By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government yesterday accused the European Union (EU) of relying on outdated information to keep The Bahamas blacklisted, as a Cabinet minister said: “We’re doing everything in our power to get it right”.

Ryan Pinder KC, the attorney general, who had previously voiced optimism that The Bahamas would be delisted this month, told Tribune Business the Davis administration was “rather disappointed but not surprised” that this nation has not been permitted to escape what is a 16 nation-strong tax ‘blacklist’.

He explained that the EU based its decision on an April 2023 report by the Organisation for Economic Co-Operation and Development’s (OECD) Forum on Harmful Tax Practices, which is now some six months out-of-date and does not include or account for The Bahamas’ subsequent reforms to its economic substance laws, their enforcement and the online reporting portal.

Alleged deficiencies in this nation’s “economic substance” regime is what prompted the 27-nation EU to brand The Bahamas a “non-cooperative jurisdiction” for tax purposes in October 2022. However, the EU takes its cue on this issue from the OECD’s Forum for Harmful Tax Practices, given that both bodies’ tax and “economic substance” initiatives overlap to some extent.

Given the nature of this relationship, Mr Pinder questioned the “logic” of the EU making its decision, and relying on an outdated assessment, before the Forum on Harmful Tax Practices’ next meeting which is scheduled for later this month.

He added that he was “cautiously optimistic” that The Bahamas’ reforms, and progress in implementing them, will receive a “favourable review” from the OECD body which - had it come out earlier - could have influenced the EU to take a different approach to this country with its own blacklist.

As a result, he described The Bahamas’ continued blacklisting as “a timing issue”, and hinted at optimism this nation will no longer be viewed as a “non-cooperative jurisdiction” when the EU Council conducts its next review in February 2024. The Attorney General also said yesterday’s events were unlikely to have any further negative impact on the financial services industry and wider Bahamian economy.

“We’re not surprised,” Mr Pinder told Tribune Business of The Bahamas’ failure to escape the EU’s clutches yesterday. “We’ve been speaking to them. They made their determination based upon the Forum for Harmful Tax Practices, which is a committee of the OECD. The Forum did their assessment in April and, of course, in April, we were not in a position to be fully compliant.”

Given that the EU takes its cue from the OECD Forum on “economic substance”, the Attorney General added that it was “most disappointing” that the 27-nation bloc made its determination in advance of the latter’s next meeting.

“If that’s the case, logic tells you they make their assessment after the Forum on Harmful Tax Practices,” he said. “This is a timing issue. We’re rather disappointed that the EU took a decision based on a review done in April.

“We fully expect to have a favourable review by the Forum for Harmful Tax Practices and, by the end of this calendar year, will have revised recommendations from the Forum which the EU will take into account in its February meeting.

“I am cautiously optimistic that we have done everything in our power and complied with the recommendations of the Forum on Harmful Tax Practices, and they will have a favourable review of us later this month.” Mr Pinder said The Bahamas is in contact with both the OECD Forum and the EU’s Code of Conduct Group, the latter of which leads the “non-cooperative jurisdiction” initiative for the bloc.

The EU gave little justification for maintaining The Bahamas on its tax blacklist, other than to repeat a previous explanation. “The Bahamas facilitates offshore structures and arrangements aimed at attracting profits without real economic substance by failing to take all necessary actions to ensure the effective implementation of substance requirements,” was the ‘substance’ of its explanation.

‘Economic substance’ is a test that requires companies to show they are doing real, legitimate business in a jurisdiction and are not merely brass plate, letterbox fronting companies acting to shield taxable assets and wealth from their home country authorities.

The initial Commercial Entities (Substance Requirements) Act 2018 required all companies conducting “relevant activities” to confirm they are carrying out real business in The Bahamas via annual electronic filings - a requirement that was maintained in upgraded legislation, passed by Parliament earlier this year, to help address the purported deficiencies identified by the EU.

The Government has also initiated inspections and enforcement actions to ensure registered agents and their corporate clients are complying with the Act, while BDO - the company that developed the beneficial ownership registry (BOSS) system - was hired to develop a new electronic online portal for economic substance filing and reporting. That portal went live in September, although the deadline for 2022 filings was extended to October.

“The level of work has been, and continues to be, rather intense,” Mr Pinder told Tribune Business of the ongoing drive to ensure The Bahamas meets EU and OECD demands. “We have accomplished a lot in the last year. You would note, if you look at the October release by the EU last year, it spoke about deficiencies in the country-by-country reporting mechanism

“You would note those are no longer detailed this year. The EU has acknowledged that, in the grand scheme of things, in their review that we have improved.” The implementation of country-by-country reporting under the OECD’s Base Erosion and Profit Shifting (BEPS) initiative was raised as a concern by the EU in late 2022.

This is an effort to prevent multinational groups with annual turnovers of $850m or greater from avoiding/evading taxes in the jurisdiction in which these monies are earned by shifting them, via transfer pricing or some artificially contrived transaction, to countries where they will be taxed at a lower rate.

The Bahamas’ progress in this area was indeed acknowledged by the EU in its February 2023 ‘blacklist’ review, where it said: “The Bahamas was in particular urged to continue to undertake compliance actions and the required exchanges of information with respect to all relevant entities, and encouraged to verify its statistical data....

“Since the general recommendation that was addressed to the Bahamas in the 2021 BEPS Inclusive Framework Action 13 peer review report on country-by-country reporting was removed in the most recent report, the commitment The Bahamas made to the group in January 2022... is deemed fulfilled. The group therefore recommends to delete the reference to this commitment from the entry on The Bahamas.”

“All across the board a tremendous amount of work is going on,” Mr Pinder told Tribune Business yesterday. “We implemented the new portal in September, passed a whole new piece of legislation and developed detailed guidance notes, and have done extensive consultation with industry. We continue to work very hard as part of the reporting requirements for the Forum on Harmful Tax Practices.”

The last step in fully complying with the OECD Forum’s requirements is to provide a year’s worth of economic substance reporting data and filings. To accomplish this, Mr Pinder said the Government has had to go back in and retrieve data from the old substance reporting portal that was attached to the Department of Inland Revenue, and deemed inadequate, and migrate this to the new one via manual processes.

Tribune Business previously reported that deficiencies with the economic substance reporting portal, and an inability to test, analyse and inspect the data, was a critical factor in the EU’s blacklisting decision. “The old portal was completely deficient and did not function,” the Attorney General told this newspaper.

“Part of the challenge that we faced, and the work we continue to do, is take the data that was reported historically in that system and review it, reorder it, clean it and make sure that it’s accurate so it can be advanced [migrated] to the new portal. If the former portal was bad, the organisation of the data was equally as bad.

“We’re working through that manually. Every report in the old portal we’re manually reviewing, manually assessing and putting in the new portal to complete the reporting by the end of the calendar year. That will be the last piece to be deemed co-operative and compliant with our obligations,” he added.

“It’s been a lot of work. The fact of the matter is we have an obligation to get it right even if the former administration got it wrong, and we are doing everything in our power to get it right.” Asked whether the failure to escape the EU’s blacklist in this review will negatively impact financial services and The Bahamas’ status as an international financial centre (IFC), Mr Pinder said he foresees no further fall-out.

“You never want to be determined to be non-cooperative,” he said, “but nothing has substantially changed. I don’t think there will be an increased adverse effect. You always want to be determined to be co-operative, and not on any list, and that’s the position we’re working towards.”

The EU yesterday added Antigua and Barbuda, Belize and Seychelles to its list of non-cooperative jurisdictions for tax purposes, while also removing the British Virgin Islands, Costa Rica and the Marshall Islands. This keeps it at 16 countries.

Besides The Bahamas, the other 15 are American Samoa; Antigua and Barbuda; Anguilla; The Bahamas; Belize; Fiji; Guam; Palau; Panama; Russia; Samoa; Seychelles; Trinidad and Tobago; the Turks and Caicos Islands; US Virgin Islands; and Vanuatu.