BACKGROUND – WHERE IS THE EU FOOT?
Until The Bahamas adjust aspect of its model or approach to delivering financial services it will be vulnerable to the vagaries of international (supra-national) agencies and developed countries seeking to destroy it as an offshore financial center. Until it become more responsive to the fact that competitive strategy must be influenced by local stakeholders, the potential economic value from the industry will consistently underperform.
In 2018 there was a great flurry of action as the EU included The Bahamas on its adverse listing. The end result was that the country was “quickly” removed from the listing, as had been foreshadowed by the Deputy Prime Minister. At the time the issue at play appeared to have been largely “administrative” in nature. This brought to an end another obvious close-call episode, which could have had detrimental consequences. Another attack on an important piece of the economic arrangement of the country!
Two years later and we are back at it again. The EU making it clear that the Bahamas will not exit its adverse listing this time until and unless it makes changes to its tax regime. Very colorful language was reported to have been used to describe the situation. According to the Attorney General, Carl Bethel, senior European Union officials and politicians have warned The Bahamas: "We won't take our foot off your neck until you implement a corporate income tax”. It was noted that there was "nothing The Bahamas can say or do" to alter the decision.
Whether we want to acknowledge it or not, there is no way of stopping the EU and others. They will keep coming after The Bahamas. We are all wise enough to understand the end game. For all the institutions which level attacks on The Bahamas and other jurisdictions, this is about repatriation of capital or opportunity to eliminate offshore jurisdictions as avenues for tax planning, thereby securing more taxes from its citizens. In the final analysis, the financial services industry and the economy will take a hit if the response to this initiative is not effective.
In 2003 the Internal Revenue Services (IRS) unveiled its Offshore Voluntary Compliance Initiative. Back then I wrote in a paper carried by The Tribune, “This programme, lauded by IRS personnel as sound tax administration, designed to root out tax evasion, carries with it some very serious implications for offshore jurisdictions. So much like the cleverly crafted Patriot Act, the initiative comes armed with the ability to catch the proverbial horse that has escaped while attempting to effectively lock the gate”. The underlying principle of that initiative continues to be seen. However, since then the game has changed, the subtleties are gone and we have now evolved to “in your face” discussions with admission of having foreign body parts fully planted on delicate parts of our anatomy, a symbolism which has certainly taken on great prominence in recent days.
This is certainly not a positive situation for The Bahamas. The upside though is that, seemingly, it is occurrences such as these that cause decisions, which should have been taken long ago, to get the appropriate attention. The country seems to always be able to extricate itself, all be it temporary, from the onslaught of these attacks. That though is only true when viewed from the discontinuation of whatever listing or action is being taken against the country. When viewed through the prism of the impact on the industry over the years every single one has had incrementally negative impact, the industry has contracted over the years.
This initiative could have the same effect with a deeper implication. It must be viewed against the backdrop of the current circumstances of the country. The Bahamas is grappling with a global financial crisis. The largest contributor to the economy, the tourism industry, has seen significant curtailment as a result of COVD-19. While tourism contributes more as a collective, the financial services industry provides higher paying employment, contributing approximately 27% to GDP. COVID-19 has shown how vulnerable the economy is. With uncertain ongoing impact on tourism, protection of other industries becomes paramount.
This new initiative takes on greater significance in light of a projected deficit of $1.3 billion and in the aftermath of a very destructive hurricane, the remediation of which is still at rudimentary stages. One thing which should not be lost on anyone is that the tax revenue space for the country has always been narrow and insufficient; the country runs significant deficit each year. There are questions therefore as to whether the current tax regime of the country is effective, is it serving the country well, and has the differential treatment between domestic and offshore segments of the economy adversely affected the country’s growth. The questions therefore are: should the Bahamas pursue a corporation tax regime which will address the EU concerns? And how will such a regime change be for the viability of the offshore industry?
There is a clear dilemma here and no one should pretend that this is easy for policy makers. There could not be a worst time for the country to be dealing with this issue. However, in my opinion, if the situation or circumstance is properly assessed, analyzed and solutions effectively executed, positive benefits could accrue, chief of which is a broadening of the country’s tax base. What is clear though is that failing to take serious and strategic action will place the country in an imperiled position. One thing which continues to become clearer is that The Bahamas has to take a deep and well considered, broad based look at the financial services industry and certainly a very clinical look at its tax regime. The way forward demands this. Left undone the attacks will keep coming with the eventual potential loss of critical mass.
In 2010 I wrote a paper entitled “Assessing the Strategic Approach to Growth and Development of The Bahamas Financial Services Industry”. Part of the opening statement taken from that paper reads as follows: “A careful assessment of various policy making and interest groups within the Bahamian Financial Services Industry (FSI) will reveal a real and overt aspiration to become or being seen as a leading International Financial Centre (IFC) jurisdiction. However, that same careful assessment would quickly reveal that there is no clearly articulated, comprehensive and cohesive vision, plan or strategy to achieve this noble objective”. Since that time the National development Plan was drafted but to date has not been “ratified”. While it makes an uncomfortable discussion in certain quarters, the truth is that there is a need to rethink comprehensively the underlying construct and arrangements of the industry.
The recent listing of The Bahamas, by the EU, brings a number of questions to mind. While in many instances the matter has been discussed, abstractly, as another occurrence to be addressed or survived, in my mind there are more fundamental issues at play which go to the heart of the well-being of the country and its economy. What is the strategic outlook for the financial services industry? How will it look after the fundamental shifts which may be needed to address this initiative? Is there a need for a definitive reengineering, reorganizing and restructuring of the FSI and what will that look like? Is the Bahamas serious about extending its growth as an OFC, in its strictest sense? Is the Bahamas value proposition at risk of diminishing? Can the Bahamas remain competitive? How can it be better structured to balance the need for diversification? If the Bahamas were to see significant loss wat would that mean for the country? How serious is the issue of corporate taxation to the resolution? Is there a national will to move in this direction?
The play book seems to be the same each time The Bahamas happens to find itself on another adverse listing. We do what is necessary to be removed. Unfortunately, in my opinion, the same scene is likely to play out forever and a day in the future unless there is a fundamental shift in the management of matters impacting the sector and a serious rethink of the approach to managing the industry, led from the policy level of the country. I admit that the delicate balancing required, and the dilemmas faced are real and therefore there is always the temptation to address the short-term issues only. However, it is only when looked at through long term lens that the proper perspective emerges. Again, I remind that the current matter is not typical but its occurrence, together with other past events, suggests and underline the need for a more defined and structured look at the industry and by extension the economy.
Remedial responses to these blacklisting initiatives demand a comprehensive and collaborative strategic outlook. There must be a view of how to protect the quality of the economic arrangement within the country, on a sustainable basis, for the benefit of the country and its citizens. The continued tactic of ad hoc responses is not sustainable as it plays to the aggressors’ objective. Each response erodes aspects of th