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CORPORATE TAX PLAN REVEALED: Govt favours proposal of 10-12 percent rate for most businesses

• 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

nhartnell@tribunemedia.net

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."

Comments

K4C 1 year, 2 months ago

pay a "modest" corporate income tax of either 10 or 12 percent

10 or 12 percent ISN'T "MODEST

Dawes 1 year, 2 months ago

They conveniently forget to mention that if you have a corporate tax, then you will need income tax too.

newcitizen 1 year, 2 months ago

This is good. This tax will be paid on profits, not on revenue as the current business licence requires. A 10% rate will likely see a savings for businesses in their tax bills. This incentivizes owners to invest profits back into the business as they now see a savings, where as currently it does not matter.

DonAnthony 1 year, 2 months ago

I agree, this is very good and will lead to a fairer tax regime. Some companies now ( like grocery stores and gas stations) that have high turnover but low profit margins pay a huge percentage of their profits in business license fees. In some instances they pay more in business license fees than the company earns in net income.

moncurcool 1 year, 2 months ago

I cannot understand how government could charge on turnover and profits all this time. Greed is a dangerous thing.

killemwitdakno 1 year, 2 months ago

That's what Value Added tax should've been, on the markup alone.

KapunkleUp 1 year, 2 months ago

Government ain't got a clue what they are proposing and how to implement this. Example: a company makes $50,000 profit but loans out $45,000 to Jane Doe. Net profit = $5,000. Companies all around the world are masters in manipulating the system and government thinks it can play in the same league?!

newcitizen 1 year, 2 months ago

That's not how it works at all.

ThisIsOurs 1 year, 2 months ago

The general sentiment is true, the real masters are the ones who make the most profit. They redirect profits by charging business lines for services from other business lines, its technically then an expense

killemwitdakno 1 year, 2 months ago

That's not profit, that's revenue if lending is a service. You'll want to lend out before the due dates.

Craig 1 year, 2 months ago

As the owner of a low margin business, I say it about darn time they change the business license tax regime. The current system is extremely unfair to low margin businesses, who effectively pay a very high percentage of their net income in taxes, while the high margin businesses, get away with paying much less. The Business license tax system is a very regressive tax system that has been detrimental to businesses for decades and should have been changed many years ago.

JokeyJack 1 year, 2 months ago

So this is what we are going to do? I think instead we should ban all persons and flights beteen Europe and Bahamas except for the UK which has left the EU.

This is being forced on the world by Brussels and it's way past time to fight back. Give all EU citizen property/business owners 3 years to liquidate. Ban all travel starting Jan 1st 2024.

moncurcool 1 year, 2 months ago

And what are the European flights, outside of the UK that fly here, are we banning?

dahasamo 1 year, 2 months ago

And then can we know what the current expenditure is? Excessive travel, payouts to aggrieved individuals, etc. What happens to the money? The cost of collection will mean an already bloated civil service increasing.

ThisIsOurs 1 year, 2 months ago

When are we going to eliminate customs duties like the WHITE paper said would happen 10 years ago once VAT was introduced? I dont believe for a second that they intend to eliminate anything. Whatever they introduce, businesses will pay what they paying now, plus.

LastManStanding 1 year, 2 months ago

This. I won't believe they will ditch the business license regime until I see it. We got sold the same dream with VAT and duty. Our politicians thrive off of the electorate's short memory and collective stupidity.

moncurcool 1 year, 2 months ago

Governments don't reduce. They just try to see how they can continue to tax the population to death, and just spend all they get. Never see the boasting about how they have cut their expenses. Just how they collect more and more taxes.

They will only add this onerous burden upon what they already do to businesses.

One day would like to see a politician with a brain who has a plan to help business grow i this country and not just to always tax, tax, tax,

killemwitdakno 1 year, 2 months ago

I was ready to ask this last week on grocery.

TalRussell 1 year, 2 months ago

The Colony's Central Government ... Need to create income streams can only worsen ... As for artificial intelligence .... Eventually replaces --- Every Hotel Job ... Makin' it even more strange as to ... Why the colony's central government ... Is rushing to intimate Atlantis Paradise Island ... In the clownish ways of ... Florida's DeSantis vs. Disney. --- Very soon ... The pressure on central government, builds as artificial intelligence is moving' in to eliminate workers' at Comrade Rupert Roberts 13 stores chain at SUPERValu' ... Well, yes, fifty-percent the family doctors offices --- Will shutter down.--- No No Yes Yes?

killemwitdakno 1 year, 2 months ago

Bro post a lnk to a tiktok sometime. We need to see you.

observer2 1 year, 2 months ago

A corporate income will not work without a corresponding personal income tax.

Every developed country has both without exception.

In order to avoid the loophole of persons transferring wealth to thier individual names they will introduce personal income rapidly after the implementation of corporate tax.

Since the implementation of VAT taxes have increased dramatically and the national debt has doubled to $12.5 billion.

With income tax the government will be able to double its debt again.

Please pray no hurricanes hit Nassau.

observer2 1 year, 2 months ago

Expect a clumsy implementation with areas related to foreign residents with billions of dollars to tax remaining sufficiently vague and constantly changing.

With bank account freezes and asset confiscations already implemented without a tax court the government now become judge, jury and and enforcer with zero oversight.

If someone tells you who they are believe them the first time.

First real property tax, then VAT, then corporate tax and after that income tax.

Middle and upper class Bahamians have already gotten their children and grand children out.

We should soon start to see an increase exodus of bank accounts out of the country as the debate noise becomes deafening.

observer2 1 year, 2 months ago

Ppl may not mind paying a tax if there was accountability and some effort to control the rapid growth of government.

Also this does is make everyone more anxious.

killemwitdakno 1 year, 2 months ago

What's the point when the multinationals with the biggest returns all got GBPA exemption extensions already??

Only needed 1% of 1$T.

killemwitdakno 1 year, 2 months ago

So why couldn't we take that to Privy?

DDK 1 year, 2 months ago

Fifty years "majority rule" independence celebrated by bringing on corporate income tax. Way to go Bahamas! Fifty years of ever-increasing, relentless borrowing and not paying back the debt has resulted in the lenders insisting on austerity measures. The austerity falls on the backs of the working classes, not the politicians and their cronies. Case in point, let's just buy a hundred new police vehicles to smash up!😣

BONEFISH 1 year, 2 months ago

This corporate tax is being pushed by the Biden administration. This goes beyond the two major political parties of this country.Treasury Secretary Janet Yellen spoke about 15% percent global corporate tax at a meeting.That is the americans attempt to reduce american corporations from moving aboard to reduce their us tax bill.

ThisIsOurs 1 year, 2 months ago

This is an attempt to grab taxes from the digital giants wherever they may be. That's the real target of this bill.

ExposedU2C 1 year, 2 months ago

DUTY + BUSINESS LICENSE FEES + NATIONAL INSURANCE COSTS + OUTRAGEOUSLY HIGH UTILITY BILLS + VAT + ALL KINDS OF EXCISE FEES + INCOME TAX = BANKRUPT BUSINESS

LMAO. This foolishness has our spend-spend-spend incompetent PM, who is taking advice from dumber-than-dumb bozos like Simon Wilson and Anthony Ferguson, helping the OECD not only kill our offshore financial services sector and seriously damage our domestic banking sector, but also drive all of our other Bahamian owned businesses, which do not enjoy the generous concessions given to foreign investors, right into the ground. Talk about stupidity of the highest order!

The_Oracle 1 year, 2 months ago

Indentured servitude under the misnomer of taxation. This has been coming since 2004, but we don't read or even want to know. Until it appears inevitable, and even then we just want someone to tell us we will be alright. And duty rates were negotiated to come down to 8-10% by 2025. We shall see what we shall see.

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