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Tax compliance and The Bahamas

Tax compliance and The Bahamas

Jurisdiction meets OECD information exchange requirements, looks to new era of transparency

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The Bahamas Investor Magazine
June 22, 2010
June 22, 2010
Kevin D Seymour

Twenty-one days before the official deadline of March 31, 2010, The Bahamas signed a bundle of Tax Information Exchange Agreements (TIEAs) with a group of seven Nordic countries, thereby exceeding the requisite number of such agreements demanded by the Organisation of Economic Co-operation and Development (OECD) in order to be placed on its “white” list of cooperative jurisdictions. As the dust settles on the negotiations, it is time to look at exactly what this means to The Bahamas’ financial services industry, and how best we should position ourselves to deal with this new era of transparency.

OECD colour coding
On April 2, 2009, during the G-20’s meeting in London, the OECD Secretariat provided a detailed report on the progress that offshore financial centres around the world were making towards the implementation of an internationally agreed standard on exchange of information for tax purposes. The report categorized financial centres into three main groupings: “white”–jurisdictions that had substantially implemented the internationally agreed tax standard; “grey”–tax havens and other financial centres that had committed to the internationally agreed tax standard, but had not yet substantially implemented it; and “black”–jurisdictions that had not committed to implementing the internationally agreed tax standard.

Offshore financial centres were classified as based on the number of TIEAs they had entered into. In order to be on the “white” list, an offshore financial centre was required to have entered into a minimum of 12 TIEAs. At that point, The Bahamas only had one TIEA, with the US, hence the jurisdiction, along with countries such as Bermuda, the Cayman Islands, the British Virgin Islands, and the Turks and Caicos Islands, were placed on the “grey” list.

In response, at press time the Bahamian government had signed an additional 20 TIEAs, becoming compliant on March 10, 2010.

TIEA fallout
So what does this mean for The Bahamas’ traditional private banking business and the country’s competitiveness as an offshore financial centre going forward?

Exchange of information between countries or tax authorities can be done bilaterally or multilaterally. When done bilaterally, two main types of agreements are used, namely Double Taxation Agreements (DTAs)–sometimes referred to as income tax treaties–and TIEAs. DTAs are comprehensive agreements between two countries to prevent income or profits from business activities being taxed twice. Most countries enter into DTAs ostensibly to encourage foreign investment. A good example of this is Barbados, which has an extensive network of DTAs.

TIEAs, on the other hand, are bilateral agreements that commit to the exchange of information in criminal or civil tax investigations. TIEAs are suitable for countries that have no or low tax regimes, such as The Bahamas. Each TIEA is accompanied by an Administrative Agreement. The Administrative Agreement generally sets out the process for exchanging tax information and identifies the competent authorities and related agencies responsible for obtaining and exchanging requested tax information. As legal instruments developed by the OECD’s Global Forum Working Group, TIEAs represent the “gold standard” for the effective exchange of information to address harmful tax standards.

Requesting information
The TIEAs entered into by The Bahamas are based on Article 26 of the OECD’s Model Tax Convention on Income and Capital, the most widely accepted legal basis for bilateral exchange of information for tax purposes. Article 26, creates an obligation to exchange information that is “foreseeably relevant” to an investigation of a taxpayer and prohibits “requesting countries,” from engaging in “fishing expeditions.” Foreseeably relevant information includes: bank information, information held by fiduciaries, details about the ownership of companies, partnerships and trusts, as well as reliable accounting information for “all relevant entities and arrangements.”

For the avoidance of doubt, “foreseeably relevant” information is “veil piercing” and ultimately intended to capture the identities of beneficial owners. In formulating its request, the requesting country should demonstrate the foreseeable relevance of the requested information.

In addition, the requesting country should also have pursued all domestic means to access the requested information before sending its request. TIEAs grant the tax authorities in each country the power to share and request information in relation to specific named taxpayers who are subject to investigation in the requesting country.

Information exchanged under the terms of these TIEAs is subject to strict confidentiality rules. Each TIEA expressly states that information communicated shall be treated as confidential, and that it can only be used for the purposes stated in the request.

Benefit for Bahamas
Save for assisting The Bahamas in being removed from the OECD’s grey list, and the Convention Tax Benefits contained in the agreements with the US, Monaco and Belgium, these TIEAs appear to be of little benefit to The Bahamas, since any exchange of tax information will likely move in only one direction, from The Bahamas to the requesting country.

In addition, the harsh reality is that The Bahamas has agreed to exchange tax information for criminal, as well as civil matters. Private bankers, purely from a risk management perspective, will need to become au fait with the taxes covered in these TIEAs, to ensure that they are not unwittingly aiding and abetting in transactions that may potentially rise to the level of a tax crime in their clients’ respective home countries.

In essence, private banks in The Bahamas will now constructively take on the role of tax “intermediaries” for the revenue authorities in the countries with whom The Bahamas has entered these agreements. This role has actually been formalized in the case of the country’s TIEA with the US, whereby private banks with customers who trade in US securities, must apply to the United States’ Internal Revenue Service to become Qualified Intermediaries (QIs). A QI’s ultimate responsibility is the collection of “withholding taxes” on passive income earned on US securities on behalf of the US.

Global Forum Peer Review Program
The next big challenge The Bahamas and other offshore financial centres face is the OECD’s Global Forum Peer Review Program, which commenced in March 2010 and will be carried out in two phases:

Phase 1 of the Peer Review Program will be in the nature of a “desktop” review and will examine the legal and regulatory framework set up in each country to facilitate the exchange of information. The raft of know-your-customer and anti-money-laundering legislation that the government passed in 2000, when The Bahamas was first placed on an OECD list of uncooperative jurisdictions, should place the country in a good position with respect to its Phase 1 review. Countries receiving a less than satisfactory rating on Phase 1 will be given a period of time to remediate any deficiencies identified.

Phase 2 of the Peer Review Program will generally be carried out only after the Phase 1 review is completed. The Phase 2 review, which will be an “on-site” review, will evaluate The Bahamas’ overall effectiveness in exchanging tax information. Notwithstanding the number of TIEAs The Bahamas has already signed, the OECD’s tax standard ultimately requires a country to exchange tax information with “all relevant partners.” Therefore, The Bahamas’ commitment to the exchange of tax information will also be assessed during the Phase 2 review from the perspective of whether or not it has also signed TIEAs with partners that have a “reasonable expectation” of requiring tax information from The Bahamas. At the end of the Phase 2 evaluation, each country will be rated as either “compliant,” “largely compliant,” “partially compliant” or “non-compliant.” The rating achieved by each country will then be publicized by the OECD.

Future of offshore banking
The inescapable fact is that “confidentiality,” the very foundation on which traditional offshore private banking business was built, has been eroded by the TIEAs, and the OECD’s and G-20’s demands. Consequently, the future viability of what has traditionally been referred to as “offshore private banking,” is very much in doubt. However, international investors continue to be attracted to The Bahamas because of its convenient geographical location, enduring and stable democracy, cadre of well-trained business professionals, idyllic business and natural climatic conditions, and the absence of income taxes.

At this juncture, Bahamian citizens, business and legal professionals, and legislators need to carefully consider whether now is an opportune time to revamp and restructure the country’s tax regime. To be clear, a country should never change its tax regime solely because of external pressure. Other more important factors that need to be considered would include whether or not the current system of indirect taxation is i) fair and equitable; ii) sufficiently buoyant; and iii) stimulative to domestic and foreign investment. In the final analysis, however, our ability to develop our economy, as well as transform the traditional private banking industry, hinges on when and how these important tax factors are ultimately addressed.

The views expressed in this article are those of the author and not necessarily those of The Bahamas Investor.

Bio:
Kevin D Seymour
Kevin D Seymour is a partner at accounting firm PricewaterhouseCoopers, Bahamas, serving as the managing partner for the company’s northern Bahamas operations, which comprise Grand Bahama, Abaco and Bimini.

Seymour currently serves as co-leader of The Bahamas firm’s insolvency practice. He is also technical partner on tax and structuring matters, and serves as a regional specialist for the Caribbean for Qualified Intermediary clients falling under the United States Internal Revenue Service’s withholding tax regime.

A member of the Bahamas Institute of Chartered Accountants and the American Institute of Certified Public Accountants, Seymour holds an Associate in Science degree in business from St Gregory’s College, Shawnee, Oklahoma, and a Bachelor of Science in commerce from DePaul University, Chicago, Illinois.

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