By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
The Government is hoping to release a public consultation paper on possible corporate income tax reforms before the 2023 first quarter’s end, it was revealed yesterday.
Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that the Davis administration was “very close” to releasing a so-called ‘green paper’ on The Bahamas’ options to comply with the global push for a minimum 15 percent corporate tax rate.
The Deloitte & Touch accounting firm was hired by the Government to examine the implications for the Bahamian economy and its financial services sector and, when asked how close the launch of public consultation is, Mr Wilson replied: “I will say before the end of the first quarter of this year.”
The Government’s 2022 Fiscal Strategy Report, released yesterday, detailed how the G-7 and its members are driving the “minimum corporate tax” initiative as a mechanism to prevent large multinational enterprises avoiding/evading tax by transferring revenues and profits from the country where they are earned to a lower tax state.
“In December 2021, the Organisation for Economic Co-Operation and Development released its ‘Pillar Two’ model for the implementation of a global minimum corporate tax of 15 percent, applicable to Multinational Enterprises (MNEs),” the report said. “This effort, supported by 137 countries, is designed to [prevent the erosion of countries’ tax bases] and is estimated to increase global tax revenues by $150bn.
“Within the context of the proposed global requirement for the implementation of a global minimum corporate minimum income tax, the international accounting firm, Deloitte, has been engaged to provide an assessment of the cost, regulatory reform and implementation strategy should such a framework be desirable. A green paper is now being prepared to initiate the public consultation process.”
The Fiscal Strategy Report also identified the Government’s unfunded, multi-billion civil service pension liabilities as a significant risk moving forward although proposed reforms will take time to make an impact. “An initial review and assessment of the Government’s existing defined benefit pension scheme has been completed by the accounting firm, KPMG, which outlines the need for reform and modernisation,” it added.
“Pension payments for fiscal year 2021-2022 equate to $166.2m (5.5 percent of recurrent expenditure) and are budgeted to increase to $170.7m in fiscal year 2022-2023 (5.7 percent of recurrent expenditure). To limit the risk associated with future pension liabilities, government is advancing with the strategy where all new employees will only be eligible to participate in a defined contribution plan, with a limit on the growth in pensionable salaries for existing employees.
“This strategy is estimated to improve cash flow by $6m over ten years, and will also include reform of SOE (state-owned enterprises) pension schemes.” The Fiscal Strategy Report, though, conceded that the risk presented by these unfunded pension liabilities has been known for more than a decade.
“The Government has historically maintained a non-contributory defined benefit pension scheme for the benefit of qualifying permanent public service officials, inclusive of uniformed branches. The public service pension programme is separate, and in addition to the defined contribution pension scheme managed by the National Insurance Board (NIB) for the general public,” it added.
In 2012, government engaged a private consulting firm to review the existing public service pension scheme to determine the sufficiency of pension reserves to meet future obligations, estimating any potential pension deficits and recommend corrective action. Government intends to proceed with the recommendations made by KPMG to limit the risk associated with future pension liabilities.”
KPMG in 2013 estimated the unfunded, ‘pay-as-you-go’, civil service pension liabilities at around $1.5bn. These liabilities were estimated then to increase to $2.5bn by 2022, and $4.1 billion by 2032, unless reforms are enacted.
The IMF, for its part, said in 2016: “Government pensioners (15 per cent of the public work force) receive pension payments from the Budget that, on average, stood at 1 per cent of GDP and 7.3 per cent of tax revenue per year in 1994–2014.
“The accrued pension liabilities [will total] $1.5 billion in 2021 (17.9 per cent of GDP). Pension payments and liabilities are projected to reach $230 million (1.5 per cent of GDP) and $3.7 billion (24 per cent of GDP), respectively, by 2030.”
The payments to civil service pensioners come directly out of the Government’s annual Budget, as no specific scheme has been set aside for them. The IMF’s 2018 Article IV report projected a $2.2 billion increase in these unfunded liabilities over the 18 years to 2030, which translates into an average increase of $122 million per year.