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Features - July 2009



The Bahamas Investor

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Focus on regulation

Focus on regulation

Increased oversight likely by OECD, US in near-term outlook

The Bahamas Investor Magazine
June 23, 2009
June 23, 2009
James H Smith

Regulators of the world’s financial system have customarily linked their major initiatives on to the coat-tails of significant global events. Given the depth and width of the current global recession, the regulators would find it difficult to resist the urge to introduce additional measures to monitor and control the international financial services sector.

In order to see where the regulators are likely to go in the near future, a review of what they have been doing in the recent past would be necessary.

The Financial Stability Forum (FSF) is perhaps the most influential of all international regulatory agencies. The FSF recently issued a report that called for increased oversight of financial institutions with respect to capital adequacy, risk management and more transparency. That call was supported by the developed countries, which responded by drafting proposals to curb tax evasion, eliminate taxation treaty abuses, and to regulate those areas of the industry, such as hedge funds, that are currently un-regulated.

Those countries are committed to bringing offshore activities under control and eradicating any practices used to avoid and/or evade Organisation for Economic Co-operation and Development (OECD) taxation.

There have been recent moves to instigate a “blacklisting” initiative. The list defines non-cooperative countries as those which have no effective information exchange on tax matters with the OECD; effective information exchange would require a minimum of 12 Tax Information Exchange Agreements (TIEAs) with OECD countries. As The Bahamas has only one TIEA, with the United States, but has expressed its intention to comply with the OECD initiative, the jurisdiction at press time remains on the “grey list.”

US initiatives
Recently, the US Senate was considering introducing some new measures against offshore tax evasion that included extending the statute of limitations with respect to prosecutions for not reporting foreign bank accounts; requiring taxpayers to file the offshore reports along with their individual and corporate returns; and redefining ownership to include beneficial ownership of a corporation.

One of the most watched regulatory moves in the US is the Stop Tax Haven Abuse Bill of which President Barack Obama was a co-sponsor when he was a member of the US Senate. That bill would be aimed specifically at those financial centres that have secrecy laws that are thought to prevent US agencies from enforcing US laws. The proposed legislation would empower the Treasury Department to prohibit or impose conditions using correspondent banking relationships in the US as well as restrict the use of credit and debit cards and other financial instruments issued by foreign financial institutions and generally impose sanctions similar to those found in the Patriot Act.

Recent events involving tax evasion in some offshore centres will no doubt be regarded as incontrovertible proof that offshore financial centres are aiding and abetting tax evasion and will have the effect of strengthening the resolve of the OECD countries to continue exerting pressure on offshore centres to implement effective tax information exchange regimes.

Tax dollars
Above all, the current global economic crisis is likely to increase the fiscal deficits of OECD countries at a time when there is little scope for tax increases. To the extent that the developed countries are convinced that billions of taxable dollars are lying offshore and could be accessed to shrink those deficits, there would be an irresistible compulsion to attack and if necessary, dismantle those centres.

Going forward the continued existence of these centres may depend on perhaps three important considerations: One, the number of TIEAs the offshore centres are prepared to execute with the OECD countries; two, a commitment by the financial institutions to desist from assisting OECD citizens in evading legitimate home country taxes; and three, the clients themselves must seek to become more tax compliant in their home countries.

James H Smith, CBE
James H Smith served in Parliament as a senator and in the Cabinet of The Commonwealth of The Bahamas as the Minister of State in the Ministry of Finance 2002-2007. He served as the country’s Ambassador for Trade in the Office of the Prime Minister for five years up to April, 2002. Between 1987 and 1997, he served as governor of The Central Bank of The Bahamas.

Educated in Canada at the University of Alberta, University of Windsor and Ryerson University, Smith obtained bachelor’s and master’s degrees in economics as well as a diploma in financial management. He is currently the chairman of Circle Vision Financial Planning (CFAL).


Obama’s proposed tax plan
Earlier this year, the US administration under President Barack Obama outlined its intentions to crack down on US corporations that have been using legal loopholes in the country’s tax code to avoid paying taxes. The main thrust of the plan focuses on offshore tax shelters, in line with President Obama’s campaign pledge to enhance “tax fairness.” The administration predicts that the move would raise more than $210 billion in revenue over the next 10 years. The key proposals in the plan include:

• an end to the policy that allows US companies that invest overseas to defer federal taxes on the resulting profits. Starting in 2011, they would not receive tax deductions until they pay levies on offshore gains.

• eliminating a provision that allows US companies that pay foreign taxes on overseas profits to claim federal tax credit.

• permanently extending a research-and-development tax credit that is set to expire at the end of this year.

• terminating the “check-the-box” provision that lets US companies legally reduce federal tax bills by moving income to overseas subsidiaries they classify as branch offices.

• hiring 800 new IRS workers for international tax enforcement.

President Obama will put his proposed plan before Congress later this year.

Compiled by Alex Black

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