By NEIL HARTNELL
Tribune Business Editor
A top QC would be “very surprised” if the premature end to foreign investors’ preferential tax breaks is not challenged in the Bahamian courts within the next three years.
Brian Moree QC, senior partner at McKinney, Bancroft & Hughes, told Tribune Business that the elimination of such preferences was likely to prove “more challenging” than the European Union’s (EU) other demand for Bahamian-domiciled corporate vehicles to have “economic substance”.
Agreeing that existing investors had a legitimate expectation that they would enjoy tax breaks, such as the 20-year stamp duty exemption provided to International Business Companies (IBCs), for their full term, Mr Moree conceded that the three-year transition period agreed with the EU was “clearly” not long enough.
As a result, the early end to such preferences - which must be eliminated by 2021 - was likely to spark legal action by aggrieved investors on the basis that their legitimate entitlements and rights have been breached.
Should the Bahamian judicial system rule in favour of such legal challenges, Mr Moree argued that the EU - as well as the Government - would have to respect this even though it would likely extend the life of such preferential benefits.
“This whole elimination of tax preferences is a major challenge. I think that may well prove to be more challenging than the economic substance legislation; we’ll have to wait and see,” Mr Moree told Tribune Business.
“I think there’s a very good prospect of that being challenged in the courts, especially when you end up with tax concessions that give rise to vested interests. I would be surprised if, at some point in the next three years, this is not challenged in the courts.
“This is going to be an area where we have to see how it works out. The challenge may not come until we get to the end of that period. But I’d be surprised if the three-year period expires without a major challenge in the courts.”
The need to comply with the European Union’s (EU) anti-tax evasion/avoidance drive means that The Bahamas has to eliminate all “ring fencing”, or preferential tax regimes for non-resident entities and foreign investors that are not offered to their Bahamian counterparts operating in the domestic economy.
Despite the Government’s efforts to secure a longer transition period, the Removal of Preferential Exemptions Bill 2018 only allows existing IBCs, Investment Condominiums (ICONs) and Exempted Limited Partnerships (ELPs) to maintain their special investment incentives - such as the Stamp Duty break and flat $300 business licence fee - for a further three years until 2021.
This effectively means that all IBCs incorporated from 2002 onwards will not enjoy the 20-year stamp duty waiver their beneficial owners will have anticipated, creating the grounds for legal action that have been flagged up by Mr Moree and others.
K P Turnquest, deputy prime minister, conceded when introducing the Removal of Preferential Exemptions Bill 2018 for parliamentary debate that the early end to these incentives would create issues that The Bahamas needed to “carefully negotiate” to avoid sparking mass litigation.
He previously told Tribune Business that the Government initially sought a 20-year transition period so that existing preferences could run their full course but, not surprisingly, this proved a non-starter with the EU.
The 28-nation bloc instead demanded that all such incentives be eliminated within six months of 2018’s year-end, with the Government moderating its stance to seek a five-year transition - a timeframe many in the Bahamian financial services industry believed could be acceptable.
The EU again refused, though, and eventually settled with The Bahamas on a three-year changeover that takes effect from end-2021.
Asked whether the three-year transition was sufficient for this nation’s investor clients, Mr Moree replied: “I think the answer is clearly no. We would have preferred longer. The Government was trying to secure at least five years, but what they ended up with was the best deal they could do.
“We didn’t end up with what was needed and necessary. We ended up with the best deal the Government could get.” And the EU, while acknowledging the likelihood that its demands could ignite a litigation frenzy against the Government, has adopted the attitude that this is The Bahamas’ problem and not its own.
Mr Moree, though, said the EU - just as much as the Government - would have to accept the outcome of any Bahamian court verdict over the premature end to preferential tax breaks even if it went against its desires.
“If that happens the Government will have to comply with whatever decision the court makes,” he told Tribune Business. “If the court says no, you can’t do it, one would expect the EU to respect that position as you cannot expect to have a democratic country ignore the rulings of the court. We’ll have to wait and see how that works out.”
The elimination of preferential tax breaks will impact most, if not all, corporate and private wealth management business domiciled in The Bahamas since many employ IBCs, ICONs and ELPs in their structures.
As a result, it is likely to have a greater effect that the EU’s other key demand - that all entities which are part of corporate networks, especially those controlled by multinational entities, conduct real, substantive business in The Bahamas or otherwise their revenues and profits be reported - via the Ministry of Finance - to home country tax authorities.
Given that The Bahamas has traditionally focused on private wealth management as its core business, as opposed to the corporate type, it is likely to have fewer entities impacted by the EU’s “substance” as opposed to “end ring fencing” demands.
John Riva, head of tax for KPMG’s ‘Islands Group’, said as much at a Bahamas seminar early last year. And Mr Moree, in his recent interview with Tribune Business, said he “intuitively tends to agree with that” despite the absence of data to back such assertions.
“The impact depends on how many companies are caught by this legislation,” the senior McKinney, Bancroft & Hughes partner told Tribune Business. “What’s important is that we maintain a level playing field in the international community across the board so countries can’t arbitrage their regime against others.”
Mr Moree added that it would be “profoundly disappointing”, and “very difficult”, for the EU to “blacklist” The Bahamas when its finance ministers meet next Friday given this nation’s efforts to comply with its demands.
“I think in the current circumstances it will be very difficult, and profoundly disappointing, if there were any further threats to blacklist The Bahamas because we certainly seem to be fully compliant with the requirements and we were on time in delivering the new legislation,” he said.
“It would seem that the Government has delivered on its commitments to the OECD and EU with regard to the legislation, which it agreed to pass before the end of the year. It was an aggressive legislative agenda, and a very significant and important one which involved fairly complex provisions, particularly with regard to economic substance and physical presence and the BEPS legislation for the OECD.”