By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
The Prime Minister yesterday voiced “confidence” that changes to commercial bank taxation will not violate existing agreements with the European Union (EU) despite Opposition fears it “could shake the foundation of our credibility”.
Philip Davis QC, leading off the House of Assembly’s 2022-2023 Budget debate, said it was “not the case” that reimposing Business Licence fees on the likes of Royal Bank of Canada (RBC) and Scotiabank will undermine The Bahamas’ commitment to eliminate preferential tax regimes for foreign-owned entities conducting business outside this nation.
Yet Kwasi Thompson, former minister of state for finance in the Minnis administration, expressed concern that reinstating the bank Business Licence regime - as the Government plans to do via the 2022-2023 Budget - could again result in The Bahamas being ‘blacklisted’ by the 27-nation EU.
That would result in potential reputational damage for The Bahamas, while its financial services providers could suffer difficulties in accessing EU markets and clients. Mr Thompson warned that reverting to the pre-2018 tax structure for domestic commercial banks could “breach” this nation’s agreements with the EU “and shake the foundation of our credibility as a trusted partner”.
The then-Business Licence regime for commercial banks was disbanded because it was part of a structure that created a preferential tax regime for foreign-owned entities, which enjoyed benefits and concessions that their counterparts operating in the domestic economy did not. This ran afoul of the EU’s so-called “ring fencing” standard, and The Bahamas eliminated this by moving to a fee-based structure applied to all its financial services providers.
Mr Davis, seeking to ease concerns over the switch back to Business Licences for commercial banks and domestic financial services operators, said: “There has been a suggestion that doing so violates some agreements with the OECD [sic; EU]. This is not the case.
“The concern arises over the principle called ring fencing. This is where preferential tax rates are given to foreign-owned entities to attract this business to The Bahamas, although the taxable activity is outside the country. Ring fencing is a principle that evolved as a result of financial services entities that are foreign-owned but are here in The Bahamas and conduct their activity outside The Bahamas. They are attracted here because we are not taxing them.
“That became a concern to the OECD (Organisation for Economic Co-Operation and Development) and an intervention was made to correct that in December 2018. As a result, I can say that it impacted our revenues by about $80m.”
Mr Davis said the need to recover that revenue loss, when set against the backdrop of The Bahamas’ fiscal and deficit crisis, was a key motivator behind his administration’s desire to reinstate the Business Licence fee regime for commercial banks and other providers focused on serving Bahamians and residents in the domestic market. However, at least one commercial bank chief is disputing that there was any revenue loss (see other article on Page 1B).
Still, the Prime Minister added: “When we reviewed the whole situation, we thought we needed to level the playing field and entities that are doing business in The Bahamas, financial entities doing business in The Bahamas, conducting business in The Bahamas and their activities are in The Bahamas, they should pay Business Licence fees like any other entity.”
“In this case, where the concern arises, we are imposing Business Licence taxes on entities that do business in The Bahamas with Bahamian citizens and residents, it’s where their mind and management reside, and they have a physical presence here in The Bahamas. We are ensuring entities licensed to business in the country pay Business Licence fees.”
This provoked the first of several interventions by Mr Thompson, who argued that the same tax structure has to apply to all Bahamas-based financial services providers regardless of whether they operate in the domestic or “offshore” segment. He expressed misgivings that the Government is seeking to reinstate the same two-tiered system that The Bahamas pledged to abolish, and which attracted the EU’s wrath in the form of so-called blacklisting.
“There needs to be equal and the same tax system for all the banks regardless of whether they do business here or just home base here,” Mr Thompson argued. “The fee structure was set up to ensure the same system applied across the board to those home basing and those doing business here.”
Mr Davis, in response, focused on what he terms “suitcase” or “brass plate” companies that were domiciled in The Bahamas, conducted all their business activities outside the jurisdiction but were domiciled here and “not taxed at all”. The EU and OECD, in their efforts to crackdown on international financial centres (IFCs) such as this nation, demanded that such entities be taxed.
Acknowledging the fee-based structure established by the Minnis administration to replace the Business Licence fee and meet EU/OECD demands, Mr Davis added: “But we are still short of what we had lost [in revenue]. We are recovering that and, at the same time, introducing Business Licence fees for the banks.”
Noting that the elimination of ring fencing was part of a reform package that required financial services providers to establish a physical presence in The Bahamas, and prevent multinationals from artificially shifting profits between countries to avoid taxes, the Prime Minister said: “I did have some conversations with the former attorney general [Carl Bethel]. I thought there was another answer to it. We never got to deal with it. We are satisfied we are not violating it.”
This prompted Mr Thompson to ask whether the Government had discussed the proposed taxation shift with stakeholders both domestically and internationally, and “whether it creates any challenges for us with international regulators”.
Mr Davis replied that “my confidence comes” from the Government’s “technical team” telling him they were satisfied there will be no breach of the EU agreement. “My first question when the matter was presented to me was whether we were violating any agreement with the EU and OECD,” he said.
“They assured me consultation had taken place and, as we were implementing the tax on domestic banks that do business with Bahamians and residents, that excludes us from violating any agreements we have.”
Mr Thompson, though, was not finished. In his contribution to the Budget debate, he said: “The second major amendment that concerns us is the reversal of the financial services fee structure that was implemented in 2018 to address the international community’s concern that the previous flat fee structure effectively gave ‘offshore institutions’ a tax advantage, considered to be so-called ring fencing....
“The previous government worked hard on this issue in consultation with the Central Bank, the Insurance Commission, the Securities Commission, the Bahamas Financial Services Board (BFSB), the Association of International Banks and Trust Companies (AIBT) and other interested stakeholders.
“As a result of that intense and close consultation, the new fee structure was developed and accepted by all parties, and presented to the OECD’s Code of Conduct Group on Tax Matters. The Bahamas was eventually removed from the EU’s blacklist as a result, which appears to now be in jeopardy if this change goes through,” Mr Thompson added.
“Unless there is a new agreement that the Government has not yet disclosed, this will represent a reversal and a possible breach of agreements made, and could shake the foundation of our credibility as a trusted partner.”