A FORMER financial services minister believes it is “probably inevitable” that the Bahamas will have to introduce some form of low-rate income tax, warning: “We’re not in the clear yet.”

Ryan Pinder told Tribune Business that while the entire financial services industry had “exhaled” at the Bahamas escaping the European Union’s (EU) blacklist last week, it knows “a lot of work needs to be done” to meet both its demands and those of the Organisation for Economic Co-Operation and Development (OECD). Mr Pinder, who held the financial services ministerial post from 2012 to end-2014 under the former Christie administration, credited the current government with “a significant accomplishment” for keeping the Bahamas off the ‘blacklist’, even though the EU’s own announcement said it had more to do with Hurricane Irma-related compassion.

However, he warned that the EU and OECD, together with the G-20 group of nations, were unlikely to ease the pressure intended to drive the Bahamas away from its current ‘zero tax’ platform and towards income tax implementation.

Mr Pinder argued that the Bahamas now needed to use the 12-month reprieve granted by the EU to demonstrate “measured progress” in complying with its demands, especially the structure of this nation’s taxation regime moving forward.

The now-Graham Thompson & Company attorney and partner added that should the Government decide to move in the direction of an income, or corporate income, tax, it needed to “fully think through” the impact on the overall economy and obtain “the widest buy-in possible”. 

“I think it was a significant accomplishment by this government to ensure that we were not on the EU blacklist,” Mr Pinder told Tribune Business.

“Anybody would agree that being on the ‘blacklist’ would have adverse consequences for the industry and a disadvantageous impact for the country, having an adverse effect on correspondent banking and affecting our international trade and commerce.

“It was a significant accomplishment and one we exhaled about, but it doesn’t mean we’re in the clear. There’s a lot more work needing to be done,” he continued.

“It’s definitely an opportunity to exhale, but it certainly isn’t the end of the race, and we have to get to the next stage. We can’t procrastinate and can’t do it by ourselves. We have to do it with the rest of the economy.”

The EU, in unveiling its 17-nation ‘blacklist’ last Tuesday, said it had suspended its assessments of the Bahamas and seven other Caribbean states to enable them to recover from the devastation inflicted by Hurricanes Irma and Maria.

The 28-nation group said it would resume “contacts” with the Bahamas in February 2018 to determine if it was in compliance with the three criteria used to designate ‘non-cooperative jurisdictions’. A final decision on this nation and the others will be taken before year-end 2018.

Mr Pinder said the Bahamas’ main difficulty in complying with the EU’s demands is the absence of any form of income tax - personal, corporate or otherwise.

The absence of such taxes, he explained, is treated as a ‘harmful tax practice’ by both the EU and OECD. The latter is especially significant, because its initiatives provide much of the foundations for the EU’s ‘blacklisting’ criteria.

“The principle behind that is you have a tax system, it’s recognised - meaning income tax - and no preferential regimes behind that. There’s no ring fencing,” Mr Pinder said of the EU criteria.

Tribune Business has previously reported that last week’s passage of legislation to facilitate the multilateral approach to automatic tax information exchange, and the Government’s signing on on to the Mutual Administrative Assistance in Tax Matters convention this week, will bring the Bahamas into compliance with the OECD’s Common Reporting Standard (CRS).

This, in turn, will enable the Bahamas to meet the first of the EU’s three criteria on ‘tax transparency’. However, meeting the latter’s other two conditions are made more problematic for this nation precisely because it has no type of income tax regime.

Meeting the EU’s third condition requires the Bahamas to comply with the OECD’s Base Erosion and Profits Shifting (BEPS) initiative.

This aims to prevent tax avoidance by multinational companies, who using legal and creative mechanisms to shift profits from higher tax to low tax jurisdictions, enabling them to enjoy significant savings while eroding the tax bases of certain countries.

The Bahamas has already signalled its intent to comply with BEPS by adopting a ‘minimum’ four of 15 actions. However, one of the ‘actions’ it plans to implement is ‘no harmful tax practices’, and both the OECD and EU consider a corporate tax rate of less than 10 per cent to be a ‘harmful tax practice’.

“We’re experiencing the international pressure on income tax from a variety of different directions,” Mr Pinder told Tribune Business. “I think it’s probably inevitable, but it [its introduction] has to be measured, well thought-out and, to the extent possible, get the widest possible buy-in.

“It’s not something that should be rushed into. I’m not sure what the Government’s timeframe is going to be, but over the next 12 months we will have to show measured progress with respect to what we’re doing about our tax regime. My guess is we can’t get away with anything less than a 10 per cent rate.”

Mr Pinder is thus the first senior figure, political or otherwise, to suggest the implementation of some income-type tax is likely. K P Turnquest, the deputy prime minister, previously acknowledged that the Bahamas “may have to look” at it, although he stopped well short of suggesting this was likely to happen.

Compliance with BEPS is the third of the EU’s three ‘blacklist’ criteria, and Mr Turnquest last week said the Government had made proposals to the OECD on how it could achieve the minimum standard without implementing a corporate income tax.

Yet even more troubling is the second and final EU ‘standard’, which requires countries to provide ‘fair taxation’. This is tied directly to BEPS compliance, and is highly subjective, meaning different things to different people, with many observers viewing it as undermining the sovereignty of individual nations to choose the tax system that best fits them.

Countries with ‘offshore structures’ that can be used to facilitate tax avoidance of the type BEPS is intended to counter will run afoul of this demand, meaning the Bahamas and other international financial centres (IFCs) may have to take further action to ward off the EU.

“There’s certain pressures with respect to the Bahamas being in a position to have to introduce some form of income tax, whether it be income or corporate, and how that is designed and structured,” Mr Pinder said.

“Any form of corporate income tax is going to affect the wider economy more than financial services. If only domestic-sourced income is taxed, that will not tax a lot of financial services, as it is  mainly foreign sourced. There’s a lot of thinking through, and a lot of complexities are involved.

“Then there’s cultural acceptance, as we’re not used to an income tax, keeping track of deductions and expenses, and what’s attributable to personal and corporate. We’re going to have to be very sensitive,” he continued.

“If the Government goes that way, and certainly the external pressures are there to push is in that direction, a lot of thinking and consultation will have to go into that, and a lot of understanding of how that affects the private sector.”

With the EU frowning upon ‘ring fencing’, namely the maintenance of separate tax regimes for foreign and domestic interests, Mr Pinder said areas such as Business License fees would need to be evaluated.

“We would have to take a real good look at how the regime is structured currently and get rid of the more ‘ring fencing’ elements,” he added of Business Licenses.

Mr Pinder’s comments add to an already-vigorous tax reform debate within the financial services industry, as many sector players believe shifting from a ‘no tax’ to a ‘low tax’ platform would enable the Bahamas to better target corporate/institutional business, enter into investment-type treaties and shed the ‘tax haven’ label’.

Tanya McCartney, the Bahamas Financial Services Board’s (BFSB) chief executive, previously told Tribune Business that the Bahamas needed to “seriously look” at implementing a low-rate corporate income tax - a suggestion also made by the International Monetary Fund (IMF) earlier this year.

However, she and others have repeatedly said that such reform must take into account the wider economy’s interests and be done for the Bahamas’ benefit - not the OECD’s and EU’s.

Many observers believe that forcing the Bahamas to introduce an income tax has been the OECD’s ultimate objective all along, thus undermining its competitiveness in financial services.