By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Deputy Prime Minister has slammed as "very much unfounded" fears that the Government will be able to introduce corporate taxation with little to no warning.

K P Turnquest, responding to growing concerns over the proposed legislative response to the Bahamas' 'blacklisting', told Tribune Business that no Minister of Finance "could or would" implement such a fundamental reform without first undertaking widespread consultation and analysis.

He emphasised that the Minnis administration had taken no decision on whether to introduce corporate taxation, and was "not planning any kind of significant" tax reform in the short-term, even though the Multinational Entities Financial Reporting Bill paves the way for such a levy to be imposed on key Bahamian financial services products.

Mr Turnquest said the Bill was designed to merely provide flexibility, enabling the Government to introduce corporate taxation if it so chose, and he accused the Government's critics of "making leaps" and "taking licence" over its wording.

However, the Deputy Prime Minister admitted the negative private sector reaction and subsequent fall-out was partially "self-inflicted". In particular, he said comments on the Bill and its contents by Carl Bethel QC, the Attorney General, had "opened a can of worms".

Disclosing that the European Union (EU) had never demanded that the Bahamas introduce corporate taxation to be removed from its 'blacklist', Mr Turnquest said tax reform would "never be driven" by foreign pressures.

And, while conceding that a 'grandfather' provision is necessary to protect the 20-year tax exemptions enjoyed by existing International Business Companies (IBCs), he reiterated that the era of 'ring fencing' is over. The Deputy Prime Minister was seeking to address fears, both in the financial services industry and wider private sector, that the Multinational Entities Financial Reporting Bill will give the Government virtually unchecked power to introduce corporate taxation - in the type, rate and structure of its choosing - at 'the stroke of a pen'.

"I don't think, despite what anyone might say, that any Minister of Finance, even if he could, would engage in a significant shift in the tax structure without proper consultation and consideration of all factors involved," Mr Turnquest told Tribune Business.

"That would be very much an over-simplification of the process and considerations that have to go into making these types of decision..... Whoever is the Government, we are fully cognisant of the factors that go into these decisions, and we have to have wide consultation and acceptance by the private sector and public sector as to the affects and benefits derived from that."

Mr Turnquest reiterated that it was "very much unfounded" to suggest the Multinational Entities Financial Reporting Bill opens the door to major tax reform with no warning, although many attorneys will likely question why the legislation does not specify this and provide the necessary clarity.

For the Bill repeals and amends numerous financial services-related laws to allow for the introduction of corporate tax "of any nature" on International Business Companies (IBCs); Foundations; Executive Entities; Exempted Limited Partnerships; and Investment Condominiums (ICONs).

The amendments to the Acts for these products include a new section on taxation, which incorporates broadly the same language for each. Besides making all "resident or non-resident for exchange control purposes", thereby addressing the EU's 'ring fencing' concerns, the new language states the listed financial products will be "subject to such corporate taxation of any nature in respect of its resident or non-resident income, capital gains, shares, dividends, debt, obligations or securities, Business Licence, estate, inheritance or gift tax or other transactions related to such company as shall be prescribed by the Minister in regulations".

To calm any fears, Mr Turnquest said the Government planned to issue a formal statement "to try and clarify what we're doing versus what we're not doing, and what this Bill intends to do and does not do".

"People are taking licence because they have not read the Bill," he told this newspaper. "People have been making leaps, and some of it is self-inflicted. We had the Attorney General talking about this, and it's opened up a can of worms."

Mr Bethel told Tribune Business last week that corporate taxation is on the way, although the Government has yet to determine what type. He added that this will be based upon advice received from its external consultants, the UK arm of the Deloitte & Touche accounting firm.

"In the Act, we give with respect to each entity the power for the Minister of Finance to prescribe any tax," Mr Bethel said. "We're not specifying the type of taxation. That will be based on what the experts tell us. I wanted to give him complete flexibility."

Mr Turnquest, meanwhile, took particular aim at Arinthia Komolafe, accusing her of "distorting the facts" and questioning whether she was speaking as a Democratic National Alliance (DNA) or Organisation for Responsible Governance (ORG) member in comments on the matter last week.

He described all discussion of corporate taxation as "premature", given that the EU's primary concerns with the Bahamas instead related to 'economic substance' and 'ring fencing'.

"The reality is we have not decided we are going to do corporate taxation, and we're not going to be driven to do corporate taxation by any outside agency," Mr Turnquest said. "It's not the impetus of that Bill. That's not the idea. The Bill is dealing with profit shifting; it has nothing to do with taxation.

"We are looking at our tax structure. As I've said many times before, we're looking at it overall and how we could simplify it and make it more progressive. We have not decided what that looks like, because we have not completed the analysis."

As a result, the Deputy Prime Minister argued that it was "premature" to be talking about corporate taxation or any other type of reform. "We're not planning any kind of significant change in the short-term," he reaffirmed.

"These things have implications. We have to consider how this thing affects other legislation, so it's very premature to talk about the introduction of any corporate taxation. The whole issue of the EU, and the listing with that, has nothing to do with it.

"They [the EU] have not said to us, in any suggestion or directly, that we need to implement corporate taxation to comply with their standard. They are interested in economic substance, and ensuring companies operating in the Bahamas have a substantial presence in the Bahamas, and are not just here as shell companies where profits can be stuck."

The EU 'blacklisted' the Bahamas on the grounds that, in its eyes at least, this country had not done enough to prevent its corporate vehicles from being used by multinational companies for tax avoidance purposes.

In the absence of 'economic substance' requirements, the EU's fear is that such companies could artificially shift profits and other taxable income earned elsewhere to the Bahamas, even though they have no physical presence or economic activities in this jurisdiction.

The 28-nation bloc's second concern is 'ring fencing', or the existence of a preferential tax regime for non-resident entities and foreign investors compared to the domestic economy.

The Multinational Entities Financial Reporting Bill's efforts to address the latter issue have raised concerns that the distinction between IBCs and domestic companies is being virtually eliminated, with the repeal of the former's 20-year tax exemptions causing particular concern.

Attorneys and financial services executives have warned of tremendous market upheaval if there is no transition or 'grandfather' clause to protect existing IBCs, which they say have a 'legitimate' right to expect the Bahamas will honour the 20-year exemption promise given that business strategies will have been based upon this.

While acknowledging the need for such protection, Mr Turnquest reiterated that the days of so-called 'ring fencing' were over. "Whatever we do there has to be some kind of transition clause included, but the idea we can 'ring fence' certain classes of companies is not going to be viable going forward," he told Tribune Business. "But we have to consider these kinds of transition issues for sure."

Mr Turnquest said the Government had already received feedback on the Bill, and would "certainly take it into consideration". He conceded, though, that this requires "a balancing act" between any changes and not watering down the legislation's intent and the Bahamas' commitment to meeting the EU's 'criterion 2.2' standard.

Promising that the Government would seek to maintain the country's competitiveness, Mr Turnquest said meeting the EU's 'economic substance' demands could ultimately generate greater economic benefits for the Bahamas.

"We have to make some structural adjustments to the 'ease of doing business', and our productivity, but once we do those things I think it will be an advantage for us," the Deputy Prime Minister said.

"One of the things we've talked about as the EU pushes us to approach this 'substance' question is it could mean companies establish substantial offices here, do business from here and, using the rules, because the economic activity is from here, we can capture more of the tax revenue generated here, domicile it here and reduce the amount of tax owed to these states.

"It's about economic substance and economic presence. To the extent companies do not have a substantial presence or do not wish to, it's not a problem. Persons will just have to report income back to their home jurisdiction. It's not a zero sum game. It's a matter of how you want to structure your holdings."

Mr Turnquest's comments allude to the fact that only a small portion of the Bahamas' IBC business, and other corporate vehicles, is likely to be affected by the Multinational Entities Financial Reporting Bill given that reporting/notification requirements are only mandatory for those entities that are part of multinational company networks doing more than $850 million in consolidated annual turnovers.

Those vehicles used by private clients are likely to be relatively unscathed, and the Deputy Prime Minister added: "We'll do our best to protect existing business as well as grow it, recognising the opportunities presented as a result of this paradigm.

"We give the assurance that whatever adjustments will be made in the business model will be reasonable, in accordance with international best practices, and we hope we cause as little disruption to business as possible."