The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Reinvesting 50 percent of the revenues generated by a corporate income tax would lessen - but not eliminate - the negative economic impact of each of the four proposed implementation options, the Government is forecasting.

Its long-awaited 'green paper' on corporate income tax reform, released at the end of last week, found that the gross domestic product (GDP) contraction caused by its replacement of the present Business Licence fee system could be reduced by up to one-third or almost half under one of the options being considered if the Government pumped tax revenues back into the economy via infrastructure spending or public services.

Under the 'green paper's second option, which would introduce a 15 percent rate for all Bahamian corporate entities part of multinational groups with over 750m euros in annual turnover, and also levy a 10 percent corporate income tax on all other businesses, reinvesting 50 percent of revenues generated by this taxation would cut the negative economic impact from a 0.3 percent GDP shrinkage to 0.1 percent.

As for the third option, which 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, levy 15 percent corporate income tax on multinational group members above 750m euro turnovers and all other companies generating more than $500,000 pay a 12 percent rate, the GDP shrinkage falls from 0.9 percent to 0.5 percent.

Under the final option, which would 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, the contraction in economic growth is projected to fall from 1.7 percent to 1.2 percent if 50 percent of revenues are reinvested.

The latter scenario is projected to increase the Government's income by 96 percent to $274m compared to the $140m Business Licence revenues from 2019. 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.

"Investment into Bahamian projects such as infrastructure or healthcare provision could mitigate some of the negative economic impacts via creation of jobs or by improving productivity. However, the size of these impacts depends on the actual projects chosen by the Government," the 'green paper' said.

"For example, expenditure on infrastructure may have greater long-term impacts in terms of transport or logistics, whereas expenditure on healthcare could improve long-term health of the population and thus the productivity of the workforce." It added that there were several factors which might limit the economic impact not captured by the data.

"First, the global tax landscape may mitigate the estimated adverse impacts. Around 140 countries are signatory to the OECD Pillar Two initiative. This could close the gap between tax systems globally and thus marginalise the role of tax factors in investment decision making, at least for large multinational groups," the Government's 'green paper' said.

"This is particularly relevant for foreign direct investment, and thus the impacts on GDP may be more moderate as investors are less likely to relocate to jurisdictions with lower effective tax rates as the gap between respective systems appears to be closing. Second, against this backdrop, non-tax factors should become the main driver to attract investment from overseas.

"The Bahamas benefits from high levels of human capital, political stability and an internationally recognised financial system, which will be important considerations in investment decisions. IMF research cites the strength of legal and economic institutions as a reason many international financial service entities hold assets and lending operations in The Bahamas. Even when tax factors are considered, under all policy options, The Bahamas will remain a relatively low-tax jurisdiction on the global scale."

However, the Government admitted that introducing a corporate income tax will likely increase the country's already high costs of doing business. "The imposition of a new corporate income regime in The Bahamas is likely to increase the overall cost of doing business in The Bahamas," it conceded.

"In addition to the change in the tax burden, there may be increased administrative costs which will vary according to business size and complexity. For entities operating in The Bahamas that fall in scope of Pillar Two, this burden will likely exist even if The Bahamas does not impose corporate income tax where jurisdictions of the associated ultimate parent companies require top-up taxes."

Then there is the uncertainty over whether, and how, businesses in Freeport's free trade zone will be impacted by the introduction of corporate income tax. "Businesses under the Hawksbill Creek Agreement in Freeport are exempt from paying the Business Licence fee, alongside the elimination of property taxes and import duties," the Government's 'green paper' said.

"For these free trade zones, appropriate Bahamian legal advice would be required to determine whether the application of corporate income tax would be legally possible, though any application of corporate income tax would likely erode the competitive advantage afforded to this area."