By NEIL HARTNELL
Tribune Business Editor
The deputy prime minister has asserted that the new regulatory structure “will not be the death” of International Business Companies (IBCs), as not all will have to pay business licence fees.
KP Turnquest clarified that, while all IBCs must obtain a business licence, “only those” conducting real business and revenue-generating activity will have to pay the associated fees. These charges will not apply to those IBCs that act as passive holding vehicles for investments, real estate and other assets.
“All IBCs as well as Companies Act companies engaged in commercial activity will require a business licence,” he explained in written replies to Tribune Business. “[But] only those IBCs operating with relevant activity will be subject to substance rules and be subject to the licence fees. Passives, by definition, will not.” The latter would only pay the current annual and other fees.
The Government’s unveiling last week of the new financial services regulatory framework led several observers to quickly proclaim an end to the IBC’s status as The Bahamas’ leading product, not least because of fears that all such vehicles will now have to pay business licence fees.
Mr Turnquest’s response, though, makes clear that only those IBCs with “substance”, and carrying on real business via a physical presence in this jurisdiction, will be required to pay fees - especially given plans to again alter the basis on which business licence charges are calculated.
Fees will be determined from 2020 onwards by a “value-based calculation using revenue that is subject to value-added tax”, instead of the current annual gross turnover definition, in a move that further excludes “passive” IBCs - those typically found in the private wealth management structures that form the core of The Bahamas’ financial services business.
IBCs are widely regarded as the international financial services industry’s “vehicle of choice”, given their flexibility and beneficial tax advantages/preferences. As a result, they are widely used in both private wealth management and corporate structures for a variety of purposes.
However, compliance with the European Union’s (EU) anti-tax evasion demands means The Bahamas has effectively had to strip IBCs of these benefits. The Government has “equalised the tax treatment” of IBCs and domestic companies incorporated under the Companies Act, meaning the former will lose much - if not all - of their competitive advantages by end-2021.
This is when The Bahamas must eliminate all preferential tax breaks, such as the 20-year Stamp Duty exemption, afforded to IBCs so that it complies with the recently-passed Removal of Preferential Exemptions Act 2018 - the law that meets a key EU demand by eliminating the advantages previously enjoyed by non-resident entities and their foreign investor owners.
Many observers immediately saw the introduction of Business Licence fees as heaping extra costs on to IBCs, further undermining their already-impaired competitiveness. But Mr Turnquest argued to Tribune Business that predictions of the Bahamian IBCs demise are greatly exaggerated.
“This will not be the death of IBCs operating legitimate business, and it provides an opportunity for expansion of local involvement in the financial services industry and service providers,” he told Tribune Business. “We expect our book of compliant business to remain stable and to grow as the evolving standards settle.”
Gowon Bowe, the Bahamas Institute of Chartered Accountants (BICA) president, backed Mr Turnquest’s position that only “substance” IBCs will end up paying Business Licence fees.
While “none would be exempt” from having to obtain Business Licences, he agreed that “passive” IBCs would not attract fees since they will not be participating in revenue-generating activity subject to VAT.
“Any IBC on the active register will be expected to apply for a Business Licence but will not pay a fee because they will not have any positive VAT-rated revenue,” Mr Bowe explained to Tribune Business.
“This is an initiative to ensure the commercial substance and removal of preferential treatment legislation is backed by an actual revenue-based regime.”
He added that the EU itself had not determined how to treat the activities of passive investment holding companies not doing real business, especially since investments typically enjoy preferential tax treatment because of the economic and employment activity they generate.
“Where investment income from passive holding companies is concerned, the jury is out globally on how they should be taxed and treated,” Mr Bowe said. “That is one where we’re saying: ‘We’re not trying to address it before the rest of the world addresses it’.”
The BICA chief said one potential advantage of the reforms was that IBCs, which typically conduct business outside The Bahamas, could now use the Business Licence regime to pay tax here and claim this nation as their primary domicile. But, to do so, they would have to demonstrate revenue-generating activities are conducted from here to justify this treatment.
The IBC-related Business Licence reforms are part of a wider financial services regulatory shake-up of historical significance for The Bahamas as it moves to implement reforms that comply with the 28-nation EU’s anti-tax evasion offensive.
For the Government also broke down the long-standing divide between Bahamian domestic and international financial institutions in a bid to “make the playing field level” and allow them to offer services to both domestic and international clients once the necessary regulatory approvals are in place.
This, again, is designed to eliminate the “preferential” tax treatment institutions operating in the international sector received compared to their domestic counterparts. While it ends the decades-long separation of the two market segments, and radically alters The Bahamas’ financial services business model in theory, Mr Turnquest said there was unlikely to be a major change in practice.
“The change in framework will not result in a significant shift in the way the sector operates,” the Deputy Prime Minister told Tribune Business. “The elimination of preferences and eligibility for ‘offshore’ banks to enter the local market may result in an expansion of activity although this is not expected to be significant at the moment.”
Others, though, took a more pessimistic view. Paul Moss, Dominion Management Services’ president, said the reforms had “closed the door” on many IBCs, with the product itself “losing a lot of lustre”.
He also branded the tearing down of the domestic/international financial services divide as “a huge change; a 99 percent change” that will alter how The Bahamas has conducted financial services business for decades.
“Unfortunately, it means this is a door closing for many IBCs,” he told Tribune Business. “To the extent that there are companies that still want to do business here, it means they will have to pay these fees and incorporate them into their business.
“You’re not going to find many new IBCs incorporated, although that has dropped off tremendously already. It’s going to be a further closing of that door for IBCs. It’s incredible. You’re going to have many IBCs that simply stop conducting business, and will be struck off, with some going into liquidation to kill off the business itself.
“These are the two principle activities I see happening for IBCs, as they’ve lost a lot of their lustre. It’s not going to attract people any more. Right now the IBC is an enigma. You don’t know what it is because they will not have the preferences attached to them that they had before.”
Mr Moss pinned his hopes on the likely legal challenge, already forecast by many leading attorneys, to the premature end to these preferential IBC tax benefits on the basis that it breached investors’ rights, and the “legitimate expectations” they had of enjoying them for their full term.
“I think it’s really a huge change,” he added of the new financial services regulatory framework. “It changes the way we have conducted business all these many years before. I would say it’s 99 percent change. It’s a big change; a big deal. It’s a huge deal.
“It’s unfortunate the Government has done it in the manner in which they have, without doing things in a way that really benefits The Bahamas. It is crazy. It seems it doesn’t matter to the OECD and EU whether countries change or not. They’re still going to put the pressure on the Government going forward. I really see the financial services business as dying; I’ve never said that before.”