By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

AN ex-finance minister yesterday urged the Government to place the Bahamas’ “true economic needs” above the European Union’s (EU) demands in its haste to escape the latter’s ‘blacklist’.

James Smith, also a former ex-Central Bank governor, told Tribune Business that the Minnis administration seemed to be “moving very fast” in adopting some form of “corporate taxation” in its bid to address the 28-nation EU’s concerns.

Calling on the Government to focus on ‘the bigger picture’ in its ‘blacklisting’ response, Mr Smith echoed concerns among some in the financial services industry that it may be going ‘too far’ in its response to the EU’s ‘economic substance’ and ‘ring fencing’ demands.

The Government has unveiled new legislation, the Multinational Entities Financial Reporting Bill, to tackle both these concerns, but the now-CFAL chairman warned that the best regulatory and tax information exchange systems will serve no purpose if the Bahamian financial services industry ceases to exist.

“They seem to be going very fast, focusing on being removed from an artificial, arbitrary list,” Mr Smith told Tribune Business of the Government’s EU response. “Important as it is, I think we should immediately seek a wider international audience or we will forever be falling victim to the dictates of the EU as they move the goal posts.”

He echoed Alfred Sears, the former attorney general, who last week told this newspaper that the Bahamas should seek to form an alliance with other international financial centres (IFCs) and lobby for the tax matters raised by the EU and Organisation for Economic Co-Operation and Development (OECD) to be placed under the United Nations’ (UN) oversight.

The former finance minister in the 2002-2007 Christie administration added that this offered the only opportunity for the Bahamas and other IFCs to obtain ‘a seat at the table’, and have equal influence on - and participation in - devising rules that will affect them, plus overseeing their implementation.

“The only way you can preserve some semblance of your sovereignty is form a committee of countries like yourself,” Mr Smith said, suggesting the Bahamas had long “gone past” the stage when it should be worried about escaping an adverse listing.

He added that this nation had implemented a series of “robust laws” to address prior anti-money laundering and counter-terror financing concerns, but the EU was now effectively demanding that the Bahamas help collect and enforce its members’ tax laws in this nation.

“What we’re doing is a huge expense for taxes that we don’t collect, and passing the information on to the Europeans who don’t have to pay for the hardware and software,” Mr Smith told Tribune Business of the Government’s planned legislative reforms.

“A tax regime should be established on your internal needs, not external pressure from abroad. You might also be providing disincentives for investment, particularly foreign direct investment, and that’s what you need to balance the trade deficit.

“We can say we’re fully compliant, not on the ‘blacklist’ any more, but subsequently you don’t have a financial services sector - or not the kind we need to balance the trade deficit. Then we’ll really be in trouble.”

The Multinational Entities Financial Reporting Bill 2018, a copy of which has been obtained by this newspaper, effectively paves the way for the introduction of “corporate taxation” on a wide range of financial services products.

Carl Bethel QC, the Attorney General, confirmed that the Bill had been written in such a way as to provide “flexibility” in determining the type of “corporate taxation” the Government will impose.

The Bill, as currently written, 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 them “resident or non-resident for exchange control purposes”, thereby eliminating the ‘ring fencing’ the EU has complained of, 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”.

“In the Act, we give with respect to each entity the power for the Minister of Finance to prescribe any tax,” the Attorney General told Tribune Business. “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 Smith, though, suggested that the Bahamas’ best approach might be to “hold on and look at the impact on the economy”, rather than rush to pass such legislation and escape the EU’s ‘blacklist’ at the first opportunity.

“We might find we have the best information exchange system and anti-money laundering regulations,” he told Tribune Business, “but there is nothing to regulate if all are closing down. 

“Let’s find a balance that meets the true economic needs of the Bahamas rather than satisfying the demands of the EU, and their interests being allowed to overshadow and trump our interests, no pun intended.”

The Multinational Entities Financial Reporting Bill, and other elements of the Government’s planned EU response, were still largely being digested and analysed by the financial services industry yesterday.

Yet an accountant, speaking on condition of anonymity, told Tribune Business of the general sector mood. “The industry is saying that it appears the Government went too far,” they said, adding that they had been contacted by multiple law firms for their input on the new Bill and its implications.

The Multinational Entities Financial Reporting Bill eliminates all preferential tax regimes for foreign, non-resident entities, and introduces a country-by-country financial reporting regime for Bahamas-domiciled entities that are part of multinational corporate empires earning more than $850 million in consolidated group revenue during their prior financial years.

Only IBCs and other Bahamian entities in structures that exceed this threshold will face such reporting requirements, as they will not apply to all.

Those corporate vehicles that fit this criteria, and are either the ‘ultimate parent’ or ‘surrogate parent’ of such a multinational network, will have to file an annual report with the Ministry of Finance that breaks down their profits and losses according to each jurisdiction where they are earned.

A ‘surrogate parent’ is defined as a Bahamas-resident entity designated as responsible for filing country-by-country reporting in situations where the ‘ultimate parent’ is not required to do this, or its ‘home country’ does not have a Competent Authority Agreement with this nation.

Mr Smith, though, described the proposed reporting requirements as “ridiculous”, pointing out that IBCs in US states such as Delaware and Nevada were not mandated to do anything remotely comparable.

As a result, many fear significant IBC business is likely to leave the Bahamas for such states, as well as potential IFC rivals such as the British Virgin Islands (BVI) and Cayman Islands.’

“It’s a greater risk implementing these things without subjecting them to rigorous analysis,” Mr Smith told Tribune Business. “It’s a greater risk doing that than complying and being off the ‘blacklist’. It’s like putting up a ‘For Sale’ sign and there’s no house.

“I would really question the validity and fairness of the list itself. They don’t allow you to take a look at it and see how it fits. They’re saying: Sign on now or we’ll list you.”

Mr Smith said the Bahamas’ ability to thoroughly analyse the implications of its ‘blacklist’ response had been diminished by the financial services sector’s shrinkage in recent years.