By NEIL HARTNELL
Tribune Business Editor
The government yesterday pledged it will not be bullied by this weekend’s 15 percent minimum global corporate tax deal amid warnings that The Bahamas cannot afford to be “burnt” by any knee-jerk response.
The Ministry of Finance, in a statement responding to the agreement announced by the G-7 (group of seven) finance ministers, indicated it was executing just such a measured approach by saying it was assessing whether there are any consequences for The Bahamas’ domestic tax system and international financial services industry.
It also said this country “reasserts its sovereign right to determine the tax structure best suited for the ongoing development of the country” in response to the pronouncement by the world’s most powerful economies that they have reached agreement on how to combat tax avoidance by major multinationals - especially those in the so-called “digital” economy.
The G-7’s finance ministers, unveiling an agreement that the German representative described as “bad news for tax havens”, said in an end-of-summit communique: “We strongly support the efforts underway through the G20/OECD inclusive framework to address the tax challenges arising from globalisation and the digitisation of the economy, and to adopt a global minimum tax.......
“We will provide for appropriate co-ordination between the application of the new international tax rules and the removal of all digital services taxes, and other relevant similar measures, on all companies. We also commit to a global minimum tax of at least 15 percent on a country-by-country basis.
“We agree on the importance of progressing agreement in parallel on both pillars, and look forward to reaching an agreement at the July meeting of G-20 finance ministers and Central Bank governors.” Much, though, remains to be done to implement this agreement worldwide, with low-tax European nations such as Ireland and Cyprus already voicing opposition to its trampling of a sovereign nation’s right to set its own taxes.
For The Bahamas, as a ‘no tax’ jurisdiction with zero history of personal or corporate income taxes, it is still unclear what impact this 15 percent global minimum corporate tax will mean - especially since there was a suggestion coming out of the G-7 finance minister’s meeting that countries will still be free to determine their own tax rates and systems.
However, if multinationals operating in The Bahamas pay zero taxes here, they will face the prospect of their home countries levying at least a 15 percent tax on profits and revenues repatriated from this nation to bring them up to the international minimum.
Several observers yesterday also suggested that the G-7 initiative will have minimal impact on The Bahamas’ financial services industry, at least in the “short-term”, because this nation has traditionally focused on private wealth management as opposed to the multinational ‘offshoring’ that is the main target of the ‘15 percent’ drive.
Concerned that the likes of Facebook, Amazon and Google are exploiting legal tax avoidance loopholes by switching revenues and profits away from jurisdictions where these monies are actually earned, and instead transferring them to low-tax jurisdictions to minimise their exposure, the G-7 nations believe their actions will prevent the loss of critical tax revenues at a time when their treasuries are trying to rebound from COVID.
“I would say we don’t do anything until we know what’s going on or how we will benefit in the long-run,” James Smith, ex-finance minister and former Central Bank governor, told Tribune Business. “We’ve already given up much financial services space to serve developed countries.
“We need to study this one very carefully, and not make a move that adversely affects GDP or the contribution to that comes from financial services. When the lawyers work out the details, that’s when we need to look at it. We’ve moved much too fast from 2000 up until now. We wanted to be the first one out there, and always got burnt.”
That refers to The Bahamas’ approach to handling the various “blacklistings” and other international regulatory initiatives faced by the financial services industry since the turn of the century. The Ministry of Finance, based on its statement last night, appears to be following Mr Smith’s recommended approach.
“The Ministry of Finance is conducting an assessment of the impact of these proposals and what implications they may have for the domestic tax regime of The Bahamas,” it said in response to the G-7 announcement. “The Bahamas reasserts its sovereign right to determine the tax structure best suited for the ongoing development of the country.
“Nonetheless, the ongoing multilateral discussions are timely given the recent announcement by the Prime Minister in the Budget speech regarding the Ministry’s imminent comprehensive tax study. The output of this in-depth, empirical assessment will inform ongoing tax reform efforts in pursuit of greater fairness and equity within the country’s tax regime.”
As to the impact on the financial services industry, the Ministry added that one of its officials, Stephen Coakley Wells, had since last year been on the 24-member Organisation for Economic Co-Operation and Development (OECD) steering group co-ordinating discussions involving 130 nations on how to develop a framework for executing the kinds of reforms unveiled by the G-7 at the weekend.
Pointing out that the framework being developed as part of the OECD’s Base Erosion and Profit Sharing (BEPS) talks will still need to be approved by all nations, notwithstanding the G-7 announcement, the Ministry of Finance said: “The Ministry continues to remain proactive to shape a position that ensures that our financial sector remains competitive and dynamic.
“Through the country’s representation on the steering group, the Government will ensure that the positions of no/nominal tax jurisdictions like The Bahamas are ventilated and considered. At the same time, the Government will work with industry stakeholders to ensure that the jurisdiction is poised to take advantage of whatever opportunities arise from any changes to the international taxation architecture.”
Hubert Edwards, principal of Next Level Solutions, a Bahamas-based corporate governance and risk management consultancy, yesterday told Tribune Business that the G-7 agreement on a 15 percent minimum global corporate tax was “not going to be significant” for this nation in the short-term given that it has traditionally not gone after corporate business.
But, while suggesting that the likes of Bermuda and the Cayman Islands will be hit harder, Mr Edwards said the G-7 move potentially undermines the competitiveness of all international financial centres (IFCs) - The Bahamas included - because it strips away the advantages of their ‘no tax’ platform.
“It affects the competitiveness of the offshore arena from the perspective of if, up to now, you were saying come to our location because there’s no tax to be paid, as we are a low or no tax jurisdiction, the nature of the agreement emerging here makes it academic,” he explained. “You have to pay the tax one way or another, and the level of attraction that existed previously is not there any more.”
This has potential implications for The Bahamas’ ability to exploit its economic substance/physical presence legislation, implemented to satisfy the European Union (EU), by attracting companies to domicile here and do real business from this jurisdiction.
This is because the G-7 tax move has implications for The Bahamas’ entire value proposition and competitive rationale. Up until 2000, this nation competed on client confidentiality/secrecy and its ‘no tax’ platform. The former has long since disappeared, and moves for a one-size-fits all global corporate tax are now threatening to undermine the latter.
Paul Moss, Dominion Management Services’ president, yesterday branded the impact of the G-7’s initiative for Bahamian financial services as “dire”. He added: “It’s going to have a tremendous effect because we don’t have a comparative advantage now, and the response has to come from a group of jurisdictions that are formed to oppose this.
“Unless we do that, we don’t have a fighting chance at all. We’re going to have to capitulate and do 15 percent. Every jurisdiction has the right to set taxes in the manner they see fit. Otherwise we’re going to be dead. All the private wealth management structures have companies behind them. There’s no way we can escape it. It’s all about tax competition. They want everything to be uniform.”