Recent plans announced by the US to crack down on its citizens making use of tax havens have raised concerns over the long-term viability of offshore financial services. This in addition to the Organisation for Economic Cooperation and Development (OECD) including the Bahamas on its list of countries that were not as yet in full compliance with the body's standards on fiscal transparency. However, a careful look at Washington's proposals and at measures being taken by the government should allay at least some of these concerns, with the possibility that the situation could even be turned to the Bahamas' benefit.
The Bahamas is in a better position than many other countries that also operate offshore financial services. In addition to its tax information exchange agreement (TIEA) in place with the US, which came into force in 2004, Nassau is also looking to seal a number of similar agreements with Canada, another of its major trading partners, and other countries in order to meet the OECD requirement of having at least 10 TIEAs in place. In late March, Prime Minister Hubert Igraham told the parliament that, "It is the intention of the government to enter into these negotiations as a matter of priority."
On May 4, US President Barack Obama unveiled a wide-ranging programme of reforms to the US tax system, mainly dealing with companies or individuals investing or transferring funds overseas as a means to avoid taxation. Obama said the reforms, which have yet to go before Congress, would "crack down on illegal overseas tax evasion, close loopholes and make it more profitable for companies to create jobs here in the US".
Obama said the new rules, due to come into effect in 2011, would eliminate some tax deductions for companies that earn profits in countries with low tax rates and make it illegal for US citizens to use tax havens.
As a country whose financial sector is heavily geared towards providing offshore services, the Bahamas needs to take the Obama plan seriously, as should the decision of the OECD, taken in early April, to include the Bahamas along with 37 other states on its so-called gray list of countries that had committed to meet but had yet to comply with its tax standards.
These require countries to exchange information when requested on all tax matters for the administration and enforcement of domestic tax law without regard to a domestic tax interest requirement or bank secrecy for tax purposes.
Currently, the Bahamas does not levy income or corporation taxes, capital gains tax, VAT, sales tax, or withholding tax on offshore operations, instead charging a sliding scale of annual fees on foreign companies, depending on their field of activity.
The country has taken a number of steps to tighten its financial regulatory and monitoring regime and bring them up to international standards. Between 1999 and 2000 the parliament approved a raft of legislation dealing with the securities industry, mutual funds, requirements for reporting financial transactions as well as establishing a financial intelligence unit to monitor activity in the sector. These acts also contain provisions authorising Bahamian regulators to pass to an overseas regulatory authority any information necessary to enable that authority to exercise regulatory functions.
While the IMF's most recent review of the Bahamas' financial regulation and supervision regime, released in late 2004, recommended greater co-ordination between various agencies and increased resources, it praised the country's authorities for having made substantial progress towards establishing an effective regulatory regime.
Another issue that should be taken into account is the scope of the proposed US legislation. According to US Treasury figures, Washington misses out on $100bn a year in tax revenue from firms operating out of tax havens. However, in his address Obama said that the planned new regulations would bring $95.2bn into the state's coffers over a 10-year period from those making use of tax havens, meaning that the US is seeking to garner less than 10% of potential tax income rather than shut down offshore activities completely.
Another possibility to limit the impact of the US proposals is for the government to levy taxes on foreign firms based in or operating out of the Bahamas, along with negotiating agreements with the US, EU and other countries to avoid dual taxation.
According to Paul Moss, the managing director of financial services company Dominion Management Services and president of Bahamians Agitating for a Referendum on the Free Trade Area of the Americas (BARF), the government needed to act to rid the country of its tax-haven image. The best way of doing this, and of getting off the OECD's gray list, was to impose taxes on international clients.
"This system should be no more than 2% of either the gross, 3.5% of profits or 1% of funds under management. If we had a policy of 1% under management for $1trn – that would mean $10bn in revenue to the government," Moss said in an interview with local media on May 5. "This is not as radical as some may think. The clients would no longer go running to another jurisdiction where they pay no taxes because those jurisdictions are on a list created by the OECD or the G20, which means increased scrutiny and delay."
Having most of the pieces in place to meet international regulatory requirements and with the government committed to developing a network of TIEAs, the Bahamas has a solid basis from which to work in order to protect its standing as a financial centre.