Last-ditch bid to halt EU blacklist


Tribune Business Editor

The Deputy Prime Minister and minister of financial services were yesterday travelling to Europe in a last-ditch bid to plead the Bahamas’ case against being ‘backlisted’.

Carl Bethel QC, the Attorney General, confirmed to Tribune Business that both K P Turnquest and Brent Symonette are leading a government delegation that will hold “face to face meetings” with the European Union (EU) in an attempt to ward off the potential reputational and economic damage this would inflict on the Bahamas.

With finance ministers from the 28-nation EU set to meet tomorrow to ratify the Bahamas’ inclusion on the ‘blacklist’, the Minnis administration was engaged in feverish ‘11th hour’ efforts over the weekend to convince them otherwise.

Mr Bethel revealed he had called in Attorney General’s Office staff on Saturday to deal with the drafting of legislation that would address the EU’s concerns, which focus on the ability of multinational companies to use Bahamian financial products and structures for tax avoidance purposes.

He said they had produced “a very good Bill”, which was set to be shared with the Prime Minister, Deputy Prime Minister and minister of financial services, to deal with both the EU’s fears and the issue underpinning them - implementation of the Organisation for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative.

Suggesting that this legislation would now ‘move up’ the Government’s agenda, Mr Bethel blamed “a series of miscommunications” by both the Bahamas and European Union (EU) for placing this nation at risk of being ‘blacklisted’.

Without giving specifics, he suggested the EU had failed to properly notify the Bahamas about the “timing and details of implementation” it was seeking in attempting to curb tax avoidance by multinationals.

Refusing to blame either side, the Attorney General said the Government would “do all that is necessary” to defend the Bahamian financial services industry’s “right to compete on a level playing field” without targeting another country’s tax base. “We are moving with alacrity,” Mr Bethel told Tribune Business. “A delegation of ministers, led by the Deputy Prime Minister and minister of financial services, is heading to Europe to engage in face-to-face meetings.

“I summoned my people here on Saturday. I’m now competing a draft Bill to capture the immediate concerns of the Europeans with regard to the effective implementation of the BEPS initiative, meaning the booked profits and losses of non-resident companies that may be resident in the jurisdiction will have to be subject to country-by-country reporting.

“This is particularly when these entities are constituent members of multinationals earning over and and above more than several hundred million dollars in terms of consolidated annual profits.”

Mr Turnquest, in his statement on Friday, said the proposed EU ‘blacklisting’ stemmed from concerns the Bahamas has not done enough to prevent its financial products and structures from being used by multinational companies and others for tax avoidance.

The legislation worked up by the Attorney General’s Office directly targets Europe’s fears, as it proposes to impose financial reporting requirements that will mandate Bahamas-based subsidiaries of multinationals to show the profits and losses earned in different countries.

These requirements will only apply to Bahamian affiliates of multinationals whose earnings are above a certain threshold, but those that do will become “a reportable entity” that must demonstrate to the Bahamas’ ‘Competent Authority’ - the Minister of Finance - that it is engaged in country-by-country reporting.

Mr Bethel told Tribune Business: “We have just finished finalising a first draft of what we think is a very good Bill to address this issue, and put the Bahamas in a very good position to comply with BEPS.

“The main thing right now in terms of BEPS is multinationals, and the way they book profits and losses in corporate vehicles around the globe, using financial structures to put themselves in the best possible position in their home jurisdiction.

“I think the Bill we have is very serviceable. We think the Bill accommodates satisfactorily the requirements set out in the [BEPS] criteria.... We have addressed that issue with our eyes firmly fixed on BEPS criteria 2.2.” This deals with the use of products/structures that book business worth multi-million dollar sums in jurisdictions where companies have no physical presence, or conduct no substantive activity.

The threatened ‘blacklisting’ of the Bahamas is tied directly to the OECD’s BEPS initiative, as compliance with the latter is one of three criteria being employed by the EU to determine whether a country is co-operative in the fight against tax avoidance.

At its simplest, BEPS aims to ensure that the profits of multinational companies are taxed in the country where they are generated.

Multinational companies often use legitimate tax avoidance strategies to “exploit gaps and mismatches” between different countries’ tax rates and rules, and “artificially shift profits” to low or ‘no tax’ jurisdictions despite conducting no or minimal business there. This enables them to minimise their tax exposure by paying a lower rate than they otherwise would in countries where they do conduct business.

The Bahamas has elected to meet the minimum BEPS requirement by complying with four standards: (Action 5): Countering Harmful Tax Practices; (Action 6): Treaty Shopping; (Action 13) Transfer Pricing Documentation and Country-by-Country Reporting; and (Action 14) Dispute Resolution.

Yet financial services industry sources told Tribune Business that compliance with Action 5 was especially problematic for the Bahamas. This is because the OECD considers a corporate tax rate of 10 per cent or less to be a ‘harmful tax practice’, but the Bahamas - with no income taxes of any kind - has an effective corporate tax rate of ‘zero’ because it simply does not have this system.

Therein lies the problem for the Bahamas in meeting both OECD and EU demands, and many observers believe the latter - in particular - is seeking to force this nation to implement a corporate income tax.

The recommendation to include the Bahamas, together with the US Virgin Islands and St Kitts and Nevis, on the EU ‘blacklist’ was leaked last week to the Reuters news agency. Bahamian financial services industry, speaking on condition of anonymity, told Tribune Business they viewed this as a ‘deliberate act’ by the EU in a bid to further ratchet up the pressure on this nation, force it into a corner and ‘bounce’ it into meeting more demands.

“They’ll probably have their corporate tax in the next three years; maybe two,” one source told this newspaper of the EU. “It is the extent of change, not just the pace of change, that is being rapidly accelerated. They know the Bahamas is going to say: ‘What do you want us to do to beat off this blacklist on Tuesday?’”

The source added that the Bahamas’ commitment to the OECD to comply with BEPS “arguably” requires implementation by end-2019, which is the same timeline for when this nation is supposed to accede to full membership in the World Trade Organisation (WTO).

Mr Bethel, though, said he was “loathe to ascribe” hidden agendas or ulterior motives to any party. “When the Bahamas gives its commitment we live up to it, and have every intention of living up to it” he told Tribune Business.

“It’s a question of our own integrity when we say we’re going to do it. No one has to put a gun to our head. All I can say is that we are demonstrating our good faith. We’ll see what the end result will be. I can only speak to and say what we as a government are doing. We are showing our good faith, and we trust and hope we’ll receive the same consideration.”

Mr Bethel then revealed that “a series of miscommunications” by both the Bahamas and EU had exposed this nation to the threatened ‘blacklisting’, although he did not fully explain what these were.

“It’s a series of miscommunications that put us in this position,” he disclosed. “A series of miscommunications on both sides. Now we’ve got the full picture we will respond to it forthwith. Nobody was attempting to swing anybody.

“It was a miscommunication on timing and the details of implementation that were not forthcoming until [Friday]. I think we’re going to be well on our way to showing the seriousness of our commitment, and that when we give a commitment we live up to it.

“A large part of the threatened ‘blacklisting’ was a failure of communication; them or us not asking the right questions, and for them to set out fully the details of the initiative. We knew the criteria, but only got the implementation notes then.”

Mr Bethel’s comments likely refer to the EU’s original ‘blacklisting’ announcement in early December 2017, when it placed the Bahamas in an eight-nation grouping, along with the likes of the British Virgin Islands (BVI), Dominica and Turks & Caicos, that would be given a further 12 months to meet its demands for “fairer taxation”, transparency and compliance with the fight against tax avoidance by multinational companies.

The EU said it had suspended “the screening process” for the Bahamas and other seven, due to the impact of Hurricane Irma, but warned that the process would resume in February 2018 “with a view to resolving these concerns by the end of” the year.

“I will only say this,” Mr Bethel told Tribune Business. “That the Commonwealth of the Bahamas is intent on living up to its commitments to be a responsible member of the international community, and to do all that is necessary to defend the integrity and right to compete of our financial services sector on a level playing field with the rest of the world.

“Not to come with any untoward advantage that targets people’s tax bases, but to compete on quality, timeliness and efficiency of services we offer to the world. On those grounds we can compete, and we can win. We will press on regardless.”