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‘Writing’s on the wall’ on income tax reform

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Gowon Bowe

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas must see “the writing on the wall” and get ahead of the worldwide 15 percent minimum corporate tax push by enacting reforms for its own benefit, a top banker said yesterday.

Gowon Bowe, who headed the private sector’s Coalition for Responsible Taxation prior to VAT’s introduction, told Tribune Business that the country must “get in front” of the G-20/OECD push “as opposed to being behind the 8-ball” via taxation reforms that create a more equitable system, improve economic competitiveness and provide sufficient revenues to fund public services.

In an assessment that contrasted with former finance minister, James Smith (see other article on Page 1B), he argued that it would be “naive” for The Bahamas to believe that the 15 percent minimum global corporate tax initiative will stop at targeting just a handful of multinationals focused on the digital economy.

Warning that The Bahamas cannot afford to be caught flat-footed when this eventually expands to cover all entities, including small businesses, Mr Bowe said this nation needed to work with the financial services industry and its clients to devise an alternative structure that will maintain the sector’s competitiveness while allowing it to “play in other countries’ sandboxes”.

The Bahamas, he added, needed to maintain access to capital markets and clients in developed countries, and not be cut-off because of a non-compliant tax system, as this would endanger “the lifestyle we have become accustomed to” as a small, open economy.

Mr Bowe also suggested that The Bahamas has “wasted the better part of 20 years” by failing to look seriously at tax reform, as the Financial Action Task Force (FATF) blacklisting and OECD’s ‘harmful tax practices’ initiatives of that year were merely an indicator of the future pressures that would be applied to international financial centres (IFCs).

Describing the recent International Monetary Fund (IMF) report, which called for The Bahamas to get ahead of the global push by implementing both its own corporate income tax version and a personal income tax for high earners, as a “high level, desk top” review of the available options, he added that more empirical analysis is now required from the Government.

Suggesting that the Deloitte & Touche (Bahamas) study on taxation from 2016 now needs to be “updated and expanded” through such modelling, Mr Bowe said: “When you look at our tax system, it isn’t equitable, it’s not sufficient to meet the Government’s needs in terms of expenditure, and it’s not competitive.”

The G-20/OECD focus on multinationals was merely a “pilot project” towards developing a taxation framework “palatable” for wider roll-out and imposition on most business categories, he added, arguing that it was “naive to believe the framework being developed is only going to stop at large companies”.

Mr Bowe warned: “We should be ahead of that, look at the writing on the wall and devise a strategy that allows us to be in front of it as opposed to being behind the 8-ball. The last thing we want happening is us signing up to ‘Pillar One’ and ‘Pillar Two’ believing it will only impact those companies.

“Then it manifests itself into a global tax that we’re not ready to implement. I see this as our lead time.” Pillar One and Pillar Two refer to the two key components of the 15 percent minimum global corporate tax initiative.

The first pillar is billed by the OECD as ensuring “a fairer distribution of profits and taxing rights among countries with respect to the largest and most profitable multinational enterprises”.

This taxing rights reallocation only applies to multinationals with annual turnover greater than 20bn euros and profit margins greater than 10 percent, with a particular focus on those that have benefited so much from the digital economy - the likes of Facebook, Apple and Google. Just 25 percent of profit above the 10 percent threshold is to be reallocated.

And the 15 percent minimum global corporate tax, billed as generating an additional $150bn in annual global tax revenues, is only targeting companies with a yearly turnover of greater than 750m euros. The OECD/G-20 are hoping that all countries will formally commit to the initiative in 2022, with implementation targeted at 2023.

Mr Bowe said The Bahamas should be now using what little time it has to explore and develop the mechanisms required to collect and enforce personal income, and corporate income, taxes as well as develop the necessary information repository to correctly calculate taxes due and crackdown on potential fraud and evasion.

“We should be using this time while the OECD finalises its framework to ready ourselves for implementation, even in advance of it,” he added. “We need to get to the basis of ability to pay as opposed to some arbitrary mechanism. Right now it’s consumption.

“We need to have something that allows us to equitably distribute the responsibility and, more important, have it very transparent in terms of looking at the revenues and their use, and what is being taxed.

“In my view, The Bahamas has wasted the better part of 20 years because when we were blacklisted, and the [OECD] inclusive framework came about in 2000-2001, that was always an indicator that the OECD and larger countries felt tax arbitrage opportunities were a disadvantage to those countries.”

The Bahamas, as small, open economy that relies on being a services exporter via its status as an international business centre and financial services centre, cannot afford to be cut-off from key global markets.

“I don’t subscribe to the notion that we do it because they want it,” Mr Bowe said of tax reform. “I subscribe to the notion we want to play in their sandbox. We need to develop strategies that allow us to play there. If they exclude us, we’re in even deeper trouble. We need to be forward looking and get ahead of this; grey listings, blacklistings and what they impose in their sphere.

“We don’t want to be first out the gate, but we don’t want to be left in cement shoes when the rest of the world is scampering down the track. If we want to play in their sand box, we have to play by their rules. I hear it from politicians: Why let them dictate to us? They forget the childhood experience, where if you went to someone else’s court you had to play by their rules.

“If you didn’t want to do that, and go to their court, that’s fine but The Bahamas is an open economy. We import everything we need, so we need an open economy in The Bahamas to sustain the lifestyle we have become accustomed to. If the rules change, don’t cry about it. Adapt, make sure we comply with those rules and beat them at their own game.”

Mr Bowe acknowledged that the IMF report had become “political fodder”, and added: “It should not have been haphazardly issued. It should have been developed into a ‘white paper’ and road map to what I call the future tax system of The Bahamas.”

Comments

LastManStanding 9 months, 3 weeks ago

What percentage of our GDP is made up of offshore banking/financial services anymore? The industry has only been in decline since the early 2000s and surely cannot be worth further destroying our economy over.

What is the income tax rate in the Caymans? As a far superior offshore center than us, will they be adding an income tax? I cringe every time I see some IMF or OECD talking head/report compare us to Jamaica, Barbados, or anywhere in the Caribbean really. We are not even located Caribbean, and none of those countries are examples of what we should be aspiring to become. They are third world crap holes to be rather frank. The Bahamas is the third wealthiest nation in the Americas, but would be fifth if the Caymans and Bermuda were independent nations. Those are who we should be looking to for guidance and inspiration.

The Bahamian economy was explicitly designed around being a no tax jurisdiction. What else is going to attract permanent residents here? Income taxation is done on the basis of residency in most parts of the world, excluding the United States (who does give an exemption of up to 100k for non-resident citizens though), so how many economic PR holders are going to remain when we jack an income tax on them for living here? Why do you think Sean Connery lived in the Bahamas before he passed (among many other well known individuals). Furthermore, over half of the Bahamian population makes less than 20k a year, how can you expect them to pay out of their meager earnings? You will drive the Bahamian working class further into poverty by doing so. Not to mention that the informal economy is still huge here.

My God, I can already see the horror of having audits used as a tool of political persecution. The Shane Gibson fiasco(s) will look like child's play. Income tax is an absolutely horrible idea all around, and anyone proposing it needs to realize that we just can't do it. Our economy was explicitly structured around being a no to low tax jurisdiction, and any attempts to change that will horrifically break it.

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Proguing 9 months, 2 weeks ago

Sir, you are correct, Caymans is the model for the Bahamas to follow, not some countries that are far worst than us...

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donald 9 months, 2 weeks ago

Income tax is a nightmare for accounting and Yes! it will be used as a tool to audit political opposition!!!

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