|The Bahamas Investor Magazine
July 13, 2014
July 13, 2014
Five years since the global economic crisis of 2008, many world economies are still attempting to regain pre-recession levels. The aggressive campaigns against offshore jurisdictions intended to counteract real or perceived drains on government revenue, such as tax avoidance and tax evasion, have crystallized into legislation implemented to underpin evolving international standards for transparency and exchange of information.
The Bahamas, like many other offshore financial services centres, has had its share of challenges over this period, having been “grey listed” by the Organisation for Economic Co-operation and Development (OECD) and designated as a tax haven, then “white listed” in the OECD’s 2009 Progress Report. Subsequently, the jurisdiction has been subject to in-depth monitoring and peer reviews of the implementation of the standards of transparency and exchange of information necessary to comply with the OECD mandates.
Changes in legislation
As a result of the first OECD peer review, The Bahamas was required to make a number of amendments to various pieces of legislation to address perceived deficiencies in account record keeping requirements.
The Bahamas has long established itself as a premier financial services centre and, in an effort to maintain its position, made a number of amendments to trust legislation in 2011, resulting in the passage of several pieces of legislation including the Trustee (Amendment) Act, 2011 and Rule Against Perpetuities Abolition Act, 2011 (RAPPA).
These amendments represented major advancements, setting the jurisdiction apart from its competitors in a number of areas, including by providing for directed investment trusts and trust arbitration in the Trustee Act, 1998, and in the new RAPPA, the prospective abolition of the rule against perpetuities, with the ability to apply the RAPPA by way of a court application to previous dispositions.
The Trustee (Amendment) Act, 2013 (2013 Amendment) specifically addresses trustee accounting records. This amendment was made just a few years after the aforementioned advancements, however, the same was not an innovative enhancement to the legislation in the usual sense, but rather a requirement of the new and evolving international compliance standards.
What do these changes entail?
The 2013 Amendment followed sweeping changes to legislation relevant to a number of entity types established under Bahamian law, including foundations, international business companies, segregated accounts companies, exempted limited partnerships, investment funds and purpose trusts. These amendments came into operation in 2012 and were implemented to address perceived deficiencies in account record keeping requirements identified during the OECD Peer Review.
It is a well established principle of trust law that trustees have a duty to account to the beneficiaries of a trust by virtue of the fiduciary nature of the relationship. Accordingly, the 2013 Amendment does not expand the duties and obligations of a trustee, it simply codifies the accounting requirement and provides guidance to trustees of express trusts concerning the documentation to be obtained, so that reliable accounting records can be maintained.
The 2013 Amendment requires every trustee of an express trust to maintain reliable accounting records in relation to:
(a) all sums of money received and expended in relation to the trust and the matter in respect of which such receipt and expenditures takes places, inclusive of all sales, purchases and other transactions; and
(b) the assets and liabilities of the trust.
The 2013 Amendment also identifies what are “reliable” accounting records.
Section 2 provides that accounting records must:
(a) correctly explain all transactions;
(b) enable the financial position of the trust to be determined with reasonable accuracy at any time;
(c) allow financial statements to be prepared; and
(d) include the underlying documentation including invoices, contracts and receipts, necessary to facilitate (a), (b) and (c).
All accounting records and documentation are required to be maintained and kept for a minimum period of five years and any trustee of an express trust agreement that does not adhere to the 2013 Amendment commits an offence under the Act and is liable on summary conviction to a fine not exceeding $2,000.
The benefits of the recent amendment are twofold, as they incorporate an express requirement for reliable accounting records to be maintained, which would give beneficiaries a clear picture of the financial position of a trust and also assist the jurisdiction in evidencing the adherence to international standards in relation to transparency. This should assist in the attractiveness of a Bahamian trust for the sophisticated client in that it has formalized accountability obligations demonstrating its status as a highly regulated jurisdiction compliant with international standards.
The 2013 Amendment and other amendments affecting Bahamian entities and structures evidence the continued commitment of the government of The Bahamas to maintain a financial services sector that is well equipped to compete and succeed in the increasingly regulated environment.
What The Bahamas has to offer
The Bahamas’ financial services sector encompasses banks, trust companies and corporate service providers, among others. The Bahamas as a banking centre is positioned among the top 10 countries in the world. The jurisdiction offers a tax-neutral platform and easy access through extensive air and communication links, an independent judiciary that upholds the common law tradition, a well respected regulatory regime and an ample supply of trained professionals.
The jurisdiction has also been recognized by its OECD peers as an important and reliable partner in the international efforts for transparency and exchange of information and has all the tools necessary to continue to compete and thrive. These factors provide a myriad of reasons for clients to have confidence and seek The Bahamas as a jurisdiction of choice for wealth planning.
What the future holds
The fiscal stimulus plans designed to stimulate world economies and reduce debt promoted by the International Monetary Fund continue to be implemented with many effective dates set for this year including: the US Foreign Account Tax Compliance Act (FATCA) and the domestic value added tax (VAT). In regards to FATCA, the government has negotiated an Inter-Governmental Agreement that provides the best treatment for Bahamian structures that are tax compliant including trusts and funds. As regards VAT, there is zero rating of financial services provided to persons who are designated non-resident for Exchange Control purposes under the draft VAT legislation. This indicates that both the government and the industry have been responding proactively in an effort to ensure that the financial services sector model remains ahead of the curve in the changing times.
How the jurisdiction can compete
The Bahamas has proven itself to be a trailblazer in the development and implementation of pioneering structures and services to fulfil client needs. Two recent examples are The Bahamas Executive Entity, which provides a unique solution for carrying out executive functions, and the SMART Fund 007–an investor focused, cost efficient entity type that caters to the needs of Latin American clients.
These innovations speak to the talented pool of professionals in the jurisdiction, which is one of the greatest assets of the Bahamian economy and our key to outshining competition. The continued vigilance in addressing our clients’ needs and proactive nature in seeking ways to satisfy the same, while maintaining a robust regulatory framework, will continue to facilitate the recognition of the jurisdiction as a premier financial services center.