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Corporate income tax is 'wrong way around'


Tribune Business Editor

The Opposition's finance spokesman yesterday argued that The Bahamas has corporate income tax "the wrong way around" because the proposed reform options are forecast to suck "more money" from the private sector via taxation.

Kwasi Thompson, former minister of state for finance, also told the House of Assembly that the Opposition "cannot support increasing taxation" - as envisaged by all four corporate income tax options in the Government's 'green paper' - without the Davis administration producing a plan to eliminate "unnecessary spending".

Speaking as the House debated legislation to amend the International Business Companies (IBCs) and Exempted Liability Partnership Acts, so as to improve The Bahamas' financial services competitiveness, he asserted that it is "very concerning" that all four reform options are projected to cut economic growth, domestic and foreign direct investment, and result in increased unemployment.

Noting that increased taxation is not a recipe for sparking economic expansion, Mr Thompson argued: "I would suggest isn’t this the wrong way around? Don’t we want more funds in the hands of the private sector, and let the private sector hire more people and grow the economy as opposed to taking more money out of the private sector into the Government and relying on the Government to put it back into infrastructure?

"I would suggest we are looking at it the wrong way. We should be looking at ways for the Government to keep their funds, and by keeping their funds they can invest them in increased employment and grow the economy and grow revenue."

Mr Thompson said he agreed with the Prime Minister that The Bahamas should impose the 15 percent minimum global corporate tax, as demanded by the G-20 and OECD, on local corporate entities that are part of multinational groups with turnover in excess of 750m euros per annum. For if it did not, a potential source of tax revenue would be lost to head office jurisdictions that would implement a "top-up" tax there as a consequence.

Acknowledging that the former Minnis administration agreed that The Bahamas would comply with the G-20/OECD drive by signing on in July 2021, Mr Thompson said: "We consulted before we did this, and it was widely accepted by [the financial services] industry that it didn't make sense not to do it. The very point the Prime Minister made: If we don't collect it, we lose it. If we don't collect it, it's collected in the multinational's home country.

"It only makes sense that we put in the infrastructure to collect this minimum corporate tax. There are not very many Bahamian companies that fall into this category, and that's allowed us to make that determination. There are not very many Bahamian companies this will affect.

"I recall that after consultation, the industry said we cannot avoid doing it, the industry is moving in this direction, and if we want to be at the top of our game in financial services we have to sign up for this." However, Mr Thompson said the G-20/OECD initiative has given The Bahamas a chance to "go further.... and look at the entire tax system" including the possible replacement of Business Licence fees with a corporate income tax.

However, Mr Thompson said he and the Free National Movement (FNM) are opposed to any increase in taxation unless the Government demonstrates a plan to bring its spending under control. "The Government is not able to control spending," he argued. "We have record-breaking revenues but have not seen a corresponding decline in the deficit.

"As a fundamental point, we cannot support an increase in taxation without a plan to reduce unnecessary spending." The east Grand Bahama MP said the debate is now about whether corporate income tax should replace the Business Licence fee and be imposed on much, if not all, the domestic Bahamian economy as well as those entities caught by the G-20/OECD initiative.

Describing the Government's 'green paper' as "a little incomplete" when it came to providing the necessary information, Mr Thompson argued that it should have gone beyond the stated four "objectives" to include a fifth and sixth goal. "When looking at taxation on one side, you have to be looking at how to grow the economy. That is the ease of doing business on the other side," he said.

Suggesting that the 'green paper' was "missing the bigger picture" and that, as a result, The Bahamas is "going to miss out" - especially since the Government conceded that introducing corporate taxation will "increase the cost of doing business" domestically with all the filing, reporting, auditing and compliance requirements.

"The 'green paper' seems to be a bit uncertain how this affects the area of Freeport," Mr Thompson added. "Freeport is supposed to be a tax free zone, and we pay business licence to the Grand Bahama Port Authority." Suggesting that paying corporate income tax as well as GBPA licence fees would be untenable, he said: "I believe corporate income tax ought not be in Freeport because we're already paying business licence to the Port Authority."

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 that would have zero impact on the country's economic growth and unemployment rate, the paper estimates it would cause foreign direct investment (FDI) and domestic investment to contract by 0.3 percent and 0.1 percent, respectively.

The second and third 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