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Bahamas committed to compliance

Bahamas committed to compliance

The jurisdiction's efforts to implement Common Reporting Standard ensures integrity

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The Bahamas Investor Magazine
August 21, 2017
August 21, 2017
Tanya McCartney

As international compliance measures gather pace and the regulatory environment is redefined, The Bahamas has continually renewed its commitment to maintaining best practice and adhering to international standards for tax cooperation and tax transparency. The strong regulatory regime that it has in place characterizes the financial services sector and ensures that the integrity of The Bahamas as an international financial centre is maintained.

As a sovereign nation for more than 40 years, successive governments have consistently demonstrated the country’s commitment to international best practices, cooperation in the administration of justice, international tax transparency, anti-money laundering and the countering of financial terrorism initiatives. The integrity of the jurisdiction is evidenced by the following:

a. A strong anti-money laundering, counter financing of terrorism regime;

b. Tax transparency and cooperation;

c. US Foreign Accounts Tax Compliance Act (FATCA) implementation compliance; and

d. Commitment to automatic exchange of information and the Common Reporting Standard (CRS)

In order to meet international standards for transparency and tax cooperation, The Bahamas has entered into 33 tax information exchange agreements (TIEAs). On March 20, 2010, The Bahamas achieved the G20 standard on transparency and cooperation in tax matters. This standard was first promulgated by the Organisation for Economic Co-operation and Development (OECD) in the 1990s.

In 1998, the OECD sought to have 40-plus countries, including The Bahamas, adopt this standard. The Bahamas, in a 1999 presentation to the OECD, insisted on a level playing field. This principle was formally accepted by the OECD in 2002 and represented in a communiqué issued by The Bahamas that year.

CRS emerges
On November 3, 2014, The Bahamas and the US signed an agreement to improve international tax compliance and to implement FATCA based on the model 1 intergovernmental agreement (IGA). To accommodate the non-direct tax system in The Bahamas, the IGA is a model 1B (non-reciprocal) IGA. As an IGA partner jurisdiction, Bahamas-based financial institutions will not be subject to a 30 per cent withholding tax on US source income, unless they fail to meet the requirements set out in the IGA and in The Bahamas domestic implementing legislation.

Under the terms of the agreement, Bahamas financial institutions provide The Bahamas competent authority with the required information. It then forwards that information to the competent authority in the US. In exercise of the powers conferred by section 1 (2) of The Bahamas and the United States of America Act, 2015, FATCA 2015 came into force on August 18, 2015.

Entering into TIEAs and the implementation of FATCA paved the way for the implementation of the CRS.

The government of The Bahamas committed to implementing the CRS using a multilateral (announced in May) approach and is taking all the necessary steps to do so. The enabling legislation has been passed. Industry and government are collaborating on the full implementation of CRS.

Automatic exchange
On December 29 last year, the Automatic Exchange of Financial Account Information Act, 2016 was passed. The purpose of the act is: a. to give effect to the CRS; b. to confer the necessary powers on the competent authority to enter into an agreement with the government of another country for the automatic exchange of financial account information in tax matters; and c. to ensure the proper administration and enforcement of this act.

The key provisions of the legislation are as follows:

  1. Section 4 of the act imposes a duty on reporting financial institutions to apply to the competent authority to be registered. Reporting financial institutions must apply the due diligence rules and procedures under the CRS, The Bahamas’ anti-money laundering regime or similar requirements that the reporting financial institutions are subject to, in order to identify account holders of reportable accounts maintained by the reporting financial institutions.
  2. Section 6 of the act imposes a duty on reporting financial institutions to obtain, prepare and file with the competent authority an information return related to financial accounts maintained by reporting financial institutions.
  3. Section 7 of the act imposes a duty on a reporting financial institution to keep records inclusive of self- certifications and records of documentary evidence at its place of business. The records must be held in the prescribed electronic readable format for a minimum period of five years: a. in the case of self-certification, after the last day on which a related financial account is opened; and b. in any other case, the end of the last calendar year in which the record is relevant. Section 7 also provides that a reporting financial institution shall not destroy, conceal or alter books of accounts, records or other documents relating to its operations. Further, if a reporting financial institution fails to comply with subsections (1) and (2), the reporting financial institution commits an offence and is liable on summary conviction to a fine of $5,000.
  4. Section 8 of the act provides that reporting financial institutions may engage third-party service providers to carry out any of the reporting financial institutions’ obligations under the act. However, the reporting financial institutions: a. must have access to the records and documentary evidence used to identify and report on reportable accounts and when requested, provide such records and documentary evidence to the competent authority; and b. is liable for the third-party service provider’s failure to carry out its obligations under the contract.
  5. Sections 9 and 10 of the act provide for the functions of the competent authority. Further, sections 11 and 12 of the act provide for the powers of the competent authority. Section 13 of the act provides for excluded accounts. These accounts include, but are not limited to, retirement or pension accounts; certain investment accounts; certain term life insurance contracts; escrow accounts; and certain depository accounts. It further provides that excluded accounts shall not be treated as Reportable Accounts. Part V comprises Sections 14 to 18 which outlines various miscellaneous provisions.
  6. Section 15 of the act provides that where a reporting financial institution enters into an arrangement or engages in a practice, the main purpose or one of the main purposes, of which can be reasonably be considered to be to avoid an obligation imposed under the act or the regulations made under the act, the reporting financial institution is subject to the obligation as if the financial institution had not entered into the arrangement or engaged in the practice.
  7. Section 16 of the act empowers the Minister of Finance to make regulations to give effect to the act.
  8. The schedule of the act sets out the CRS and due diligence for financial account information as approved by the council of the OECD 15 July, 2014.

Global initiative
World leaders have constantly sought solutions to the harmful effects of tax evasion. According to the OECD secretary-general’s report in 2013, since the breakthrough of “more transparency” in 2009 (information exchange on request) “there is another step change in international tax transparency driven by developments around the globe, including Europe and the US, with unprecedented political support for automatic exchange of information.” This other step was to take the process for obtaining tax information upon request to another level: the automatic exchange of information– automatic and digitized.

The CRS builds upon FATCA’s IGA approach to implementing FATCA in order to maximize efficiency and reduce cost for financial institutions. However, the approach to FATCA reporting deviates from the CRS as the CRS regime is based on residency and is driven by its multilateral nature, whereas the FATCA regime is based on US citizenship and 30 per cent withholding tax. CRS is effectively a “global FATCA.”

The CRS is the mechanism for the automatic exchange of financial account information between countries. In 2013, the G20 finance ministers and Central Bank governors endorsed automatic exchange as the expected new standard. The G20s decision followed earlier announcements by a number of European countries of their intention to pilot multilateral tax information exchange based on the IGA developed between these countries and the US.

To date, 106 jurisdictions have endorsed the CRS as the new standard, The Bahamas being one of them.

Life after CRS
In a world characterized by transparency and tax cooperation, all international financial centres must first assess the impact of the global changes and, where necessary, make adjustments to their business model for increased competitiveness.

For those which implement CRS, there is now a level playing field to compete on service and the ability to provide tax compliant solutions to clients who seek privacy and wish to diversify their portfolio. Innovation, ease of doing business, tax efficiency and high standards of customer service will be what differentiates international financial centres. Through public and private sector collaboration on these matters, The Bahamas can be repositioned to compete for long-term growth and sustainability. The full impact of implementing the CRS is something that we cannot definitively state.

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