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No ‘Substance’ To Private Wealth Fear

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Private wealth management structures “ought not to” be impacted by The Bahamas’ physical presence response to global anti-tax evasion initiatives, the deputy prime minister said yesterday.

KP Turnquest told Tribune Business that the “substantive presence” element in the legislative package to address the European Union (EU)/Organisation for Economic Co-Operation and Development (OECD) would only impact corporate entities in such structures if they were doing “real business”.

“It depends on whether they are engaged in ‘real activity’,” the deputy prime minister confirmed of the Commercial Entities (Substance Requirements) Bill’s likely impact. “If they’re just holding passive assets it ought not to, but it needs to be applied against the [physical presence] test.”

While the latest EU/OECD initiatives are largely aimed at combating tax evasion by companies, especially multinational entities, much of The Bahamas’ existing financial services comes from private wealth management.

This focuses largely on trust and estate planning, and other services demanded by high net worth individuals and their families, which means the new “substance” or physical presence requirements will not apply to them.

More problematic for The Bahamas’ private wealth business is the elimination of existing tax breaks they, and their non-resident corporate vehicles, may enjoy as a result of the EU’s pressure to end so-called “ring fencing” through the Removal of Preferential Exemptions Bill. The Register of Beneficial Ownership Bill will also make some nervous about whether they will be able to maintain legitimate privacy.

Mr Turnquest, meanwhile, conceded that “there is a risk that some entities” caught by the Commercial Entities (Substance Requirements) Bill will choose to “exit the jurisdiction”, but added that The Bahamas has “no control over that”.

He told Tribune Business he expected “most to come into line” with the Bill’s requirements, and said those affected would have “no place to run to” as all countries will be subject to the requirements” through the EU’s bid to create a level playing field.

“It is a fairly significant piece of legislation that has to be considered,” he told this newspaper. “I’m sure there’ll be some review of portfolios to determine how they will be affected. We feel most will see the benefit of coming into line with the substance Bill and establish a physical presence so they can benefit from being in the jurisdiction.”

The Deputy Prime Minister also reiterated his hope that the Bill, combined with The Bahamas’ tax neutral platform and other attractions such as the Commercial Enterprises Act, could ultimately boost the economy and employment by enticing more companies to do real business here.

“We believe it will offer opportunities for local service providers and local employees of talent to be employed in real, substantial activities with respect to operations operating from The Bahamas where there was no requirement for a physical present in the past,” Mr Turnquest added.

He pointed to Shell’s relocation of its Caribbean headquarters from Barbados to The Bahamas, for which the opening ceremony was held this week, as an example of the economic and jobs growth that can be generated from companies with a physical presence in this nation.

Headquarter operations, together with banking, insurance, fund management, financing and leasing, shipping, distribution or service center operations, and holding companies, are the business activities that must have a “substantial presence” in The Bahamas through offices and employees and be conducting “real business” activities.

Mr Turnquest told Tribune Business it was “too early to talk” about developing specific incentives regimes to attract each type of industry outlined in the Bill, adding: “We want to have an opportunity to have a conversation with stakeholders on all sides and go from there.”

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.

Mr Turnquest said The Bahamas’ legislation, which is benchmarked on Jersey’s, meets these demands by eliminating the “distinction” that allowed companies to form International Business Companies (IBCs) and other corporate entities as passive “fronting” or holding vehicles that had no physical presence - in terms of an office or staff - in this nation.

“All companies operating from the Bahamas must demonstrate substantial economic and operational presence or have their activity reported and taxed in the jurisdiction where the substantial relevant activity is conducted, so that they can be assessed for tax purposes in that jurisdiction,” the Deputy Prime Minister explained.

Conceding that there was “a new paradigm” when it comes to financial services, Mr Turnquest said the criteria for assessing whether a company has complied with the Bill - besides having an office and staff here - includes the presence of “mind and management” through directors and Board meetings.

“You can’t just pad a company with nominee directors,” he added. “They must have the qualifications to fulfill the substance requirements and make the decisions they’d be expected to make in the conduct of business.

“In essence the intent of the Commercial Entities (Substance Requirements) Bill 2018 is to make the activities of an entity commensurate with its presence in The Bahamas. This means that, at its most basic level, it requires that the included entities have a bona fide office and be more than a ‘brass plate’ at the office of its registered agent.

“The entity should also have tangible assets with a direct connection to its business, and the entity should be in compliance with all reporting obligations within the jurisdiction.... The EU has sent a clear message that substance requirements legislation must be passed by December 31, 2018.”

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