By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Bahamas was warned in late January 2018 that its tax system is “harmful”, with the European Union (EU) demanding a detailed action ‘plan’ to remedy “deficiencies” within one month.

Correspondence released yesterday as part of the EU’s decision to ‘blacklist’ the Bahamas for being non-cooperative in combating tax avoidance shows the Minnis administration was given six weeks’ notice of the 28 nation bloc’s concerns.

A letter, dated January 26, 2018, and sent to the Ministry of Finance and Bahamas’ United Nations mission in Geneva, demanded that this nation give a “high level political commitment” to preventing its corporate vehicles and structures from being used to aid tax avoidance.

The initial Bahamas’ commitment to meet these demands, signed by Marlon Johnson, the Ministry of Finance’s acting financial secretary, did not reach the “high political level” required (see other article on Page 1B). And the Bahamas also failed to satisfy its requirement for combating tax avoidance, especially by multinational companies. Both factors were cited as critical to the ‘blacklisting’ decision, with the contents of its January 26 letter suggesting that a combination of complacency by the Bahamas, miscommunication and a ‘moving of the goal posts’ by the EU resulted in this nation suffering such a fate.

An ‘Annex’ to the EU’s letter identified the alleged “deficiencies” in the Bahamas’ legal and regulatory regime, setting out three issues that had to be addressed by this nation before it would be regarded as ‘cooperative’ in the fight against tax avoidance.

The three “proposed actions” demanded of the Bahamas were:

• Confirming its commitment to “sign and ratify” by end-December 2018 the Multilateral Competent Authority agreement for the Common Reporting Standard (CRS), which has been adopted as the global standard for automatic tax information exchange.

The EU also gave the Bahamas the option of establishing “a network of arrangements” through which it could automatically share such details with all 28 EU member states.

• Confirm its commitment, and the timeline, for signing on to and ratifying the Organisation for Economic Co-Operation and Development’s (OECD) Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

• Finally, confirm its commitment, and timeline, for joining the OECD’s Base Erosion and Profit Shifting (BEPS) Inclusive Framework, and implementation of the ‘minimum standard’.

K P Turnquest, Deputy Prime Minister, and Brent Symonette, minister of financial services, signed the Bahamas on to the first two EU demands when they visited Europe pre-Christmas 2017. Legislation to give effect to these commitments was subsequently passed by Parliament, while the Government also gave commitments to join the BEPS initiative and meet the minimum standard.

But, despite the Bahamas seemingly addressing the three “deficiencies” identified on January 26, the EU appears to have ‘circled back around’ to focus on the potential use of Bahamas-domiciled corporate vehicles and structures for tax avoidance purposes - even though this was not set out in the ‘Annex’.

That issue is admittedly tied to BEPS, and the Government may not have paid enough attention to it in the belief that it had addressed all the “deficiencies” set out in the ‘Annex’ and would be fine. It also appears to not have recognised that ‘high political level’ referred to a Cabinet minister, not a civil servant, when it came to making commitments on the Bahamas’ behalf.

The EU also appears to have ‘changed the goal posts’ on timelines, given that its initial ‘blacklist’ announcement in early December 2017 appeared to give the Bahamas and seven other storm-hit Caribbean countries until year-end 2018 to address its concerns.

Staying true to its earlier promise to resume ‘contact’ with the Bahamas and other seven nations by February 2018, the EU’s January 26 letter demanded: “We would now need a firm commitment at high political level that the Bahamas will address the deficiencies identified in Annex I, which were already mentioned in Annex I of our letter of November 7, 2017.

“Such a commitment would allow the Code of Conduct Group to positively consider future changes in our ongoing work. Moreover, the compliance of your legal and regulatory framework has in particular been assessed with reference to criterion 2.2 of the set criteria.”

This criterion was the one used to justify yesterday’s ‘blacklisting’ of the Bahamas. It demands that countries not permit corporate structures that allow companies to move, and book, profits and losses if they have no physical presence - or conduct no substantial activities - within that jurisdiction.

“Jurisdictions should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction,” the EU letter told the Minnis administration. “In doing this analysis, the absence of corporate income tax or a nominal corporate income tax has been taken into account....

“Following a technical analysis the main concern relates to de facto lack of substance, which may be due to the absence of legal substance requirements, for entities doing business in or through your jurisdiction.

“The absence of legal substance requirements.... increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial presence, which is a concern from the perspective of criterion 2.2. In light of this, experts have provisionally considered the tax system of Bahamas as harmful.”

The EU then urged the Government to “verify” if the Bahamas “intends to address the identified concerns and commit to future changes”.

It added: “We invite the Bahamas to co-operate with the Code of Conduct Group and commit, at a high political level, to addressing the above mentioned concerns. In particular, to address the issues that arise in connection with entities operating without any substance, the Bahamas is asked to give reassurances to EU member states on this issue.”

The EU letter then laid out a ‘road map’ on how the Bahamas can comply with its demands without implementing a corporate income tax, which many observers believe is its ultimate goal for this nation.

The ‘road map’ laid out sounds similar to the legislative changes revealed to Tribune Business at the weekend by Carl Bethel QC, the Attorney General. He disclosed that his ministry had completed the draft of a Bill that will impose ‘country-by-country’ reporting of profits and losses on Bahamian entities that are part of a multinational company’s corporate network, once the latter’s consolidated annual revenues are above a certain threshold.

“The Bahamas is asked to discuss with the [EU] what further steps could better ensure that businesses have sufficient economic substance,” the letter said.

“A way to achieve this could be through the imposition of substance requirements, where appropriate. Moreover, this may require that you introduce additional accounting and tax reporting obligations such that an appropriate notification regime for entities that give rise to the risks and concerns underlying criterion 2.2 can ensure the collection and subsequent exchange of relevant information with member states.”

Either way, regardless of whether the Bahamas is forced to impose a corporate income tax or not, it will likely face more red tape and costs as a result of having to meet the EU’s demands, further impairing its competitiveness.

The EU also appeared to take issue with the preferential tax regime offered to non-resident companies in the international side of the Bahamian economy, writing: “Since the same technical analysis revealed that, in your jurisdiction, legal mechanisms exist that enable the granting of advantages only to non-residents or in respect of transactions carried out with non-residents, in particular, through the incorporation of entities which are not permitted to carry on business in your jurisdiction, we would like to take this opportunity to verify whether Bahamas intends to address the identified concerns and commit to future changes.”

The letter concluded by asking the Bahamas for a “precise timeline and a description of the steps” it planned to take to address the EU’s concerns by February 28, 2018. It warned: “The Code of Conduct Group will continue monitoring the commitments taken by the identified jurisdictions to consider whether they have been fulfilled and, as the case may be, will recommend an update to the EU list of non-cooperative jurisdictions for tax purposes.”