The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government could near-double pre-COVID business taxation revenues if it were to implement a 15 percent corporate income levy across-the-board on all entities bar those generating less than $500,000 in annual turnover.

The long-awaited 'green paper' on "corporate income tax strategies for The Bahamas", which has been seen by Tribune Business, reveals that all four reform options being considered will increase the Public Treasury's revenue intake to varying degrees compared to the $140m generated from Business Licence fees in 2019.

Of the four, the "revenue focused" scenario of a 15 percent tax on corporate earnings (profits) imposed on every business bar small and medium-sized enterprises (SMEs), who would pay 10 percent, was projected to increase the Government's income by 96 percent to $274m compared to the Business Licence revenues from 2019. The latter figure would be equivalent to 2.1 percent of Bahamian GDP, a full percentage point rise, and an effective tax rate of 10.6 percent.

That scenario, together with just levying the 15 percent rate on Bahamas-based entities that are part of groups with an annual turnover exceeding 750m euros, is presently the least likely option to be adopted by this nation. The latter choice would be the bare minimum to comply with the G-20/Organisation for Economic Co-Operation and Development (OECD) minimum global corporate tax initiative, and only increases business tax revenue by 4 percent or $5m.

The two most likely options at present are scenarios where those caught in the G-20/OECD net are taxed at the minimum 15 percent rate, and all other Bahamas-based corporate entities pay a more "modest" 10 percent or 12 percent. Under the 12 percent choice, SMEs below the $500,000 threshold would still pay Business Licence fees under the existing regime.

Under the 10 percent corporate income tax option for all businesses regardless of turnover, government revenues were projected to rise by 36 percent to $191m. And, under the choice where SMEs still pay Business Licence fees, they were forecast to expand by 62 percent to $226m. The latter figure is equal to 1.7 percent of GDP, and would represent an effective tax rate of 8.7 percent.

"The additional revenues estimated to accrue from a corporate tax system would move The Bahamas to be more in line with the OECD, where taxes on corporate profits make up 3 percent of GDP on average. Under (preferred) options two and three, revenues as a share of GDP are estimated to be 1.5 percent or 1.7 percent, respectively, compared to 1.1 percent under the existing Business Licence fee," the Government's 'green paper' asserted.

"These additional revenues would be deployed by the Government to either pay down the debt-to- GDP ratio, or to invest in capital for the wider economy. Whilst debt payments will not have a direct economic impact, capital investment could improve productivity of the economy by creating jobs or infrastructure projects with longer term impacts. These positive impacts are considered in the economic impact assessment."

While the G-20/OECD initiative has given The Bahamas an "opportunity for The Bahamas to re-design its business taxation", the Government is also partially focused on using the situation to increase its revenue. "There is a need to increase the Government’s revenue raising ability given long-term spending objectives and the increasing global cost of servicing debt," the 'green paper' added.

"Reducing the overall debt-to- GDP ratio will require a sustained increase in revenues to achieve the budget surplus forecast by the Ministry of Finance by 2024-2025 combined with growth in the economy...... The Bahamas has experienced significantly higher yields on its international bonds, making international bond markets an unattractive source of financing.

"Outreach work to explain the Government’s funding strategy for fiscal year 2022-2023 has had some effect in alleviating this pressure, though a successful consolidation of the fiscal position and reduction in the debt-to-GDP ratio should improve The Bahamas’ creditworthiness.

"Ultimately, this should lead to a reduction in the cost of borrowing. Addressing the Government’s revenue raising ability by re-designing the approach to business taxation is one method by which this can be achieved."

Many in the Bahamian private sector have long favoured reforming the existing Business Licence fee regime, which is based on turnover rather than corporate profits. It is viewed as a distortionary tax that disproportionately penalises high turnover/low margin businesses, such as food stores and gas stations, while favouring high margin/low turnover entities such as services firms

It is also causes further complications for companies who sell a significant volume of price-controlled goods, and often leads to companies paying more in Business Licence fees than they earn in annual profits while others are effectively taxed into a loss.

The Government's 'green paper' acknowledged these concerns as it noted the higher margins enjoyed by some industries that paid the same Business Licence fees, based on turnover, as their lower margin counterparts. Real estate and recreational activities, both enjoying earnings margins of close to 40 percent based on EBITDA (earnings before interest, taxation, depreciation and amortisation), were shown as paying Business Licence fees equal to 1 percent of turnover.

The latter percentage was equal to wholesalers and retailers who, while also paying almost 1 percent of their turnover in Business Licence fees, earn an EBITDA margin of just 5 percent. "The main form of business taxation in The Bahamas is the Business Licence fee, which is based on gross turnover and has a range of reliefs and incentives," the Government's 'green paper' said.

"Although the rates applied to different businesses are tiered, these are levied on gross turnover, so the Business Licence fee system does not account for the affordability of the fee to businesses in terms of annual profits. This means that the Business Licence fee does not necessarily create the appropriate incentives for growth or investment, and results in disparity across sectors in terms of the share of Business Licence fee paid relative to total turnover.

"For example, the wholesale and retail trade sector and recreational activities sector each pay 0.9 percent of turnover, on average, to the Business Licence fee. However, businesses in the wholesale and retail trade sector are estimated to have a lower profit margin than businesses operating in the recreational activity sector (6 percent compared to 40 percent).

"A recurring theme emerging from the Business Advisory Committee is that the Business Licence fee inflexibility may be limiting to growth." The Government added that its "goal is to transform business taxation in The Bahamas", and described its 'green paper' as "the first step in defining the principles for a corporate income tax" - a structure of the kind that has never been levied in this nation before.

It acknowledged, though, a corporate income tax could be introduced on a "staggered" basis by applying it only to entities covered by the G-20/OECD initiative and its application to entities in the domestic economy left to a later date. This could "balance the objective of revenue collection against introducing a system that suits the needs of all firms in The Bahamas, and allow more flexibility in the approach to domestic tax reform".

"In terms of the sector level results, the impact of a corporate income tax depends on the amount of Business Licence fee currently paid relative to turnover, and whether a profits-based system improves this," the Government's 'green paper' added "The wholesale and retail sector, for instance, is currently paying disproportionately more in Business Licence fees compared to its estimated profit margin.

"Therefore, across the options, wholesale and retail activities are estimated to experience a net gain from a change in business taxation. Comparably, real estate and financial services are estimated to experience the greatest net increase in revenue paid, due to their relatively high margins.

"Similarly, across business sizes, larger firms earning at least $6m in revenues per annum (representing approximately 1 percent of total firms) are estimated to experience the largest increase in revenue contributions. For the smallest firms, the impact is zero under options one and three since they remain subject to the Business Licence fee to minimise additional administrative burden."

And, further acknowledging the need for reform, the Government's 'green paper' added: "The existing Business Licence fee system generates relatively low revenues for the Government, whilst also creating disincentives for investment for some firms. As a proportion of economic activity, fees obtained from the Business Licence fee system represented around 1 percent of GDP in 2019.

"This compares to revenues from corporate taxation representing 3 percent of GDP, on average, across the OECD. Additionally, the Business Licence fee system is levied on gross turnover regardless of profit margins meaning that, in some instances, it must be paid by firms even in loss making years. In sectors where profit margins are variable and relatively low, this feature may be limiting incentives to invest domestically and acting as a barrier to economic growth.

"Globally, the approach to business taxation is converging towards a minimum level of business taxation for large multinational groups. This convergence is guided by the OECD Pillar Two agreement, to which The Bahamas is a signatory along with around 140 countries. The current Business Licence fee system does not align with the international rules proposed under the agreement, and The Bahamas could potentially lose government revenues as a result."