End to tax preferences ‘bites’ exchange control

photo

John Delaney QC

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s elimination of preferential tax breaks “bites at the exchange control regime” and far more incentives than those identified in the act, an ex-attorney general argued yesterday.

John Delaney urged the Minnis administration to clarify the reach and breadth of the Removal of Preferential Tax Exemptions Act so that he and other attorneys could properly advise investor clients on how The Bahamas’ efforts to meet the European Union’s (EU) anti-tax avoidance demands will impact them.

While the act specifically lists International Business Companies (IBCs), Exempted Limited Partnerships (ELPs), Investment Condominiums (ICONs) and Executive Entities as vehicles whose preferential tax breaks will be eliminated by end-2021, Mr Delaney said its “general” language appears to expand its reach to other laws and products.

The Delaney Partners principal pointed, in particular, to the act’s section three, subsection one, which mandates that all Bahamian-incorporated corporate vehicles conducting business “exclusively outside” this nation pay local taxes at a rate/amount that is more than “nominal” or zero.

This, he suggested, caught more Bahamian corporate vehicles than the four specifically identified in the act, and meant the Removal of Preferential Tax Exemptions Act’s application seemed to extend to “biting into” the long-standing exchange control regime’s “divide” between companies that operate in - and outside - this nation and its economy.

The former attorney general added that the rush to meet the EU’s 2018 year-end deadline for eliminating so-called “ring fencing”, and ending preferential tax breaks provided to non-resident entities and foreign investors that were not available to counterparts operating in the domestic Bahamian economy, had likely caused the ambiguity on how the new laws will work.

“I do question whether this Removal of Preferential Exemptions Act, which became live as of the first of this month, has sufficient clarity as to how it is intended to apply,” Mr Delaney told Tribune Business, hinting that amendments were likely.

While there was no mystery about how the Government intended to bring IBCs and the other three named products into compliance with the EU’s demands, he added that “of lesser clarity is the intended effect of the fairly general language” in the clause identified

“There are other statutes that might involve certain activities that are carried on outside The Bahamas by domestic companies,” the Delaney Partners principal said. “There are other groups of Acts that exclude Bahamian companies operating abroad from being subject to the same amount of tax or no tax at all.”

Citing the Stamp Act as an example, he said it did not apply to non-resident companies - meaning those corporate vehicles that conduct business exclusively outside The Bahamas. As a result, unlike resident companies these entities do not currently pay the 6 percent Stamp Duty levied when a business or its shares are sold.

Yet Mr Delaney argued that non-resident companies will no longer enjoy this preferential treatment based on the Removal of Preferential Exemptions Act’s language. “This Act says it applies to Bahamian companies carrying on business abroad,” he explained.

“There’s a question now if that business, carrying on business outside The Bahamas, must pay Stamp Duty if it is sold. Likewise in relation to the VAT regime. If you sell services to a business where the benefits reside abroad, the question is: If you’re doing business with a Bahamian company not doing business in The Bahamas, but carrying out business outside The Bahamas, must they pay VAT at the same rate like a business doing business in The Bahamas?

“These are things that arise. It seems to me that this is a work in progress in terms of the full interpretation, application to these statutes and the full implementation as a matter of fact and proper interpretation.”

Mr Delaney said The Bahamas’ economic model of applying different tax and regulatory treatments to resident and non-resident companies stemmed from the exchange control regime inherited from the British.

He argued that the Removal of Preferential Exemptions Act now appeared to intrude on this regime through its “very general, generic terms” that catch all non-resident corporate vehicles and subject them to the payment of taxes.

“There is that whole other regime out there and so, as lawyers when we look at the language of the Act, at least to me these terms are generic enough to open it to interpretation that it also bites into the exchange control regime divide between resident and non-resident businesses,” Mr Delaney told Tribune Business.

“To my mind it’s an entirely legitimate interpretation to say that it is not only biting into IBCs, ICONs, ELPs and Executive Entities, but to the extent there’s a component of the exchange control regime that gives companies a preference in relation to tax matters, that’s also removed.

“It seems to me that from an interpretation perspective that this impacts the exchange control regime,” he continued. “I say that as a lawyer having to advise clients of the implications of this, and at least not getting it wrong and leaving someone exposed to something.

“I think that the effect, the implementation and interpretation is a work in progress. It would be most helpful if it were clarified. That there’s still some evolution to happen is a fact of the circumstances in which this came into being, dealing with what one might call an exigency.”

“The fact there’s some evolution