By NEIL HARTNELL
Tribune Business Editor
The Bahamas’ bid to secure a longer investment transition period than three years was blocked by the European Union (EU), which had demanded these incentives be ended in six months.
K P Turnquest, deputy prime minister, yesterday confirmed to Tribune Business that existing investors will only be able to enjoy their special “ring fencing” incentives until end-2021 after EU resistance thwarted the Government’s efforts to obtain up to a 20-year extension for these clients.
Describing the outcome as “unfortunate”, he said the three-year “grandfathering in” period for existing International Business Companies (IBCs), Investment Condominiums (ICONs) and Exempted Limited Partnerships (ELPs) was at least five times’ longer than the 28-nation bloc’s initial position.
“We tried to negotiate for a longer period,” Mr Turnquest told this newspaper. “Unfortunately, the European Union (EU) did not accept. They wanted six months. We negotiated as best we could.
“They would not accept five years, and our initial offer was 20 years, which was consistent with the existing Stamp Duty exemption for IBCs. They would not accept those terms. We tried to push for five years, which was not acceptable to them. We ended up settling for three years, which is consistent with what the OECD advocates for in transition clauses.”
The Government’s handling of “ring fencing” was deemed the most critical issue to the financial services industry’s future by most in the sector, and it remains to be seen whether a three-year transition will be viewed as sufficient time to adjust by The Bahamas’ investor clients.
The “grandfather” period, set out in the Removal of Preferential Exemptions Bill 2018 that was tabled in the House of Assembly yesterday, effectively means that all IBCs incorporated from 2002 onwards will not enjoy the 20-year Stamp Duty waiver their beneficial owners will have anticipated.
Such investors will have had a legitimate expectation of enjoying such preferential incentives, not only as the Stamp tax exemption but also the flat $300 Business Licence fee for non-resident entities. It remains to be seen whether the three-year period is enough to maintain investor confidence in The Bahamas, and avoid any lawsuits from these clients.
Some in the Bahamian financial services industry were yesterday already expressing doubts. Paul Moss, Dominion Management Services president, told Tribune Business: “Three years is a short time for someone who had expected 20 years.
“It should have been more than that; five to seven years. The client has to be able to navigate, and find ways in which to compensate for that. It’s going to be a problem for him.”
Mr Moss argued that The Bahamas’ response could indeed hurt investor confidence, given that it appeared the Government had sought EU and Organisation for Economic Co-Operation and Development (OECD) approval of its legislative package prior to its tabling in Parliament.
“I think it absolutely does,” he told Tribune Business. “I have less confidence in their ability to be sound, prudent and know what’s going on in business. What they’ve done is undermine the confidence an investor has; the Government of the Bahamas has gone outside the halls of Parliament and got the approval of those on the outside. That is going to undermine the confidence of investors coming into the jurisdiction.”
Mr Moss added that The Bahamas appeared to have secured little in return for complying with EU and OECD demands, saying: “There’s nothing coming from them to indicate that ‘blacklisting’ is off the table. They could not get a guarantee we will not end up on a blacklist. It will rear its head again.”
The dilemma facing The Bahamas stems from the EUs’s demanding to eliminate “ring fencing”, or preferential tax regimes for non-resident entities and foreign investors that are not offered to their Bahamian counterparts. Failure to do so would likely see this nation named on the EU’s ‘blacklist’ of non-cooperative countries for tax purposes.
Michael Paton, a former Bahamas Financial Services Board (BFSB) chairman, told last month’s Nassau Conference: “The big issue is ring fencing.... How do we eliminate preferences and ring fencing without causing irreparable, catastrophic damage to the Bahamas as an IFC? As I and others see it, the two primary issues we are facing is Stamp Tax and Business License.”
And Ryan Pinder, a former financial services minister, told Tribune Business earlier this year that The Bahamas “could kiss the entire IBC market goodbye” if it gets its response to Europe’s “ring fencing” demands wrong, branding it a “make or break” issue.
Besides eliminating “ring fencing”, the legislative package tabled in Parliament yesterday has other profound implications for The Bahamas and its financial services industry. Mr Turnquest yesterday acknowledged to Parliament that the Commercial Entities (Substance Requirements) Bill “poses some risk” to corporate vehicles that do not require a physical presence here.
He went further subsequently in speaking to Tribune Business, conceding that the use of IBCs and other products as passive “fronting vehicles” will “not really” occur any more due to the need to meet the EU’s demands.
Mr Turnquest added that “any entity in The Bahamas will have to meet the standard”, compliance with which has to be verified through more reporting to the Ministry of Finance. “It’s all the stuff to prevent the shifting of profits from high tax to low tax jurisdictions, engaging in tax arbitrage,” he added.
The Commercial Entities (Substance Requirements) Bill focuses, in particular, on key financial services industry segments as well as headquartering; distribution and services centres; shipping; intellectual property; and holding companies.
The Bill may be subject to change, with Mr Turnquest disclosing that there was an “ongoing discussion” over the exemption for passive holding vehicles, but he argued that its coming should be viewed as a glass half-full rather than half-empty.
“I think that while some may see this as a death knell for financial services, we see the potential for opportunity,” he told Tribune Business. “Entities have to create real substance, which will create opportunity possibilities for business professionals in space rental, more employment at the high end of the foreign direct investment scale.
“We prefer to look at the positive side. The facts of the matter are that with the global roll-out of these practices there’s no real place for anybody to run any more, and most of us will be competing on a level playing field. There’s always some outliers.”
Bahamas-domiciled entities will have to establish a physical presence in this nation, doing real business, through spending sufficient monies here, hiring staff and ensuring the “managing mind” is resident through holding an “adequate number” of Board meetings here.
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 Government yesterday also brought tax evasion, both domestic and international, into the penal code for the first time by making it a crime to deceive, defraud, obstruct or hinder a public servant seeking to collect due tax revenue.
“This is another one of the requirements to be in line with international practices, and to be able to enforce judgments that may be referred to us. That is the focus of that legislation,” Mr Turnquest told Tribune Business. “It necessarily strengthens domestic law.”