The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A former Cabinet minister yesterday asserted that the imposition of corporate income tax on all Bahamian businesses is “inevitable” if the Progressive Liberal Party (PLP) wins the upcoming general election.

Dionisio D’Aguilar, ex-minister of tourism and aviation in the former Minnis administration, told Tribune Business that such a move would have to be accompanied by the introduction of personal income tax - at least for company owners and top-level executives - as he argued that recent tax reporting reforms are almost certainly designed to pave the way for such changes.

Many Bahamian businesses welcomed the prospect of a corporate income tax when the concept was first introduced by the Ministry of Finance’s ‘green paper, which was released in mid-2023, especially if it would replace the present Business Licence fee regime. However, Mr D’Aguilar argued in favour of retaining the latter because of the “complexity” involved in implementing corporate income tax, including the mass of “rules and regulations” required.

Companies have frequently argued that the Business Licence fee, which is calcuated based on top-line sales, is distortionary because it effectively penalises high turnover, low-margin businesses such as food stores and gas stations in the amount of tax levied. And, given that it is determined by top-line sales as opposed to the profit-based corporate income tax, businesses frequently complain they are either taxed into a loss or pay more in taxes than net income earned.

Mr D’Aguilar conceded that the Business Licence-related concerns of high turnover firms were “a legitimate complaint”. However, he argued that this was best-solved by defining what are ‘high turnover, low margin’ businesses and then creating a specific rate for this category, asserting that the difficulties associated with implementing and adjusting to a corporate income tax outweighed this particular challenge.

“I am of the view that we are perparing ourselves for corporate income tax,” Mr D’Aguilar told this newspaper. “I am of the view that the Government is just waiting until, and I don’t want to sound political, but if the PLP is victorious in this election they are going to go to a corporate income tax.

“They have kind of built the structure in place. They have everybody reporting their income and expenditure. Right now, I think they are waiting to get over the election and then are going to switch to a corporate income tax. I think that’s inevitable.”

The Davis administration has made no secret of the fact corporate income tax is in its thinking as a reform option. Simon Wilson, the Ministry of Finance’s financial secretary, following the ‘green paper’s’ release in mid-2023, estimated that the economy-wide implementattion of a corporate income tax is some four years away if this nation elects to go that route. That would place its introduction on a post-election timeline of around 2027.

He also hinted that Business Licence fee reporting reforms, which require companies with annual turnovers exceeding $5m to produce audited financial statements, and those with top-lines between $250,000 and $5m to have their annual sales certified by a qualified accountant, were not just about tax compliance and collection but preparing the ground for future reform although corporate income tax was not mentioned by name.

Mr D’Aguilar, though, argued against the switch to a corporate income tax while asserting that it was hard to believe it will not be accompanied by the personal variety. “First of all, there’s the complexity of it,” he told Tribune Business. “Right now, you pay tax strictly on your sales. That lends itself to a very simple process but even that, when you base it on sales and turnover, can be quite complex.

“Is it a sale when you collect the cash, write it up in the system, pay a deposit? Is that a sale? Just looking at that one line can be fairly complex: What constitutes a sale? When you get into income tax, it will be based on sales, the cost of sales, overhead expenses, depreciation. What constitutes expenses, and what method will you use? It can be extremely complex.”

As for the Bahamian private sector’s concerns that the existing Business Licence regime can tax them into a loss, and/or results in them paying more in taxes than profits, Mr D’Aguilar conceded that this was “a legitimate complaint”. But he added: “I revert back to the complexity of the issue.

“Countries that have income tax presently have had it for centuries, and even then it’s still very complex. The rules and regulations that you have to roll-out to make that work properly are huge. For low margin, high volume businesses carve out a rate for them,” the Superwash chief argued. “You have your food stores, you have your gas stations, to a certain degree your construction companies.

“If you can find a certain model for high volume, low margin businesses adjust their [Business Licence] rates accordingly. That means you don’t throw the whole system out. Basing it on sales is a simple, easier model to digest and use. You can make adjustments for those high volume businesses, define what they are and adjust the rate accordingly.”

Mr D’Aguilar also told Tribune Business that he “finds it diffcult to conceptualise corporate income tax without personal income tax. I don’t think you can have one without the other. You cannot have corporate income tax without personal income tax”.

This echoes arguments by the likes of the International Monetary Fund (IMF), which has for years been calling on The Bahamas to implement both corporate and personal income taxes. In particular, it has argued that if this nation elects to impose a corporate income tax across its economy, such a levy also needs to be imposed on company owners and top executives to prevent them evading the former by switching profits to salaries.

Mark A Turnquest, founder of the 242 Small Business Association and Resource Centre, and a well-known consultant to the sector, yesterday agreed with Mr D’Aguilar that the idea of a Bahamian corporate income tax will likely be revived if the Davis administration is returned to office at the upcoming general election. However, he backed such a move, explaining that many businesses view it as preferable to Business Licence distortions.

“It all depends on who the Government is and if they want to continue that policy,” Mr Turnquest said. “I know the PLP will bring it up again. I don’t know about the FNM. I have no knowledge of what their posture is, but I think it’s a possibility for the PLP. I don’t know much about the posture of a Pintard-led government. We’ve had almost five years of the PLP and can see where they are heading. I think they will pursue it.”

He added that the 2023 corporate income tax ‘green paper’ will need to be studied yet again given the likelihood that many Bahamians and companies will have forgotten about the proposal. “It has to be revisited again - out of sight equals out of mind,” Mr Turnquest said. “There are many complaints about taxing gross income. If they lose money they still have to pay the Business Licence fee on their gross sales.

“That ‘green paper’ needs to be dusted off. The corporate income tax is attractive because it’s more progressive. The Business Licence fee on gross sales is not progressive. Once you line that up with personal income tax for high earners you should have a structure that is more refined and progressive and gains more revenue for the Government.

“Let’s put businesses on a better footing not to take heavy losses when things get negative. Sometimes you lose money in business. There’s got to be a balance and well thought-out plan.” The Bahamas’ taxation system has long been considered regressive, given that it is largely based on consumption, as opposed to being progessive and linked to a person’s ability to pay with higher earners contributing more.

Gowon Bowe, who headed the private sector’s Coalition for Responsible Taxation when VAT was introduced in 2015, has argued that The Bahamas should not shy away from progressive tax reforms simply because they appear difficult to implement and administer - the opposite of Mr D’Aguilar. Under VAT and Customs duties, lower income persons pay disproportionately more of their income in taxes than wealthy persons.

The Bahamas has already implemented the minimum 15 percent global corporate tax on companies that are part of multinational corporate groups that have a minimum annual turnover in excess of 750m euros. This complies with its obligations as one of 140 countries that have signed on to the G-20/Organisation for Economic Co-Operation and Development (OECD) initiative.

However, the 2023 ‘green paper’ set out three options for extending corporate income tax to most of the Bahamian economy. The first two, described as “more nuanced” because of the better balance they strike between tax revenue and economic impact, were those the Government indicates it is giving more serious consideration to.

One, 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”.

The next 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 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 rate on small and medium-sized enterprises earning less than that.

The first two options, according to the ‘green paper’, would see government revenues rise by 36 percent and 62 percent, respectively, compared to 2019 Business Licence revenues.