bill rather than separate them because the two issues were interlinked.
"One of the early feedbacks we got prior to settling of the draft was that substance requirements and ring fencing are really tied at the hip," Mr Bethel said. "It was accepted that they be dealt with in one Bill.
"We are right now consulting domestically with our industry. It's high-level consultation; very technical, very in-depth, that is being foreshadowed. Because it's still an enormously sensitive matter we have to proceed in a way that is in tandem with industry.
"As they are raising questions we are answering, and engaging in dialogue that is designed to shape the best possible legislation in the view of all concerned and in the circumstances."
The Commercial Entities (Substance Requirements) Bill is designed to address the EU's demand for all nations to impose 'economic substance' regimes that effectively require companies to have a physical presence - and do 'real business' - in a jurisdiction.
It wants corporate profits, revenues and assets to be taxed in the jurisdictions where they are generated. They are thus aiming to prevent companies, especially multinational corporations, from exploiting gaps in tax types, rates and rules to artificially shift profits from jurisdictions where they are generated to low or 'no tax' jurisdictions, thus lowering their tax bill.
The EU also wants the elimination of 'ring fencing', or preferential tax regimes for non-resident entities and foreign investors.
However, many Bahamian financial services executives are calling on the Government to exploit the EU's demands to reposition the industry and wider economy by using the "economic substance" requirement to attract companies to do 'real business' here.
Ryan Pinder, a former financial services minister, told a BFSB-sponsored seminar this year that family offices, intellectual property, information technology and regional distribution/trade hubs, the latter with World Trade Organisation (WTO) membership in mind, were among the industries the Bahamas could target via a transparent, preferential tax regime associated with 'economic substance'.
The EU previously 'blacklisted' the Bahamas on March 13 for allegedly being non-cooperative in the fight against large-scale tax avoidance by multinational companies, forcing the Government into a rapid scramble that ultimately persuaded the bloc to de-list this nation.
It had complained it did not receive the 'high level political commitment' it had been seeking from the Bahamas to address its concerns on 'ring fencing' and the absence of 'economic substance' requirements for corporate vehicles operating in this jurisdiction