Wednesday, March 13, 2019
By NEIL HARTNELL
and KRISHNA RUSSELL
The Bahamas must use its escape from the European Union's (EU) tax "blacklist" to take the financial services industry to the "next level of growth", the deputy prime minister urged yesterday.
K P Turnquest, speaking after it was confirmed that The Bahamas had avoided the EU's 15-strong list, told Tribune Business that the country needed to exploit this outcome by repositioning the sector to focus on high-margin, value-added business.
Following the "arduous" effort to enact multiple laws bringing The Bahamas into compliance with the EU's demands, Mr Turnquest said this nation now needed to use this legislative platform to its advantage by attracting companies to domicile and conduct real business from these shores.
He argued that this would both deepen the financial services industry's ties to the domestic economy, and provide "real, tangible benefits to the Bahamian people", since an expanded corporate presence would speak greater commercial activity and job creation.
"This is the message that needs to be put forth," Mr Turnquest told Tribune Business yesterday. "What has been a very difficult and arduous process gives us the opportunity to retool the financial services sector for the next level of growth, which is the deepening of the industry's involvement domestically and expansion of its value-added side to drive real, tangible benefits to the Bahamian people.
"It is the evolution of the business. I don't think we can deny that the volume business, as you put it, is a thing of the past, but it gives us an opportunity in respect of the high value side of the business that we can do very well in."
Mr Turnquest explained that the latest reforms will shift The Bahamas away from its traditional reliance on "volume" - represented by International Business Company (IBC) incorporations and number of bank accounts - to the higher margin end of the financial services market where real value has to be added by companies with a physical presence.
With The Bahamas' traditional "secrecy" and tax minimisation model long obsolete, it now has to restructure and reposition the financial services industry - and, by extension, the wider economy - for continued growth by developing new competitive advantages in a tax transparent and compliant world.
The Government appears to have been preparing for this eventuality since last year with the passage of the Commercial Enterprises Act, which is designed to remove Immigration-related bureaucracy and red tape and make it easier for approved businesses in targeted industries to establish a physical presence in The Bahamas.
This has now been further underpinned by the Commercial Entities (Substance Requirements) Act, which is designed to address the EU’s demand for all nations to impose “economic substance” regimes that effectively require companies to prove they have a physical presence - and are doing “real business” - in a jurisdiction.
The two Acts are thus directly linked, with the EU-related law requiring entities operating in this nation to show they have a physical presence by conducting income-generating activities here. Management and control must also reside in this country.
Headquarters operations, together with banking, insurance, fund management, financing and leasing, shipping, distribution or service center operations, and holding companies, are the business activities under the Act that must have a “substantial presence” in The Bahamas through offices and employees and be conducting “real business” activities.
Mr Turnquest yesterday indicated that "if we get it right" these Acts could form the platform to relaunch The Bahamas as an international business centre and trade hub, with financial services - as the "second pillar" of the economy - continuing to play a key role in this evolution.
He warned, however, that the Government and financial services industry must still do "a tremendous amount of work" between now and July 2019 to "operationalise" The Bahamas' new regulatory regime and show the EU it has been fully implemented.
Explaining that the 28-nation bloc will "constantly be monitoring" The Bahamas to ensure effective execution, and also conducting "peer reviews" of this nation and other jurisdictions, Mr Turnquest said some "additional tweaks" still need to be made to the new regime although he declined to provide details.
The deputy prime minister pledged that The Bahamas will now be "scanning the horizon" constantly for new international regulatory initiatives that may pose a threat to its financial services industry in a bid to get ahead of potential attacks and develop an appropriate response.
"Right now we are putting all our efforts into ensuring we operationalise all the legislation passed. There's a tremendous amount of work to be done between now and July to ensure we operationalise and implement all of the laws, and ensure we pass the monitoring and peer review test," Mr Turnquest confirmed.
"They [the EU] will be constantly monitoring our implementation, and the first peer reviews of jurisdictions will start in the next few months. There are a couple of additional tweaks to some of the legislation that we wish to make to ensure they are co-ordinated with all aspects of the regime, but those are not significant to the overall EU objective."
Mr Turnquest added that The Bahamas was an "active participant" in all EU and Organisation for Economic Co-Operation and Development (OECD) working groups dealing with tax-related issues, and "making our contribution at the table".
Revealing that the Government was still on alert for developing international regulatory initiatives, he told Tribune Business: "We are scanning the horizon for those issues being mentioned in sidebars by member states so that we are cognisant of them, put them on our radar and thinking through responses should they come forward."
Mr Turnquest identified such initiatives as the taxation of electronic and digital transactions, plus the harmonisation of VAT rates, and added that The Bahamas will do "as much as we can to ensure we can shape the environment" in a still-evolving sector.
Notwithstanding such future concerns, Mr Turnquest argued that The Bahamas' non-inclusion on the EU list had "validated" the work done by the Government in partnership with industry to transform The Bahamas' regulatory regime.
"It's very important to stay off that list and follow-up, and do the work necessary to get off their 'grey list'," he added. "Listing comes with requirements for extra due diligence and other punitive measures and, to the extent we were able to avoid this, it puts our financial services industry in a much better position.
"Not only could it affect our offshore business but also the onshore centre and its ability to facilitate trade through correspondent relationships and ease of trade across borders."
Mr Turnquest said The Bahamas' non-inclusion by the EU represented "a strength we can leverage in trying to grow and support the industry", reinforcing this nation's argument that it was a compliant, co-operative jurisdiction.
"Now that we have passed the regulatory test and are engaged in the implementation test, given these realities we have to ensure our products and services are outstanding and go back into the world in a positive and proactive manner to let the investor public know we are compliant," Mr Turnquest said.
"That we are still a progressive and well-regulated jurisdiction, and will continue to provide a valuable service to the international financial services industry, and have an attractive value proposition to bring to the table."
The EU yesterday confirmed that The Bahamas is among 34 jurisdictions that have been given until end-2019 to fulfill their commitments to complying with its tax transparency and anti-evasion/avoidance demands otherwise they could be "blacklisted" in 2020.
Tribune Business's Tuesday article, which identified all the "blacklisted" nations and The Bahamas' non-inclusion, was spot on. The 15 jurisdictions singled out by the 28-nation bloc are Aruba, Barbados, Belize, Bermuda, Fiji, Oman, Vanuatu, Dominica, the United Arab Emirates, Marshall Islands, American Samoa, Guam, Samoa, Trinidad and Tobago, and the US Virgin Islands.
Detailing the cost to these nations, the EU said development funding cannot be channelled through their financial institutions. Enhanced tax reporting is also likely to be imposed.
"In addition to the EU provisions, member states agreed on sanctions to apply at national level against the listed jurisdictions," the European Commission said in a statement. "These include measures such as increased monitoring and audits, withholding taxes, special documentation requirements and anti-abuse provisions.
"The Commission is urging member states to step up their efforts to agree on strong, binding and co-ordinated defensive measures as soon as possible to give the EU list an even greater impact."
Pierre Moscovici, the EU commissioner for economic and financial affairs, taxation and customs, said: "The EU tax havens list is a true European success. It has had a resounding effect on tax transparency and fairness worldwide./
"Thanks to the listing process, dozens of countries have abolished harmful tax regimes and have come into line with international standards on transparency and fair taxation. The countries that did not comply have been blacklisted, and will have to face the consequences that this brings. We are raising the bar of tax good governance globally and cutting out the opportunities for tax abuse."