Cross-border transactions are now common practice, with globalization leading to increased international investment opportunities. With that comes a greater need for information exchange to ensure enhanced transparency and regulatory supervision in the international marketplace. As pressure mounts for The Bahamas to proffer information about financial activities, it has to consider what it wants in return. One way to secure meaningful benefits is in the careful negotiation of Tax Information Exchange Agreements (TIEAs).

When it comes to global trade initiatives The Bahamas cannot kid itself that it is anything other than a small player. The jurisdiction has long been in debate as to whether it should join global trade behemoths such as the World Trade Organization (WTO) or enter into Economic Partnership Agreements (EPAs) with powerhouses such as the European Union and comply with the consequent tax agreements.

In trade matters the danger is that smaller countries will get steamrollered into agreements that hinder rather than help their international trade prospects and in which they have no say in their creation. As Bruce Zagaris, a partner with US-based Berliner Corcoran & Rowe LLP, stated at The Nassau Conference 2008 held in February, “The Bahamas does not have a place at the table to influence the criteria of international trade agreements such as those put forward by the WTO and in EPAs.”

However, The Bahamas is no small fry when it comes to the distribution of wealth. Smaller offshore financial centres can exert significant power on the global economy by being able to determine the allocation of resources. After all, we are currently enjoying the largest wealth transfer exchange in history with financial services being the fastest growing major industry on the planet, forecast to triple in size over the next 15 years. Revenue derived from financial services comprises 10 per cent of the global gross domestic product (GDP) and it is The Bahamas’ second largest industry, after tourism, accounting for 15-20 per cent of the country’s GDP.

According to figures released by the Central Intelligence Agency, the top 11 most successful countries in the world, based on GDP per capita, are financial services-based economies, with Luxembourg, Qatar and Bermuda taking the top three spots respectively. The Bahamas sits at 53 on the CIA list, way ahead of such trade heavyweights as China, Russia and India, and is well positioned to take advantage of the emergence of wealth management services as a highly profitable sector.

This gives The Bahamas a certain amount of leverage when it comes to negotiating TIEAs, which follow naturally on the heels of international trade agreements and help form the network of bilateral tax treaties that underpin the WTO. The thoughtful negotiation of TIEAs is one way to ensure that smaller offshore financial centres such as The Bahamas do not end up as second class citizens in the international arena. “The Bahamas should look to forming a series of mini tax treaties with countries that have high tax regimes,” says Zagaris. “When The Bahamas is being pressured into joining a TIEA then it should be very clear in what it wants in return.”

Government policy
Speaking at the Tax and Trade Symposium held last year by the Bahamas Financial Services Board (BFSB), Minister of State for Finance Zhivargo Laing commented that the government is developing a comprehensive international trade and tax policy, and is seeking full industry input on TIEAs.

He explained that the jurisdiction was receiving numerous requests from nations across the globe to enter into TIEAs with them.

“While there is mounting pressure in this regard, the government is determined to receive full input into this issue from the private sector. Certainly, for our part, any agreements entered into with other countries must meet the basic requirement of advancing the growth and development of our economy with clearly defined gains,” he observed.

The Organisation for Economic Co-operation and Development (OECD) member countries are keen to get smaller offshore financial centres such as The Bahamas on board because they want a high level of information exchange as regards the tax habits of their country’s high-net-worth individuals.

John Harrington, in his role as Acting International Counsel at the US Department of Treasury, in his testimony before the Senate Finance Committee last year said that in today’s global economy countries must be able to obtain and exchange the information needed to enforce their domestic tax laws. “Because access to information from other countries is critically important to the full and fair enforcement of the US tax laws, information exchange is a priority for the United States in its tax treaty programme.”

However, as Richard Hay of Stikeman Elliott LLP in London pointed out when speaking in Nassau earlier in the year, there is no international law that imposes obligation on one country to assist another country in enforcing its domestic tax laws.  The Bahamas could simply reject initiatives by OECD member countries, preferring to remain isolationist and favouring blanket privacy for its clients.

In the current economic and political climate, however, this may be unwise. Such a stance may lead to OECD member countries placing restrictions on access to onshore markets and would not be viewed kindly by some larger economic powers. With the continual ascent of globalization it would also prove very difficult to swim against the tide of international regulatory compliance initiatives.

With this in mind, it may appear that smaller jurisdictions are caught between a rock and a hard place—losing their competitive edge for financial services on the one hand or losing favour with OECD member countries on the other. “We tend to see the TIEA process as loaded with negatives,” says Hay, “particularly if you see it not as tax information exchange but tax information provision; as a one-way flow and the dice are loaded against you.” But, Hay advises, there is also the prospect of increased opportunities and attractive concessions from well thought out agreements.

So it may be best for smaller offshore financial centres to go with the flow, but “The Bahamas has to be careful,” adds Hay. “TIEAs may offer reputation enhancements but beware having plenty of friends but no food.”

Back scratching
So what should The Bahamas be looking to get in return for information exchange?

According to Hay, the inability to invest internationally on a tax-efficient basis is the key constraint to the growth of capital pools in an offshore centre and that is the central point of power in this debate.  “The ability to host the capital pool on your own platform, as opposed to being a handmaiden for others in helping them organize the capital they control, is essential,” he says. “But the only way you will get this is if you can invest that capital internationally on terms that are competitive with OECD countries.”

When sitting down at the negotiating table, says Hay, there are a couple of things that should be included in the ante before the cards are even dealt. Firstly, The Bahamas should insist that it is excluded from any international blacklist. Countries such as Panama have retaliation legislation that allows them to exempt countries with which they are blacklisted from partaking in certain activities such as construction and domestic infrastructure development. But it is better to secure commitment on this clause early in discussions rather than resort to such measures. “In all negotiations, exchange of value should be contemporaneous, with return granted at the time of the agreement,” says Hay.

The second bargaining chip should be to secure most favoured nation status to ensure the sector remains competitive. The Bahamas achieved this in the 2002 TIEA with the US and it has proved invaluable to the development and sustainability of the industry. Other stipulations of the US TIEA that may be used to bolster the framework for future agreements include qualified jurisdiction status and a clause that allows US taxpayers to claim convention tax benefits for attending seminars and conventions in The Bahamas.

Double tax agreements
Having established the basic ground rules, Hay calls for the adoption of Double Taxation Agreements (DTAs). This includes the reduction of nonresident withholding tax at source on dividend interest and royalties. Coupled with relief from source country capital gains tax, no discrimination and the avoidance of double taxation, The Bahamas would be getting something meaningful in return for giving up the benefit of isolation.

In an increasingly regulated environment such agreements would be essential for The Bahamas to maintain a competitive edge. “If you look forward 10 or 20 years, then DTAs will be the single benefit that will position the smaller offshore financial centres very effectively in a global integrated economy,” concludes Hay.

How easy this will be to achieve is another matter. OECD member countries may be reluctant to include DTAs in TIEAs and may insist they are not appropriate for a country with no domestic taxation system. However, there are many precedents. The United Arab Emirates has no domestic tax but has dozens of double tax agreements. Barbados, which as Hay points out is an offshore financial centre in all but name, has 14 DTAs. There is no reason why The Bahamas cannot follow suit. The liquidity that The Bahamas provides to the global economy, combined with its unique advantage as a sovereign nation, also add considerable muscle to its bargaining power, putting the jurisdiction in a prime position to get the most from any TIEA it wishes to enter into.