By NEIL HARTNELL
Tribune Business Editor
THE Bahamas will only gain “respite” from international regulatory initiatives if it implements a tax regime that moves it to “mid-shore”, a well-known attorney has warned.
Michael Paton, a former Bahamas Financial Services Board (BFSB) chairman, told Tribune Business that this nation had to “seriously consider” a new tax structure if it was to ever escape the clutches of European Union (EU) and Organisation for Economic Co-Operation and Development (OECD) initiatives. Calling for “a holistic” review that embraced all economic sectors, he said the key to any successfully repositioning the Bahamas lay in achieving timelines that avoided any “disruption” locally while still satisfying the EU’s 2018 year-end deadline.
And, while many were comparing the Bahamas to rival Caribbean international financial centres (IFCs), Mr Paton argued instead that this nation needed to measure itself against those considered the “gold standard” - the likes of Singapore, Hong Kong and Qatar.
The Lennox Paton attorney and partner said the Bahamas needed to follow their lead and introduce a low-rate corporate tax, thereby moving itself from ‘offshore to ‘mid-shore’, and shedding the ‘no-rate’ positioning that continually attracts OECD/EU attention.
“If you look at the EU criteria, we can satisfy it without taxation, but if you pull back and look at the bigger issues I don’t think we’re going to get away from them unless we put in place a tax regime that’s in conformity with what’s out there,” Mr Paton told Tribune Business.
“If you want to take the narrow focus and deal with EU issues, you can do that without bringing in new taxation.... If you bring in a corporate tax regime, [the EU’s] criterion 2.2 goes away.
“But the issue, for me, as I see it; the bigger picture issue for us is to move the Bahamas beyond continual reviews and pressure on taxation. We’ve got to seriously consider a new taxation regime for the Bahamas which encompasses the whole structure. It’s got to be a thorough review of how we tax in the Bahamas.”
Mr Paton confirmed that Deloitte (UK), the British arm of the accounting firm, which had previously been hired by the BFSB to benchmark what other IFCs have done on corporate income taxation, has been re-engaged by the Government to examine tax reform options in light of the latest EU and OECD initiatives against this country and others.
The Lennox Paton partner thus becomes the latest person to suggest that the Bahamas’ long-term solution lies in implementing a low-rate corporate income tax structure, a move that would enable it to shed the ‘tax haven’ label and adjust its business model to one based on ‘double taxation’ and investment treaties that target company business.
“I think we have to look seriously at it,” Mr Paton reiterated, emphasising that ‘tax reform’ talks would “pull in” the likes of the Chamber of Commerce and Bahamian accountants, and were “not the preserve of the international side of things” in the Bahamian economy.
He argued that the Bahamas needed to follow the likes of Singapore, Hong Kong and Qatar, and especially the former, in introducing a ‘low-rate’ - as opposed to ‘nil or nominal rate’ - tax that would place it beyond the reach of the EU and OECD.
“There has been a constituency suggesting since at least the Nassau Conference in 2016 about moving the Bahamas into the mid-shore space,” Mr Paton told Tribune Business. “There’s measured taxation on a territorial basis, and those jurisdictions don’t get the pressure like zero tax centres like us.
“I think that’s the bigger picture. It makes sense to be looking at this whole thing holistically.... My concern is: Are we going to be able to do this in a timeline that is not completely disruptive to the economy, and get it done in a timeline that meets the international regulatory pressures.
“I think we can, but it’s going to require a lot of time, dedication and resources. It’s putting the Bahamas into a 21st century global context and how can we compete going forward. The better benchmark is those who are consistently gold standard IFCs, not just our region. I would say Singapore would be the one for me.
“Until we do, we won’t have any respite from this. A will come along, B will come along, C will come along and it continues. We have to get outside the circle. Right now, we’re in the middle of it.”
The 28-nation EU has given the Bahamas, and all other countries, until December 31 this year to meet its anti-tax avoidance demands. However, it went ahead and ‘blacklisted’ the Bahamas earlier this month after it purportedly did not receive the wording and ‘high political level’ commitment to satisfy its requirements.
The EU justified its actions on the basis that the Bahamas had not done enough to prevent its corporate vehicles from being used by multinational corporations for tax avoidance purposes, involving the ‘booking’ of profits and losses in this jurisdiction despite having no physical presence - and carrying out no economic activities - here.
Another concern was ‘ring fencing’, or the existence of preferential tax regimes for non-resident entities and foreign investors, with the Government seeking to address the EU’s concerns via the Multinational Entities Financial Reporting Bill that was released for industry consultation last week.
Mr Paton, though, said the ‘economic substance’ and ‘ring fencing’ issues do ‘not come into play’ if the Bahamas is able to satisfy the EU’s crtierion 2.1, which requires a country to have a tax rate higher than a ‘zero or nominal level’.
“The interesting question for me is if we get a determination that the Government is prepared to move decisively in revamping taxation in the Bahamas, what can we put in place as a commitment market that satisfies the EU on the 2.1 issue,” he told Tribune Business.
“The question is that the timelines are condensed. The EU says we have until the end of 2018 to honour these commitments. The interesting question for me on the 2.1 issue is what has to be in place by the end of 2018 to satisfy that criterion. It would be useful for the Government to get clarity on that point.
“The Deputy Prime Minister alluded to it; that there needs to be better co-ordination and co-operation between the Bahamas and the EU in Brussels in moving this project along. I do have a note of caution; we have to be very careful in our dealings with the EU because they take a legalistic approach.”
Acknowledging the concern and apprehension whenever ‘tax reform’ is mentioned, Mr Paton said it will have to be implemented in a way that broadens the base without increasing the burden on individual Bahamians and businesses.
“We’ve got to look at this thing in total, not silos,” he added. “For example, is there still a rationale for real property tax exemptions for property owned by Bahamians in the Family Islands. That’s a huge tax base that’s been excluded.”