The Tribune

By RICHARD COULSON

Before enjoying Christmas euphoria, we should spare a moment of sympathy for Deputy Prime Minister Peter Turnquest over the dilemma he faced in his December 5 address to the House tabling five pieces of legislation, three of which are crucial to the creation and future existence of Bahamian business entities.

On the one hand, he insisted “The Bahamas has consistently maintained its right to establish domestic law, to set its own tax policy ... no conceding on the principle of sovereignty...”

On the other, his whole address concerned new legislation only being tabled at the insistence of the EU, the OECD and the powerful nations backing them, with “blacklisting” threatened for non-compliance.

Mr Turnquest points out this is simply the latest step in the campaign since 2000 to rein in The Bahamas and other offshore financial centres. The battle is not over principles, but purely over money. As the foreign nations suffered capital outflows, they felt their tax base was being “unfairly” eroded by so-called harmful tax practices (i.e. low taxes) offshore. In his words, this is “quite the hypocritical situation... but also a serious reality we have to face.” Hypocritical or not, the many consequences of blacklisting are so dire, including total loss of correspondent banking, that our country along with our cousins like Cayman and Jersey, has no choice but to adopt the new rules of the game.

Mr Turnquest takes the optimistic view that enacting the legislation will not damage our status as an international financial centre - a changed one, but fully capable of attracting business. The essential effect of the new laws will be to destroy the whole concept and reason for our IBCs (international business companies). They have enabled ventures that are conducted far from our shores to be incorporated here - and thus zero taxed - with no local assets, employees or mind and management, only a few statutory documents held by a resident agent acting on behalf of hundreds of clients. I have seen one estimate of 40,000 Bahamian IBCs, and over 100,000 in Cayman, many of which have already been liquidated, as evidenced by daily press notices.

The system worked smoothly for over 20 years as foreign taxes climbed and clients begged for legal avoidance. But the whole arrangement has been illusory. IBCs are an ingenious legal fiction with no basis in the realities of business practice. They have provided a nice income to lawyers and corporate administrators, which will soon vanish. Existing IBCs without local substance are given three years to wind up their business and dissolve and no new company will be set up as an IBC because it must have the same features as a domestic business under our Companies Act. Our law firms and accountants will be kept busy radically amending their “Guides to Doing Business in The Bahamas” by saying farewell to IBCs.

Mr Turnquest’s optimism about companies of real substance proliferating in The Bahamas to replace IBCs may be well founded but awaits more proof. It will require more than his current legislative initiatives about corporate structure. Any foreign entrepreneur or corporate giant planning a subsidiary will want to see an immigration policy enabling the flexible assignment of expatriate staff. He will be looking for steady improvement in the many elements of our “ease of doing business” environment, and, of course, corruption-free administration with no kick-backs or favouritism to political cronies. Eventually, our electric power costs must come down to make us competitive with the US.

Our government is inching its way towards reaching these goals. As a result, we are beginning to attract hi-tech companies like Cloud Carib, whose founders chose Nassau as the base for its regional coverage, already hiring over 50 staff and about to occupy brand new leased office buildings—a far cry from the typical IBC whose existence is evidenced solely by a brass plate (if that).

One risk must be faced by any company setting up in an offshore financial centre: the EU and OECD might decree that some theoretical “standard” level of income tax must be levied even on companies with a full operating presence in the jurisdiction.

Such a blatant invasion of sovereignty may seem unlikely, but who knows what steps the supra-national bureaucrats may take to impose their dream of international tax uniformity?

Their efforts will have to be firmly resisted by The Bahamas and all similar centres, at last joining to form a common front.