• Gov't sets out four options for historic reform
• Only carve-out for SMEs earning under $500k
• Hit to GDP, jobs, investment in most scenarios
By NEIL HARTNELL
Tribune Business Editor
The Government is leaning towards reforms that will see most Bahamas-based businesses pay a "modest" corporate income tax of either 10 or 12 percent with the only exception being small firms earning less than $500,000 annually.
The long-awaited 'green paper' on "corporate income tax strategies for The Bahamas", which has been seen by Tribune Business, reveals that none of the four corporate income tax options being considered will have a positive impact on Bahamian economic growth, employment, foreign and domestic investment with the fall-out negative in all bar two instances.
The Davis administration, following studies by the Deloitte & Touche accounting firm, said it has to consider "the trade-off between raising government revenue at the expense of economic activity" in all four scenarios as it mulls historical changes that will potentially eliminate Business Licence fees for most companies and replace them with a corporate income tax.
This will be the first such income-based levy in the country's history, and is intended to ensure The Bahamas complies and fulfills its obligations as one of 140 countries that have signed on to the G-20/Organisation for Economic Co-Operation and Development (OECD) drive for a minimum 15 percent global corporate tax. In the first instance, this applies only to corporate groups and their subsidiaries that have a minimum annual turnover in excess of 750m euros.
The Government's 'green paper', which is dated May 17, 2023, sets out the first option as merely introducing a 15 percent corporate income tax for all Bahamas-based entities that fall into that 750m-plus turnover category. While that would have zero impact on the country's economic growth and unemployment rate, the paper estimates it would cause foreign direct investment (FDI) and domestic investment to contract by 0.3 percent and 0.1 percent, respectively.
The second and third options, described as "more nuanced" because of the better balance they strike between tax revenue and economic impact, are those the Government indicates it is giving more serious consideration to. The second, labelled as "a soft introduction", would introduce the same 15 percent rate for all those caught in the G-20/OECD net and also levy a 10 percent corporate income tax on all other businesses "to maintain regional tax competitiveness".
This option, the 'green paper' adds, would have minor negative impacts on GDP, foreign and domestic investment, and unemployment. The latter would rise by 0.1 percent, while GDP growth would contract by 0.3 percent and foreign and domestic investment fall by 1.5 percent and 0.3 percent, respectively.
The third option, branded as "simplicity driven", would exempt or carve-out small businesses earning less than a $500,000 annual turnover to leave them still paying the existing Business Licence fee. Bahamas-based entities in groups that meet the G-20/OECD threshold would pay a 15 percent corporate income tax, and all other companies generating more than $500,000 would pay a 12 percent rate.
The third option, though, would result in greater negative economic impacts although generating more revenue for the Government. Under this scenario, the 'green paper' said GDP growth was estimated to contract by 0.9 percent with unemployment increasing by 0.5 percent. Foreign and domestic investment will fall by sums equivalent to 5.1 percent and 1 percent, respectively.
The final option, which will generate the greatest revenue increase for the Government but also inflict the harshest economic impact, is to simply impose the 15 percent corporate income tax rate on all businesses with a turnover greater than $500,000 per annum and a 10 percent on small and medium-sized enterprises earning less than that.
This would result in an economic contraction of 1.7 percent, or around $200m, the 'green paper' projected, with the unemployment rate rising by 0.9 percent. FDI would fall by 10.2 percent, and its domestic investment counterpart by 2 percent. However, government revenues under this scenario are forecast to rise by 96 percent compared to the $140m collected from Business Licence fees in 2019 (see other article on Page 24B).
The more favoured options, according to the 'green paper', would see government revenues rise by 36 percent and 62 percent from implementing the second and third scenarios, respectively, compared to those same 2019 Business Licence revenues. Just levying 15 percent corporate income tax on those groups targeted by the G-20/OECD, though, would only produce a 4 percent revenue rise from business community taxation.
"The journey towards a modern corporate income tax system is not well-defined and there are a series of trade-offs which the Government and the public will need to account for," the 'green paper' said. "This document represents the Government’s first step in understanding variation between the policy options, and the practical concessions, between raising additional revenues at the expense of negative effects on businesses.
"Considering the economic impacts against the additional government revenues by option, the Government is minded to focus attention on options two and three. The respective economic impacts and revenue raising ability of options one and four are not well balanced when considering the strategic priorities of the Government. Comparatively, the balance between the effects of options two and three go further in achieving a solution to fiscal stability whilst limiting the impact on the wider economy."
Nothing is set in stone, and the Government warns that the process of choosing the precise corporate income tax-related reform, then implementing it will be a lengthy one and not happen overnight. "This process, in its totality, is expected to be lengthy and resource intensive," the 'green paper' said.
"Countries implementing the Pillar Two (750m euro turnover) rules as a supplement to established tax regimes are typically taking a minimum of 12 months to bring forward legislation. We, therefore, anticipate that the introduction of a new corporate income tax regime will take substantially more than 12 months."
With responses to the 'green paper' sought by July this year, the timelines set out indicate that a policy decision on the corporate income tax approach will not be taken until November 2023 at earliest. A further 12-18 months would be needed to properly design it and assess the impact with specific industries and, after further time to draft and pass the necessary legislation, the first returns would only be filed some 12-24 months after the law takes effect.
The Government said it is seeking to balance competing objectives of complying with the OECD/G-20 initiative, and improving its revenues, while at the same time trying to maintain The Bahamas' economic competitiveness, modernise business taxation and mitigate any negative economic impact.
"Based on the initial analysis undertaken, the Government is of the view that this is achieved through a balanced policy that adopts a two-tiered system as outlined by options two or three. Under this approach, the impact on the economy is estimated to be moderate, though the policy is estimated to have important incremental revenue raising benefits for the overall fiscal situation," the 'green paper' reiterated.
"This consultation has presented a holistic assessment of what a corporate income tax system would mean for the Bahamian economy. Establishing such a system from the ground up is a significant undertaking, the details for which will need to be defined in a series of next steps."
The Bahamas has no history of levying or administering an income-type tax, and the costs and bureaucracy associated with enforcing and collecting it are likely to be significant. The Prime Minister, in a foreword to the 'green paper', wrote: "Confronting these challenges are as much about ensuring greater fairness, efficiency and effectiveness in our tax policy regime as it is about supporting fiscal resilience, economic growth and development.
"As it now stands, we have a Business Licence fee that is inherently biased given that it is calculated on revenues (turnover) instead of profits or ability to pay. Consequently, the regime may discourage domestic investment and limit economic growth, and it is not aligned with international best practices.
"At the same time, the imminent adoption of international tax rules for the convergence to a global minimum level of business taxation for large multinational groups require that our business tax regime is aligned with the new rules. As a government, we have already signed on to these rules, and failure to conform will result in the potential loss of revenue," Philip Davis KC continued.
"It is clear to the Government that we must introduce changes in this area, and in the 'green paper' we are laying out the case for this change."