The Bahamas taxation regime is in need of reform. In Part I we looked at recent discussions around the taxation regime. Recently there was two articles carried in a local newspaper looking from different perspectives at the issue. On one side, the argument made was that income tax reform is inevitable, on the other a stark warning not to be dragged into income tax by the IMF. The essential message of the first was to take a careful look at this development and be strategic in the approach to it, being cognizant of the need to protect the financial services industry. The other argued for not having changes imposed but rather ensuring that there are reforms that suit the country and guard against levying a significant burden on the middle and lower classes.
The closing paragraph of Part I stated, “While there is influence, observe carefully that I state none of the preceding points from the perspective of the EU/US/OECD 15% minimum corporation tax initiative. This is all about where The Bahamas is and what needs to be done to protect and fix The Bahamas.” This I believe is the fundamental issue to be grappled with. Discussions are often quickly narrowed to a few rigid options such as “no income tax”; “some supra-national organization is out to get the country”; “we do not want to pay any more taxes”. The reality is though that while these are reasonable issues to consider, none of these represents the correct approach for analysis. The country could potentially pay a significant price if we fail to accept that that the main reasons for considering broad-based tax reforms are generally all internal. The external matters cannot be ignored but in my opinion, they create much less of an urgency than the current economic state of affairs of the country.
There is a clear need for taxation reforms but the challenge is to firstly accept this fact and then consider how to get it done. Back in March, in the article “A Taxing Affair Ahead”, I wrote to this effect, “How it is done is where the rubber meets the road and the devil will be in the details. However, we certainly are at a point where I think it [taxation reforms] will be seriously considered. It is important to note that some of the factors that made The Bahamas vibrant and highly successful have changed and continue to change rapidly, factors such as population size, quantum of debt, growth rate of debt, more expansive and expensive public services demands, and potentially declining national revenue [during the heights of COVID-19]. All these exert adverse pressure on the current revenue space. With a very limited tax base it is akin to solving a mathematical problem. If too many factors are held fixed, the desired solution will not be derived. With changing demands and the pressure of debt repayments and lack of revenue, it is reasonable to anticipate an upward shift in the level of tax burden to be borne by citizens and residents. Any honest discussion on the breadth of the tax base though, would never ignore the offshore segment. The segment holds great potential for broadening the tax base, however, there are also significant challenges that could follow as such moves will disrupt the settled position of The Bahamas’ value proposition in that arena.”
This in my mind is part of where the focus of all discussion around taxes should be. Is there a fundamental need for increased taxes? If yes, what form should any increased takes take; and how any such consideration might adversely affect the current economic arrangements? Where the country is currently draws, or ought to draw, close scrutiny on the sufficiency of government tax revenue. The structure of the economy will, or ought to, fuel concerns about the range of options available. This is the tightrope the country must walk and the primary reason calls for comprehensive studies are being made.
The March article explored aspects of this “tightrope”, “While one would expect a reasonable weighing of the pros and cons, there is an important wrinkle with which The Bahamas must contend. This requires a level of urgency and seriousness that could render moot, everything we have discussed to this point, to change or not to change the tax system. In fact, it is so important that once one develops a full appreciation thereof, it would undoubtedly lead one to question - why is there not greater effort in this direction? The European Union (EU) recently lamented the fact that countries such as The Bahamas was removed from its black listing in a manner which it described as being based only on making ‘minor tweaks'. The EU has emphatically stated that by the end of 2021, it will review the criteria and the expectation is that the changes will strike closely at the heart of the country’s financial services industry. Based on the EU’s standard, The Bahamas is dead center in its crosshairs, as it relates to its ingoing harmful taxation campaign. The criteria for identifying a jurisdiction with potentially harmful measures include an effective level of taxation that is significantly lower than the general level of taxation in the country concerned; tax benefits reserved for non-residents; tax incentives for activities, which are isolated from the domestic economy and therefore have no impact on the national tax base. This exists in The Bahamas and plays out in the offshore financial sector. At the core of most decisions is the benefit to be derived because of no existing corporation or other forms of income taxation”.
On one hand, objective analysis will show that there is an insufficient level of tax revenue, as evidence by perennial deficit spending. If that perspective is not palatable then it can be restated to acknowledge that given the country’s level of expenditure the country decides to employ annually, government revenue is consistently insufficient to cover it. Therefore, nothing that has the potential to erode the revenue levels cannot be ignored. This is the troubling impact and potency of the EU/US minimum 15% corporation tax initiative. By itself, the 15% imposition does not pose a great current issue due mainly to the concentration of the financial services offerings, however, the conditions to be attached to the inclusion and subsequent removal from any adverse listing are just too critical to be ignored. Again, we should not focus on what they might do but look internally and consider what could be potentially lost and given the discussed timeline, the urgency for having a comprehensive study, a naturally slow process, to guide decision.
As stated before, I am convinced that the issues to be considered now are those that are needed most urgently to change our fiscal status. There are also other important longer-term strategic matters to bear in mind. This was captured in the March article where I stated, “The EU has concluded that its process of blacklisting and removing jurisdictions requires greater transparency. This call is certainly a self-serving effort to help address what the EU considers as being an ineffective process for the blacklisting of jurisdictions. The EU has initiated reform of the overall blacklisting process, together with refining the definition of harmful tax practices and the listed criteria thereof. Various institutions have proffered recommendations as to where they think this should head. Oxfam International, for example, in a paper recommends “blacklist zero and low corporate tax jurisdictions: make zero and low corporate tax rates a standalone criterion of the EU tax haven list; include economic analysis to identify harmful regimes; use levels of foreign direct investment and passive income as red flags for the identification of tax havens; and properly screen EU countries: EU countries must be held to the same if not higher standards than non-EU countries''. The arguments offered by the EU, as it seeks to give greater potency to its effort, parallels Oxfam’s statement. The EU states very clearly, “criterion to judge if a country’s tax system is fair or not needs to be widened. Countries should not be removed from the blacklist if they only make symbolic tweaks. Additionally, a zero percent tax rate policy should automatically lead to being placed on the blacklist.” This pronouncement provides a window into the fact that current matters around taxation, driven by global organizations are simply what has materialize so far from their ongoing and ever evolving initiatives, which keeps improving (adversely for us) in potency.
It is against this backdrop that I wrote in March, “If the above materialized at the end of the year [not likely at this stage but still should not be ignored] then certainly, The Bahamas financial services sector will see some level of disruption. It begs the question therefore, ‘What exactly are we doing at this time?’ Beyond concerns about the usefulness, suitability, equity, regressive-ness of our current tax regime, there lies a potential external threat that has the ability to impose on us that which we seem fully committed to avoiding [income/corporation tax] together with adding a level of uncertainty to our second most important source of export [financial services]. The new pronouncement by the EU on the black listing criteria (no country with zero corporation tax should be left off) could add great potency to their campaigns against jurisdictions such as The Bahamas. The proposed criteria for a 12.5% minimum effective tax rate [with the US support, 15% is now the likely level] together with "zero rate and you are on the listing" is certainly designed to be a major game changer in their effort”. As noted above the taxation debates are always too narrow. They tend to either focus on what may be external drivers or limiting internal desires, but as shown, the issues are deep and important.
Taking the preceding into account it should be clear that the reignited discussion is necessary but needed to be carefully guided. The rush to judgement one way or another could hurt the delicate balance on which an optimal outcome rests. A major factor in this whole process is the sentiment of the public that feeds into the views of the political directorate and hence the need for clear, sober and informed debates and narratives. Where we are today contemplating the suitability of the country’s taxation regime is not new but is now more urgent. One of the reason the matter is so very challenging today is in part of a failure to address it on a timely basis over a number of years in the past. A continuation of this approach could be detrimental to the wellbeing of the country.
No one can claim to have clear answers to the most optimal solutions that fixe bad protect the country. I certainly do not. What I seek to do here is to draw awareness to the multiplicity of issues surrounding this and why narrow conversations will not serve the cause of the country. Amongst other important matters, a national debt of $10B, deficits averaging $500M, 18% of expenditure paying interest on loans and a narrow 18% Revenue-to-GDP, the time is “perfect” to consider whether this low tax intake is beneficial for the country. Coupled with the issues discussed here is it time for change, for reforms, to not only the tax regime but also other areas that may provide new perspectives on sufficiency of revenue?
Part III will consider how turning the debate to explore the internal realities of the country may be the best way of approaching this very challenging matter.
*******
© Hubert Edwards 2021
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. Hubert specializes in governance, risk and compliance (GRC), Accounting and Finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. This and other articles are available at www.nlsolutionsbahamas.com.