By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A risk-management specialist yesterday warned The Bahamas will soon have to “face the music” and implement a personal and/or corporate income tax in response to internal and external pressures.

Hubert Edwards, principal of Next Level Solutions, a Bahamas-based corporate governance and risk management consultancy, told Tribune Business that while the country’s removal from France’s tax blacklist (see article on Page 3B) was positive it was only a matter of time before the financial services industry and wider economy were confronted with even greater threats.

He pointed in particular to the European Union’s (EU) likely imminent revision of its criteria for including a nation on its own tax blacklist, and specifically the requirement that countries must have a minimum corporate income tax rate of 12.5 percent to escape such punitive measures.

The Bahamas, of course, has no income or corporate income taxes, and Mr Edwards urged the government and private sector to try and move ahead of the EU’s renewed efforts by initiating tax reform studies now.

Suggesting that the 27-nation bloc may return with an enhanced “blacklisting” criteria as early as late 2021 or early next year, Mr Edwards said The Bahamas must not only respond to such external threats but also ensure whatever tax reforms are necessary provide sufficient income for the government to meet its obligations - including its elevated debt - while also facilitating economic growth.

And he argued that there will come a time when The Bahamas’ present consumption-based tax system is insufficient to meet the Government’s needs, which will require the country to switch to a more progressive system based on ability to pay rather than burden low income taxpayers with rates as high as 20 percent.

Acknowledging that The Bahamas’ escape from the French blacklist represents a short-term victory, given that French companies and individuals will be able to “operate freely without any restrictions” in conducting business with this nation, Mr Edwards warned it may prove the calm before the storm.

“The bigger issue we have lurking over our heads, even though we’ve been removed from these various blacklists including the EU’s, is that the EU plans to come back to us possibly towards the end of this year,” he explained. “They’re really revamping their criteria for getting on and off their harmful tax blacklist, and that is the one that is most important for The Bahamas to pay attention to.”

Compliance with the EU’s demands has just forced the entire Bahamian business community to go through the painful exercise of substance reporting to confirm they have a genuine physical presence, and are doing real business, in this nation, and Mr Edwards said the bloc’s demands for continued free access to its markets may get even harsher.

Suggesting the EU is moving towards a minimum corporate tax rate of 12.5 percent as one of the conditions for staying off its blacklist, he added: “If that is not available in The Bahamas it potentially impacts our value proposition with our existing businesses, which have to start to ask themselves whether they want to continue to remain located in The Bahamas.”

Mr Edwards said foreign-owned financial institutions would come under growing pressure from their head offices and via other means, and reiterated: “Any blacklisting is adverse for The Bahamas and we have to address it. I think it’s coming although you can never be sure.”

Noting that this threat was emerging with The Bahamas still trying to recover from the COVID-19 pandemic, and with a general election fast approaching, Mr Edwards said the political parties needed to address the issue even though they will not want to for fear of turning-off voters.

“At some point in time we have to face the music, confront the issue, and we have to start talking about it now. I truly believe that,” he told Tribune Business. “In order for you to make any shift with your tax system you have to do extensive study, extensive policy research and recruitment of people with the requisite expertise to shift your system from a sales tax to a more complex income and corporate income tax system.

“While I don’t expect anyone to make that decision immediately, we should use the time wisely to start the studies and have the political parties come together on the issue. If we start the ball rolling now, we can do so on a strong footing and are not running around in an emergency situation where we have to make a decision in the heat of the moment that’s not in the country’s best interests.”

While The Bahamas’ existing consumption-based tax system is sufficient to meet the Government’s revenue needs for now, Mr Edwards argued that “at some point” escalating debt servicing costs will reach “a tipping point” where the country will have to switch to more progressive tax system to avoid over-burdening poor Bahamians.

“Think about VAT at 20 percent,” he added. “We have eventually to move to a system where those better able to pay are able to pay more in taxes. We just need to get there. It’s not a popular thing to be seen as proposing an income tax; people see you as kind of stupid, but there is potential for long-term fall-out.”