By NEIL HARTNELL
Tribune Business Editor
The Bahamas does not need corporate taxation to escape its latest ‘blacklisting’, a KPMG tax expert yesterday saying: “That won’t put two fingers up to the EU.”
John Riva, head of tax for the accounting firm’s ‘Islands Group’, told a seminar that the Bahamas needed to separate its immediate response to the European Union (EU) from potential tax reform (see other article on Page 1B) given that this is not needed to address the 28-nation bloc’s concerns.
He instead argued that the Bahamas’ short-term focus needed to address ‘economic substance’, and the EU’s concern - used to justify the ‘blacklisting’ - that this nation had not done enough to prevent its corporate vehicles from being used by multinational companies for tax avoidance purposes.
The KPMG executive urged this nation to turn challenge into opportunity by requiring the ‘managing mind’ for Bahamian corporate vehicles to be domiciled in this nation, thereby ensuring they passed the ‘economic substance’ test and satisfied the EU’s demands.
“You can’t introduce a corporate tax and put two fingers up to the EU,” Mr Riva told assembled Bahamian financial services professionals, suggesting that tax reform was a long-term project that should prioritise this nation’s
“There’s nowhere that says you’ve got to introduce corporate tax. This is all about having a legal requirement to have substance to do business in the Bahamas..... Nowhere does it say you’ve got to have corporate tax.
“They [the EU] are saying that since you don’t have corporate taxation, it provides incentives for non-residents to incorporate companies in the Bahamas, and since there are no legal requirements to have substance you can stick a load of profits in the Bahamas without having any substance in the Bahamas,” the KPMG tax head continued.
“That’s what you’ve been charged with. What they want you to do to enable me to incorporate an IBC is I need to satisfy some form of substance test to do that. After that, I’m fine. If I fail the substance test, someone in the Bahamas needs to notify the EU that I’s trying to avoid tax by allocating profits to the Bahamas. That’s what you’ve been charged with. That’s what you need to sort out.”
Mr Riva’s assertion that corporate tax is not necessary to escape the EU’s ‘blacklist’ will likely raise questions over whether the Government’s proposed response goes too far, given that the Multinational Entities Financial Reporting Bill effectively paves the way for the introduction of such taxation on a host of Bahamian corporate vehicles.
The Bill’s second schedule allows the Minister of Finance, at a time, form and rate of his choosing, to levy corporate taxation on International Business Companies (IBCs), Foundations, Exempted Limited Partnerships, Executive Entities and Investment Condominiums (ICONs) - all key products for the international financial services sector and its clients.
Tribune Business sources said the resulting uncertainty, generated by the wide powers granted to the minister, was continuing to cause consternation in the industry, with clients already inquiring whether they needed to move their business from the Bahamas to other jurisdictions due to the Government’s planned reforms.
Mr Riva, meanwhile, said the Bahamas was “in good company”, with fellow international financial centres (IFCs) such as Jersey, Guernsey, the Isle of Man, Bermuda, British Virgin Islands (BVI) and United Arab Emirates (UAE) having also failed the EU’s ‘fair taxation’ test.
The Bahamas, though, was the only one ‘blacklisted’, despite having met the EU’s other two criteria - tax transparency and compliance with the Organisation for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative.
The EU’s aim is to ensure corporate activity, such as revenues and profits, are booked and taxed in the countries where they are generated. With the Bahamas currently having no legal requirement that IBCs and other vehicles have a physical presence, or conduct real business, in this jurisdiction, the 28-nation bloc fears multinationals may be able to exploit gaps in different countries’ tax types, rates and rules to artificially shift profits here and avoid due taxation elsewhere.
“It’s not the fact you don’t have a corporate tax that you’ve failed it; it’s because you don’t have a substance test,” Mr Riva reiterated. “Nowhere is the EU telling you that you need to introduce a corporate tax. You need to introduce some form of substance test. It’s a marrying up of profits and economic activity.”
Mr Riva said that the Bahamas needed to better understand its business portfolio, and what vehicles such as IBCs are used for, in determining its strategic response to the EU.
And he suggested that this response could merely involve enshrining established business practices into law. To satisfy the ‘substance test’ demands, Mr Riva said it “might be as simple as” having Bahamas-based directors; Board meetings in the Bahamas; local bank accounts; and/or holding a corporate vehicle’s financial information here - all of which would “show the nexus of the company in the Bahamas”.
“I can’t any legislation telling me that’s what I have to do,” the KPMG tax expert said, suggesting that the Bahamas “introduce legislation that enacts what we do in practice”.
Turning to industries and activities that were a particular focus of EU attention, Mr Riva cited banks as an example. With a minimum of two Bahamas-based executives, and designated management, staff and assets domiciled in this nation, he argued that the banking industry already met the ‘economic substance’ requirements.
“All you need to do is pick up the [Central Bank] guidelines and plop them into a legal document,” he suggested. “The way I look at this is this is the way we do it in reality, but we don’t have a legislative mechanism to say that.”
Mr Riva identified captive insurance; inter-group financing/leasing companies; invoicing companies; and intellectual property as other EU ‘targets’ that the Bahamas will have to address, although he suggested few IBCs were used to hold the latter.
“You look at your industries and what you actually undertake through these IBCs, and start to determine what is the minimum standard,” the KPMG accountant, who has advised Jersey’s government on dealing with the OECD and US FATCA, said.
He suggested the Bahamas needed to view the EU ‘blacklisting’ as an opportunity to both set international standards on ‘economic substance’ and boost GDP growth by requiring that IBCs and other corporate vehicles domicile their ‘managing mind’ here, thus generating real business in this jurisdiction.
Much of this activity is currently conducted ‘offshore’, and Mr Riva suggested the Bahamas’ greater population when compared to the likes of BVI and Cayman Islands gave it an advantage in the provision of company directors.
While BVI has 400,000 companies and 36,000 persons, and the Cayman Islands some 110,000 corporate entities and an 80,000 population, the Bahamas has 37,000 IBCs and near-400,000 inhabitants.
“I think this is an opportunity for the Bahamas, and I think very much you should be looking at this as an industry in that way,” Mr Riva said. “This is an opportunity for you.
“If you set the standard here, it will never be lower than what you set with the EU. The Bahamas has set substance as one or two local directors. Cayman, you have to match that. You can’t be a director of 5,000 companies. That’s physically impossible.”
Mr Riva also suggested that it was “not unreasonable” to adopt the economic substance criteria used by the EU’s own member nations in a bid to escape the ‘blacklist’.