• ‘Balance firmly tilts’ on introducing this levy

• Personal ‘high earner’ income tax also urged

• Otherwise companies switch profits to wages

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has been urged by the International Monetary Fund (IMF) to “pre-empt” global tax pressures by imposing a corporate income tax designed to suit its own purposes.

The Fund, in a report that has generated much political controversy, asserted that “the balance firmly tilts” in favour of The Bahamas getting out ahead of the G-20 and Organisation for Economic Co-Operation and Development (OECD) push for a 15 percent minimum global corporate tax rate.

Suggesting that The Bahamas “impose that same level of taxation” for itself, the IMF said that while this would impact the domestic economy it would also ensure all corporate income tax revenues went to the Government here rather than their counterparts abroad.

And it warned that delaying, or “abstaining”, from a corporate income tax could “pose reputational risks that can jeopardise the economy”. While Tribune Business has seen documents that back this finding, well-placed sources aware of the IMF report yesterday revealed that it also recommended imposing a personal income tax on so-called “high earners”. 

This was urged on the basis that Bahamian companies could seek to avoid/evade a corporate income tax by switching their profits to salaries paid to shareholders, senior executives and upper management, thus requiring that both company and personal income be taxed.

“To the extent that others impose a minimum tax on payments to, or profits in, The Bahamas, it would be in The Bahamas’ best interest to pre-empt by imposing that same level of taxation itself,” the IMF urged. 

“In principle, this would have the same effect on the activity in The Bahamas, but the revenue would accrue to The Bahamas rather than governments abroad. However, the global minimum tax per se can affect the behaviour of multinationals.

“The trade-offs manifest themselves as follows. Imposing a corporate income tax may drive away some activities, while abstaining from imposing a corporate income tax deprives The Bahamas of revenues and poses reputational risks that can jeopardise the economy.”

The Fund added that smaller companies not targeted by the G-20/OECD push for a 15 percent global minimum corporate tax would be impacted by that, and concluded: “The balance firmly tilts towards imposing a corporate income tax.”

The Bahamas was among 136 countries who, in early October 2021, signed on to international tax reforms that will see a 15 percent minimum global corporate tax rate levied on the largest multinational enterprises. The OECD/G-20 are hoping that all countries will formally commit to the initiative in 2022, with implementation targeted at 2023.

Multiple local observers have previously echoed the IMF’s view that The Bahamas should position itself in front of the G-20/OECD initiative by implementing a low-rate corporate income tax of its own. However, this newspaper’s sources said the Fund went even further and called for a personal income tax to also be imposed on “high earners”.

One, speaking on condition of anonymity, said the report - submitted to the former Minnis administration just days before the September 16 general election - called on the Government to “use the opportunity” to review more than just one form of income taxation.

“They recommended personal income tax for high earners,” the source said. “If you implement corporate income tax and do not implement a personal income tax for high earners, companies will reduce their profits by shifting it to salaries in their high corporate ranks. Owners will take it out as expenses as opposed to profits.”

Meanwhile, refuting the Government’s interpretation of the IMF report as it relates to VAT, the source added that it never recommended raising the tax rate to 15 percent as the only way to sustain the ‘zero ratings’ and exemptions now set to be repealed by the Davis administration.

Instead, they said the IMF had presented the option of raising the VAT rate and eliminating ‘zero ratings’ on the likes of breadbasket foot items and medicines - in effect doing both. While the Davis administration has elected to go in the opposite direction by cutting VAT to 10 percent, the source described the IMF advice as “theoretical, not prescriptive”.

While the Davis administration has used the IMF report to argue that its predecessor was planning a VAT hike if re-elected to office, they added that discussion of its contents and further analysis was required before any policy decisions could be taken.

“It was not to suggest ‘you must do this’; ‘you mustn’t do that’,” they said. “The way to clear this all up is to release the full report, and we’re going to have to look this tax thing squarely in the face. The University of The Bahamas report said this move [the VAT cut to 10 percent] would be detrimental to the fiscal position.”

That report said cutting the VAT rate to 10 percent will cause “only slight improvement” in job creation and economic growth, while advocating it still “be pursued’.

Prepared by the university’s Public Policy Institute for the Ministry of Finance, it also warned that the two percentage point cut planned by the Davis administration would worsen key fiscal indicators such as the fiscal deficit and debt-to-GDP ratio.

Adding that the tax cut would have no impact on reducing income inequality in Bahamian society, it called for “compensating tax revenue initiatives” to offset the reduction in VAT revenue caused by slashing the rate from the existing 12 percent to 10 percent.

“The Government still has to identify policy measures outside of collecting taxes that are due to drive revenues to 25 percent of gross domestic product (GDP),” they said. “That cannot be accomplished on compliance alone. What will be the additional tax measures that yield this type of result?

“The mid-term report will start to hopefully flesh out their fiscal plans. The creditors are watching, the rating agencies are watching, and it’s so important to speak with clarity as to how they will meet their deficit and debt targets.”

Simon Wilson, the Ministry of Finance’s financial secretary, confirmed to Tribune Business last night that the IMF report had “touched on” the issues of corporate and personal income taxation. Agreeing that “it wasn’t a true holistic review” of The Bahamas’ tax system, he added that it “looked at a couple of options” and “spoke more” to VAT than any other tax.

Focusing specifically on corporate income tax, Mr Wilson affirmed that the IMF’s suggestions were tied to the global initiative. “The caveat was that, given the global pressure, they thought it might be inevitable,” he said of corporate income tax. “The IMF report was really high level, nothing too detailed: You can get money from here, here and here without doing any detailed deep dive.”

Mr Wilson said the Minnis administration had concluded talks with the Deloitte & Touche accounting firm on “the scope” of the work it will undertake to further the study of the Bahamian taxation system it carried out in 2016-2018 at the behest of the financial services industry.

He added that the former administration must have asked the IMF to look at the implications of a higher VAT rate given the amount of the report that was dedicated to this. The financial secretary reiterated that higher VAT rates equate to multiple exemptions and zero ratings, pointing to Barbados’ 17.5 percent rate and Jamaica’s 15 percent.

Agreeing that further revenue measures are required to hit the Government’s 25 percent revenue-to-GDP target, Mr Wilson said these would be outlined in the upcoming mid-year Budget. “The process is to broadly indicate areas where you can get increased revenues,” he added.

“The presentation takes place, and you start working and consulting on priority areas before the Budget. You do one or two; you can’t do all. We’ve said we need to get more revenue, have to increase it to the 25 percent of GDP target over the next five years, and have to say these are the things we are looking at to get there.”