By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Income tax will be “a hard sell” in the Bahamas, a former finance minister predicted yesterday, warning: “This country was built on tax evasion.”

James Smith, also a former Central Bank governor, told Tribune Business that the Bahamas needed to be “very careful on the way forward” should it explore the International Monetary Fund (IMF) recommendation to implement a low-rate income tax.

He was backed by Raymond Winder, Deloitte & Touche (Bahamas) managing partner, who said income tax should not be viewed ‘in isolation’ as solely a revenue-raising mechanism.

Arguing that any tax reform should bring wider benefits, Mr Winder said introducing an income tax could have unintended negative consequences - especially for a Bahamian financial services industry that has consistently marketed its ‘no tax’ platform.

The accountant, disclosing that he was “not surprised” at the IMF’s income tax recommendation, agreed that a corporate income tax was “a better solution” to taxing companies than the current Business License fees.

“I see income tax as option that ought to clearly be explored and looked at,” Mr Winder told Tribune Business. “But considering that the Bahamas is a low or ‘no tax’ jurisdiction, and that there are a number of residents and companies present in the Bahamas because of that, we need to gain an understanding of how that’s going to impact the overall economy.

“We need to use taxation as a means of collecting revenue, but also as a means of incentivising the development of industries and certain transactions for the economy. It’s also difficult to take into consideration one aspect of taxation without considering all the taxes the Bahamas currently uses.

“Before we move in that direction [income tax], studies need to be done; not only to seek additional revenue, but spur momentum in certain industries. The Government ought to be wise and take a look at every tax being utilised in the Bahamas before we move in any one direction.”

Apart from the potential impact on the financial services industry competitiveness, the Deloitte chief said the Bahamas had to consider other factors - including energy costs, productivity and efficiency levels - when considering taxation reform.

“We have to do certain things first,” Mr Winder added. “We cannot go to the marketplace and talk about income tax and have such high energy costs. That has to be dealt with and reduced./

“I do not rule it [income tax] out, but I definitely do not support a situation where the Government puts it in place in isolation. It has to be done with a holistic view, and with the mindset that the Bahamas has to be a competitive jurisdiction and in a position to compete.”

Income tax was among the reform options assessed by the former Christie administration in 2013-2014, but was ultimately rejected in favour of Value-Added Tax (VAT) because it was seen as too costly and complex to administer and enforce.

Compliance levels were among the key concerns with income tax, a factor alluded to by Mr Smith yesterday, who said any move to introduce it in the Bahamas “should not be left to opinion”.

Calling for analysis and studies to “lead the way”, Mr Smith said the IMF itself may not have explored all the factors that would affect its implementation.

Besides determining the preferred type of income tax and the rate, the ex-finance minister said the Government would also have to target a revenue yield and put in place a structure to prevent tax avoidance and evasion.

“Bear in mind this country was built on that,” Mr Smith said of tax evasion. “It’s an interesting discussion to have, but the Bahamas - given its historical status on taxation - needs to be very careful on the way forward.”

He added that other factors to consider in relation to an income tax was the Bahamas’ relatively small 370,000 population, and the segments of society that were either low income or unemployed.

And Mr Smith also warned that it might be tough to ‘sell’ an income tax after the Bahamas had marketed itself to the world for so long as a ‘low’ or ‘no direct income tax’ jurisdiction.

“It will a lot harder sell than in other countries,” Mr Smith told Tribune Business. “We’d have to get over that barrier first. Would the tax apply only to domestic, or onshore, companies as opposed to offshore?”

Fears that premium tax would apply to the international insurance industry prompted the flight of captives from the Bahamas to Bermuda in the late 1970s, and Mr Smith warned: “The messaging must be pretty much correct as you could have unintended consequences.

“There are a lot of issues involved in this, not the least of which is the administrative machinery. The net effect ought to be positive once you’ve taken a decision. You don’t want to introduce a new tax because it’s fashionable.”