By NEIL HARTNELL
Tribune Business Editor
THE Bahamas can become a “neutral” venue for deal structuring and other major transactions “if we can get ahead of the curve” on the latest tax avoidance crackdown, a prominent banker argued yesterday.
Speaking after G-20 finance ministers endorsed the concept of a 15 percent minimum global corporate tax rate, Gowon Bowe told Tribune Business that The Bahamas can remain relevant as an international financial centre (IFC) even if it is no longer competing on “tax arbitrage”.
Despite the world’s major industrialised countries move to impose a uniform tax rate on all nations, the Fidelity Bank (Bahamas) chief said The Bahamas can still get “a leg up” on its rivals by getting ahead of the G-7 and G-20 and becoming a Switzerland-style domicile that capitalises on its common law status to become a transactions hub for companies and high net worth individuals.
Asserting that The Bahamas’ sovereignty gives it an advantage over Caribbean competitors such as the Cayman Islands, British Virgin Islands (BVI) and Bermuda, all of whom are British territories, Mr Bowe said it was critical to reform the tax system in a way that prioritised this nation’s needs but was also “beyond reproach” when it came to complying with evolving global standards.
His remarks came as the G-20 finance ministers this weekend backed the earlier agreement of the G-7 on a 15 percent minimum global corporate tax rate. The ministers, in their communique following a summit in Venice, Italy, said: “After many years of discussions and building on the progress made last year, we have achieved a historic agreement on a more stable and fairer international tax architecture.
“We endorse the key components of the two pillars on the reallocation of profits of multinational enterprises and an effective global minimum tax as set out in the [statement] released by the OECD/G-20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on July 1.”
The G-20 finance ministers called for a BEPS implementation plan to be readied by the time they meet again in October 2021. “We welcome the consultation process with developing countries on assessing progress made through their participation at the OECD/G20 Inclusive Framework on BEPS and look forward to the Organisation for Economic Co-operation and Development (OECD) report in October,” they added.
While The Bahamas is among the 130 nations who have committed to the BEPS framework, low-tax European nation such as Ireland, Hungary and Estonia have yet to do so. And international media reports over the weekend suggested that Caribbean competitors such as Barbados and St Vincent and the Grenadines, as well as the likes of Kenya and Nigeria, also have not signed on.
However, Janet Yellen, the US treasury secretary, pledged in vague language that any hold-outs will not undermine the agreement’s impact. “I should emphasise it’s not essential that every country be on board,” she said. “This agreement contains a kind of enforcement mechanism that can be used to make sure that countries that are holdouts are not able to undermine … the operation of this global agreement.”
The Ministry of Finance, in an earlier statement, said that while committing to the BEPS initiative it had “at the same time lodged reservations particular to The Bahamas”, although it did not say what these were or how they will work.
The OECD, meanwhile, continued to tout BEPS as signalling “the end of tax havens” as it targets 2023 for the initiative’s implementation. “Tax havens have thrived over the years by offering secrecy (like bank secrecy) and shell companies (where the company does not need to have any employees or activity in the jurisdiction) and no or low tax on profits booked there,” the OECD said.
“The work of the G-20 and the global forum has ended bank secrecy (including leading to the automatic exchange of bank information), and the BEPS project requires companies have a minimum level of substance to put an end to shell companies along with important transparency rules, so that tax administrations can apply their tax rules effectively.
“‘Pillar Two’ would now ensure that those companies would pay at least 15 percent tax on their profits. The cumulative impact of these initiatives means that the ‘tax haven’ as people think of them would no longer exist,” the OECD added.
“Those jurisdictions that offer international financial services may continue to find a market for their services, particularly where they add value for their customers in providing advice and support for commercial transactions that are not tax driven.”
Mr Bowe yesterday hinted that the latter avenue represents the way forward for The Bahamas. “I think we have to look at this as really the impetus for readying ourselves to take advantage of what comes down the pipeline,” he told Tribune Business.
“Our infrastructure and strategy has to be in place, feeding off the ‘sip, sip’ coming out of the G-20 and OECD. We do not want to be in a position of reacting to the implementation of the BEPS Inclusive Framework; we want to be in a position to leverage the BEPS Inclusive Framework so we can see it as an advantage and selling point as opposed to catch up.”
The BEPS Inclusive Framework contains two elements, referred to as ‘Pillar One’ and ‘Pillar Two’. The latter is the 15 percent global minimum corporate tax rate, which the OECD is billing as “putting a floor on tax competition” and preventing a so-called ‘race to the bottom’ by ensuring the profits/revenues of multinational entities attract at least this rate of tax wherever they are in the world.
And the first ‘pillar’ is effectively a reallocation mechanism to ensure that taxes generated by large multinational enterprises are redistributed to the jurisdictions where their products and services are actually bought and sold. The reforms have been touted by the G-20/OECD as ensuring such companies pay their fair share in taxes, and a counter to tax avoidance in a digitalised global economy.
This is all designed to prevent these conglomerates avoiding taxes in countries where their products/services are delivered by shifting profits/revenues to low or ‘no tax’ jurisdictions where they do no or little business. Multinational companies use often-legitimate tax avoidance strategies to “exploit gaps and mismatches” between different countries’ tax rules and “artificially shift profits” to low or ‘no tax’ jurisdictions.
Mr Bowe, though, said The Bahamas needed to position itself ahead of the G-20/OECD by developing a tax structure that meets its own economic and fiscal needs yet complies with the developing international demands.
Suggesting that there will be few permitted exemptions, he added that the initiative was developing “blocs” of nations in Asia, Europe and elsewhere who The Bahamas could seek to cater to moving forward. “For places like The Bahamas that becomes an opportunity,” Mr Bowe argued.
“We become their service provider of choice, fitting into the global framework, or fitting an exemption that would be less costly for us and others, seeing it as a tax opportunity. But we have to have a system that is beyond reproach. Our biggest thing is: We kind of know what the framework is going to look like, and we need to look for niches in that where we satisfy our purposes and that of international players.”
Pointing out that companies and high net worth individuals are all seeking “neutral environments” for deal structuring, Mr Bowe said: “The Bahamas, even if not for tax arbitrage, can provide neutrality to an international standard that can be used for structuring.
“It’s now not so much about tax arbitrage but common law jurisdictions where the environment is well known. It’s one that can provide opportunity if we get ahead of the curve and have a system that is recognised internationally, but neutrality can give us a leg-up on other jurisdictions and sovereignty can help in that regard.”