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Bahamas' Corporate Tax World's Most 'Corrosive'

By Neil Hartnell

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas yesterday received no credit for laws said to have raised compliance costs by 75-80 percent after its corporate tax policies were rated as the world’s most “corrosive”.

This nation achieved a “perfect” 100 out of 100, a score matched only by the Isle of Man, Turks & Caicos and Anguilla, as it was ranked ninth in the newly-published Corporate Tax Haven Index 2019 and grouped among countries said to have “dealt the global corporate tax system a devastating double blow”.

The Index, published by the Tax Justice Network, a long-standing opponent of international financial centres (IFCs) such as The Bahamas and the tax competition they represent, alleged that this nation and other countries in its “top ten” were “responsible for over half (52 percent) of the world’s corporate tax avoidance risks”.

Accusing them of being “most responsible for the breakdown of the global corporate tax system”, the Tax Justice Network argued: “The top ten jurisdictions have dealt the global corporate tax system a devastating double blow.

“First, the colossal scale at which the jurisdictions have enabled corporate tax avoidance risks to woo multinational corporations has made countries’ statutory corporate tax rates meaningless.

“Second, the jurisdictions have triggered a ‘race to the bottom’ across the globe that will further deplete tax revenues as countries desperate to claw back foreign investment engage in the false economy of ‘tax competitiveness’ and increase their complicity in corporate tax havenry,” it added.

“The corporate tax avoidance risks and corrosive lose-lose outcomes documented by the new index illustrate that what is often referred to as ‘tax competition’ is more aptly described as ‘tax war’.”

Heading the Tax Justice Network’s index, which yesterday received extensive coverage in international media, were The Bahamas’ three major regional rivals - the British Virgin Islands, Bermuda and the Cayman Islands. 

The Netherlands, Switzerland, Luxembourg, Jersey and Singapore came in ahead of The Bahamas in fourth to eighth spots, with Hong Kong rounding out the top ten. Despite scoring a “perfect 100” for corporate tax policies said to be the most “corrosive to the global economy”, this nation was ranked ninth because its share of global investment by multinational companies was deemed relatively small.

The Tax Justice Network’s rankings, and assessment methodology, appear to completely ignore the extensive package of legislation passed by The Bahamas last year to address the anti-corporate tax evasion offensives launched by the European Union (EU) and Organisation for Economic Co-Operation and Development (OECD).

In particular, the Commercial Entities (Substance Requirements) Act dealt with the EU’s demand for all nations to impose “economic substance” regimes that effectively require companies to prove they have a physical presence - and are doing “real business” - in a jurisdiction.

“All companies operating from the Bahamas must demonstrate substantial economic and operational presence or have their activity reported and taxed in the jurisdiction where the substantial relevant activity is conducted, so that they can be assessed for tax purposes in that jurisdiction,” K P Turnquest, deputy prime minister, said of the legislation last year.

In addition, The Bahamas is also eliminating so-called “ring fencing” or preferential tax breaks and treatments granted to foreign investors and non-resident entities which were previously not available to counterparts in the domestic economy.

The Bahamas also committed to, and passed legislation to give effect to, the OECD’s Base Erosion and Profit Shifting (BEPS) initiative that aims to ensure that the profits of multinational companies are taxed in the country where they are generated.

Country-by-country reporting was among the minimum BEPS standards adopted by The Bahamas, but the Tax Justice Network’s rankings totally neglected this by finding such procedures were non-existent in this nation. 

Mr Turnquest, likely in the throes of completing preparations for today’s Budget, could not be reached for comment. But Paul Moss, Dominion Management Services’ president, told Tribune Business that the Tax Justice Network’s index further highlighted the urgent need for The Bahamas to shed the ‘no tax’ label causing this nation to still be perceived as “a tax haven”.

A long-time advocate for The Bahamas to impose a low-rate corporate income tax, Mr Moss reiterated that this nation had to take such action for its own benefit rather than be pushed into by external pressures as this will “send the wrong message” to both clients and citizens.

He added that it was “heart-wrenching” to see the continued decline of a once-proud industry that now “seems defenseless”, with the latest legal reforms - which have fundamentally altered the Bahamian financial sector’s business model - driving a further spike in compliance costs.

“It’s tough,” Mr Moss, who heads one of the few Bahamian-owned firms in the international financial services segment, told this newspaper: “You’re trying to register [client] IBCs to get tax identification numbers, and then you have to do economic substance filings.

“It’s a lot of work to do; it keeps you busy. It’s [compliance costs] really ratcheted it up. It’s really put a dent in it, and we will have to see how we recoup those costs from the clients. I would say they’ve increased around 75-80 percent just from the latest batch of laws, how many man hours we’ve had to put into it. All of that.

“We’ve seen a lot of liquidations already. I think the industry is going to further constrict itself, and get smaller. We’ll have to see how it goes.”

While The Bahamas did not have to implement a corporate income tax to appease the EU and OECD concerns, Mr Moss argued that the Tax Justice Network’s index effectively gave this nation a further shove in that direction.

“That’s what it’s directing us to,” he said. “It’s pushing even further to suggest we go full scale into a corporate tax. Even though it’s something I’ve advocated for for a long time, when you get pressure like this and submit to the pressure, that sends the wrong message to clients and citizens because we should do it for ourselves and not be forced into it.

“Even though I believe income and corporate tax is the way to go, and we should get it done, we should do it because it’s what we want; not because we’re being pressured into it.”

Mr Moss said all jurisdictions had a sovereign right to tax “as they see fit”, and determine the best rates and structure to suit their need, rather than be “dictated to” by foreign interests seeking to drive The Bahamas’ financial services business back onshore to their states.

“Everyone has a right to stand up and determine their own taxation,” he added, “and The Bahamas has to really stand up and fight and say that’s what we want to do.... It’s heart-wrenching to see this industry that has been so robust for a number of decades and now it’s a shadow of its former self and seems defenseless with no one coming to its defence.

“Our leaders are going to roll over and do what they’re asked to do. We have to fight for it, believe in it. But there’s no belief for it and no defence for it. It’s never going to stop, especially f we respond in the manner we have done. We change the laws and do not help our cause. We continue to lose business, continue to lose our way.”

Mr Moss again urged The Bahamas to unite with other IFCs and form a united front against the likes of the EU and OECD, rather than repeat a recent past where all were picked off one-by-one through “divide and conquer” tactics.

Comments

Economist 3 months, 2 weeks ago

The percentage of assets affected by The Bahamas is small compared to the U.S. which is also listed a little further down; though the U.S. has a 60% vs 100% (Bahamas) tax haven rating.

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