Corporate income tax for Bahamas ‘mammoth task’

By Fay Simmons

Tribune Business Reporter

A leading Bermuda accountant yesterday warned The Bahamas that implementing a corporate income tax regime is a “mammoth task” that should not be underestimated.

Olivia Espley-Ault, a senior manager in EY Bermuda’s tax practice, told a Nassau Conference panel discussion on corporate income tax and The Bahamas’ tax structure that - should this nation opt for such a reform - it must introduce a system that is simple to verify and enforce for both firms (taxpayers) and the tax authorities.

She noted that corporate income tax legislation can be updated to carve out a more elaborate regime once The Bahamas becomes more accustomed to the tax, and said: “I think it is something that should never be underestimated.

“I’m not underplaying. It’s going to be a mammoth task to go from no corporate income tax to a well-administered, verified and enforced corporate income tax. But if The Bahamas is to choose a system that is a little bit simpler to follow, both for the taxpayer and for the tax authorities, that’s a great place to start.

“You know, obviously legislation can be introduced every year if they want to go more complex and create some of these more far-reaching rules, but I think keep it simple. Administer it in a really effective way as best as you can and just keep building.”

In May, the Government unveiled its its so-called ‘green paper’ on corporate income tax strategies for The Bahamas that contained four reform options.

Ms Espley-Ault explained that whatever policy option is implemented must be simple to administer and protect the domestic tax base. She said: “It’s looking at the policies that are actually implemented, and finding that balance between protecting the domestic tax base and having something that is simple enough to administer.

“If the legislation that is put in is akin to a domestic corporate income tax as opposed to going to a complex worldwide taxation system, that’s a lot more of a simple system that may be easier to administer.”

The EY Bermuda accountant said any system chosen by The Bahamas must also be managed by well-trained officials that review the tax returns filed by firms carefully. She added that administrative costs associated with monitoring the new tax regime could be adversely impacted by ineffective tax collection agents.

She said: “We are pondering over what the rules should look like, but if we get to the stage where those rules are in place, it’s all about verification and enforcement. You know, getting into a system where there’s a way to deposit the tax returns into a portal or whatever system The Bahamas chooses.

“But to make it meaningful you really need to make sure that there are well-trained tax officials who are able to review these returns and look at them critically, apply judgment, suggest adjustments that taxpayers need to make. That takes a lot of time and money to do, and I don’t think it should be underestimated at all. So that administration component is huge.”

Dwayne Whylly, partner and chair of the financial services group at the Glinton, Sweeting and O’Brien law firm, said administrative costs associated with implementing a corporate income tax regime could be high for small businesses that do not get annual audited reports.

One of the ‘green paper’s reform options is a 15 percent corporate income tax rate for firms that have a minimum annual turnover in excess of 750m euros, and 10 percent on all other business to “maintain regional tax competitiveness”. “I think that’s something that definitely needs to be considered in terms of either of these approaches that we take,” Mr Whylly said.

“For example, if we go with option two, where we’re bringing in corporate tax across the board, now that increases the amount of income we generate from the corporate income tax above using option one, but does that increase the cost of implementation, the costs of enforcement.

“This is not just applying to your top-level multinational entities. This is applying across the board and you have certain businesses it might not be cost effective for them to have audited reports.”

Mr Whylly added that the model chosen by The Bahamas must balance revenue maximisation with cost effectiveness, noting that the options that bring in larger revenue amounts come with greater costs and also require upgraded infrastructure.

He said: “There are certain businesses that don’t operate on a different model, and so you didn’t have to adjust the rules to capture this and capture that. And so, the idea has to be a cost-effective analysis of whichever model we choose and how we can make sure that we’re maximising the revenue from that

“And just because you might be getting in more revenue does not mean that the amount of income that the Government has to use to improve the infrastructure, improve programmes in The Bahamas, is necessarily increasing.”

A corporate income tax will be the first such income-based levy in the country’s history, apart from the National Insurance Board’s (NIB) payroll-based contributions, and is intended to ensure The Bahamas complies and fulfills its obligations as one of 140 countries that have signed on to the G-20/Organisation for Economic Co-Operation and Development (OECD) drive for a minimum 15 percent global corporate tax.

In the first instance, this initiative applies only to corporate groups and their subsidiaries that have a minimum annual turnover in excess of 750m euros. The Government’s ‘green paper’, which is dated May 17, 2023, sets out the first option as merely introducing a 15 percent corporate income tax for all Bahamas-based entities that fall into that 750m-plus turnover category, while maintaining the Business Licence status quo for all entities which are not affected.

The second and third corporate income tax options, described as “more nuanced” because of the better balance they strike between tax revenue and economic impact, are those the Government indicates it is giving more serious consideration to. The second, labelled as “a soft introduction”, would introduce the same 15 percent rate for all those caught in the G-20/OECD net and also levy a 10 percent corporate income tax on all other businesses “to maintain regional tax competitiveness”.

This option, the ‘green paper’ adds, would have minor negative impacts on GDP, foreign and domestic investment, and unemployment. The latter would rise by 0.1 percent, while GDP growth would contract by 0.3 percent and foreign and domestic investment fall by 1.5 percent and 0.3 percent, respectively.

The third option, branded as “simplicity driven”, would exempt or carve-out small businesses earning less than a $500,000 annual turnover to leave them still paying the existing Business Licence fee. Bahamas-based entities in groups that meet the G-20/OECD threshold would pay a 15 percent corporate income tax, and all other companies generating more than $500,000 would pay a 12 percent rate.

The third option, though, would result in greater negative economic impacts although generating more revenue for the Government. Under this scenario, the ‘green paper’ said GDP growth was estimated to contract by 0.9 percent with unemployment increasing by 0.5 percent. Foreign and domestic investment will fall by sums equivalent to 5.1 percent and 1 percent, respectively.

The final option, which will generate the greatest revenue increase for the Government but also inflict the harshest economic impact, is to simply impose the 15 percent corporate income tax rate on all businesses with a turnover greater than $500,000 per annum and a 10 percent on small and medium-sized enterprises earning less than that.

This would result in an economic contraction of 1.7 percent, or around $200m, the ‘green paper’ projected, with the unemployment rate rising by 0.9 percent. FDI would fall by 10.2 percent, and its domestic investment counterpart by 2 percent. However, government revenues under this scenario are forecast to rise by 96 percent compared to the $140m collected from Business Licence fees in 2019 (see other article on Page 24B).

The more favoured options, according to the ‘green paper’, would see government revenues rise by 36 percent and 62 percent from implementing the second and third scenarios, respectively, compared to those same 2019 Business Licence revenues. Just levying 15 percent corporate income tax on those groups targeted by the G-20/OECD, though, would only produce a 4 percent revenue rise from business community taxation.