The government has laid out a very impressive argument for the introduction of corporate taxes in its recently issued Green Paper. It delineates four options which implement a “tiered system with CIT applied only to the largest multinationals in remit of OECD Pillar Two, BLF(Business Licence Fee) for all other firms; Introduce modest CIT for all firms to maintain regional tax competitiveness; rate of 15% for Pillar Two firms and 10% otherwise; Introduce CIT for firms in Pillar Two remit (15% rate) and earning >$B500k p.a. (12% rate), with BLF for small firms below threshold; and Apply CIT across all firms at 15% when earning >$B500k p.a. and in Pillar Two remit, and 10% for small firms below threshold.”
In the first instance, the response to the OECD Pillar II initiative is clear. The country must implement the 15% effective tax rate. Based on the document, taking this action alone would shift the needle only slightly moving from approximately $140 million to $145 million or a 4% change. In contrast, the other options, which create incursions into the domestic sector, have the potential to significantly increase revenue with one option almost doubling the same.
It is against this backdrop that we must appreciate that this is largely a domestic matter driven by the need to increase the revenue space of the country. The contemplation of a wider implementation of Corporate Income Tax (CIT) is strategically leveraging the need to comply with the OECD. Without doubt this presents a significant window of opportunity to inject greater equity and fairness in the taxation regime which seeking to achieve revenue goals. Look at differently, if the government was to ultimately fail in implementing a CIT beyond its proposed Option 1 it will still be forced to eventually raise taxes under the existing regressive regime.
The Green Paper effectively identifies and underlines revenue needs which has been discussed and projected over the last year and crystalized in the 2022 Fiscal Strategy Report. On the domestic side of the equation, it is imperative to raise additional revenue. Without the influence of any external party, these are “voluntary” options and this fact provides an important point of reference, the true north, for proper assessment of the Government’s plans.
As is to be anticipated, when there are tax increases, each option holds adverse implications for economic growth. The Green Paper has in my opinion adequately captured this reality together with laying out certain compensating factors. The Green Paper provides an initial assessment of potential impact. This however comes with a reasonable set of caveats ranging from lack of information to the inability to adequately judge behavioral responses. This I believe is a fair approach as it is difficult to fully and objectively assess qualitative factors which may drive decisions at this stage.
To understand the issues faced in simple terms one need to acknowledge that to comply with the internationally driven Pillar 2, at the most basic level, only demands a 15% CIT on Multi-National Enterprises (MNEs) earning at or above $850 million, with no deductions or allowances or a higher rate with deductions and allowances to net an effective rate of 15%. Everything else is domestic. This, in my view, holds important implications for the overall value proposition of certain sectors of the economy and highlights the importance of government effectively managing this process to implementation. Regardless of the evolution of the Bahamas over the years from what is now regarded as a low-tax jurisdiction, any introduction of CIT will represent a wrinkle in the fabric of its existing value proposition.
Such a conclusion however requires balance. To reiterate, a very clear case has been made, there is a need for new or additional taxes. CIT is however not a sales tax and will present certain complexities, administratively and regulatory, which call for very careful implementation so as not to damage the country’s attractiveness. There must be carefully thought given to legislation and tax regulation. At the heart of any taxation system there must be equity and efficiency. The regulatory burden should be avoided but government through their advisors would have already been fully aware that CIT in the hands of experienced tax planners can be vicious and the certainty created by the current system can’t be guaranteed. The need for a robust approach to enforcement must be anticipated and the requisite steps taken to ensure a comprehensive but balanced system is in place to facilitate this.
One of the main challenges faced by government is the need for its policy choice to be revenue positive. In this regard, the options presented are not that dissimilar and only vary in quantum. The likely impact is that this will cause a major cultural shift in the domestic sector and taxation going forward will look markedly different. The country too could be seen much differently as a strategic location. It’s however too early to draw a hard conclusion in that regard. It is likely that over the course of the consultation period, a greater sense of what the potential impact might be will emerge.
While it’s clear what the government’s intention is and one which is supportable having regard to all the circumstances, economic and geopolitical, domestic and international, the move to implementation of a CIT should be seen as part and parcel of a greater suite of reform to public finances and taxation broadly. In all likelihood, this implementation would be a gateway change for a later adoption of a more progressive taxation system to include income tax at some level. Government should therefore appreciate the vagaries of income tax regimes and make changes to government and governance which will facilitate its effectiveness and efficiency.
Importantly, the Green Paper encapsulates the intent to take more from the economy and consequently, the country must be shown and assured how the takings will be more effectively managed vis-à-vis historical performance and track record. There are lingering reforms that must necessarily precede or be implemented alongside any CIT. Fiscal responsibility must take on a more heightened sense of awareness; the government must review and rethink its current approach to concession with a view of synchronizing disparate negotiated allowances under the CIT system; as part of the way forward, taxation must be seen and used as a more potent fiscal tool designed to drive development across the archipelago.
The scope for feedback appears to be very narrow. It is likely that greater favor will be found with Option 1 or 2 from a taxpayer’s perspective while Option 3 may represent a more viable midpoint for the Government. It is difficult to see how Option Four will be embraced given the potential shift of almost doubling the current effective rate under the BLF regime. We anticipate robust and active national debate and input from all sectors and look forward to engaging in the conversations. We recognize the need and the global shift driving this process and therefore call for the process to be effectively leveraged to secure the greatest strategic advantage for economic sectors and for the country at large.