“Don’t let the IMF drag us into income tax”

• Ex-Minister: Cannot be “pushed down our throat”

• Warns that any reform must be proven “good fit”

• Fears that the tax burden will fall on the middle and lower classes

By NEIL HARTNELL

Editor-in-chief of the Tribune

[email protected]

The Bahamas must not allow the International Monetary Fund (IMF) to “train” us to impose income taxes that “do not make sense,” a former finance minister said yesterday.

James Smith, now the head of the government’s debt advisory committee, told Tribune Business that the Bahamas cannot afford the G-20 / OECD and multilateral agencies ‘sticking us down our throats’ with tax reforms potential without first subjecting them to a rigorous analysis to see if they are “a good fit”.

Warning that the Bahamas “have already taken this route,” he suggested that corporate and personal income taxes, or a combination of the two, might not be the best model for this country to adopt given the burden tax would probably fall on the middle and lower income classes.

Mr Smith, also a former central bank governor, suggested that the people of the Bahamas – and in particular the pre-COVID workforce of 235,000 who are believed to be responsible for paying income taxes – may not provide a sufficiently broad base to generate the revenue required by the government.

Insinuating that this was not the time for the Bahamas to embark on tax experiments, he added that this base will currently be “considerably reduced” by the unemployment levels linked to COVID-19 estimated by some to still be 20 to 30 %.

And, while the Bahamas are considered by many to have a relatively high gross domestic product (GDP) per capita, that number is skewed by a relatively small proportion of extraordinarily high-income people – many of whom generate the bulk of their income in outside that country, raising questions as to whether it would be captured by a local income tax.

Mr Smith, acknowledging the desire of many to shift from regressive consumption taxes, such as VAT and import tariffs, to more progressive income-based levies, nevertheless argued that these latter forms of taxation could also become “regressive” in the Bahamian context. .

This, he explained, because businesses and high incomes will more easily find loopholes and ways to legally minimize their exposure to income tax, once again putting the tax burden on groups at risk. middle and lower income.

Responding to the IMF’s advice, revealed earlier this week by Tribune Business, that the Bahamas should head off the global push for a minimum 15% global corporate tax by adopting the levy to their own advantage, Smith said Told this newspaper: “Some may want to adopt it because the IMF says so, but we have already taken this route.

“The current situation is very similar to 2000, with the exchange of tax information and the OECD ‘harmful tax practices’ at the time. These Europeans, the developed countries, come up with these ideas to help their economies, stick them down our throats and we follow them.

The election of the Biden administration for the first time installed in the White House a U.S. government whose tax views were largely aligned with those of high-tax European welfare states, hence convergence through the G-20 / OECD towards the minimum global corporate tax of 15%. that they want to implement from 2023.

However, Mr Smith yesterday joined those who argue that the Bahamas will be little affected by the G-20 / OECD proposal at this stage, as the largest multinationals targeted by the 15% minimum tax do not represent the financial services market of this country or do not have a physical presence here.

The Bahamas has traditionally focused on the private wealth management space, as opposed to the institutional activities targeted by countries like Bermuda and the Caymans. The former finance minister said the G-20 wanted countries like the Bahamas to join the initiative just so they could say the majority of countries agree.

“A single tax does not reflect the realities on the ground,” Smith told Tribune Business. “I don’t see us hanging around with this unless it makes sense to us.” We need to take a close look at this, not follow the dance of the developed world on taxation.

“The Bahamas built their financial services industry on the basis of the absence of direct or income taxes and bank secrecy. These are things of the past. Now we are going to follow this line of adaptation without any analysis to see if it works for the Bahamas. I would not recommend accepting this just because this is what the United States and the OECD want us to do.

“I’m just saying, for the first time, let’s do our own internal analysis to see if it’s a good fit for the Bahamas, so at the end of the day we’ll be better off with it than without it.” International agencies tend to come up with ideas that work for them, the biggest economies, and drag us around saying they have a consensus on it.

If the Bahamas imposed a personal income tax, Smith argued that the base would be significantly reduced due to high unemployment rates. And an expensive and complex mechanism of collection, enforcement and administration would be required to oversee such a tax system and crack down on evasion, fraud and other abuses.

Noting that the Bahamas has always struggled with “significant leaks” from their existing taxes, Smith said failure to implement the proper administrative mechanisms would once again cause “another burden on the workforce without get the recipes you expect ”.

He added: “The argument against regressive taxation, I certainly understand that, but we have to recognize our history. We have chosen not to have direct income taxes for a number of reasons, and so has this regressive system, but so too is income tax.

Explaining what he meant by that, Mr Smith said: “Top earners and businesses can afford to hire lawyers to help them lower their taxes. Once again, you find yourself imposing a heavy tax burden on low-income people who cannot afford it. This is the potential repercussion.

“Your workforce is typically only 50% of the total population, and if there is 30% unemployment, that significantly reduces the tax base. And you have another problem. The very wealthy business owner will likely switch to dividend payments and reduce his salary “in order to minimize his income tax payments.

Many in the Bahamian private sector, however, are likely to be open to a corporate income tax if it means replacing the hated business license fee regime. While corporate tax is levied on profits, profits are calculated as a percentage of income / turnover.

This has left some companies paying more taxes than they make in annual profits, while others have suffered losses. Business license fees also favor low income / high margin businesses at the expense of high revenue / low margin ones, penalizing food stores and gas stations, while creating other distorting effects. for companies at controlled prices.

Promising that the comprehensive 15% minimum corporate tax agreement, to which the Bahamas has subscribed, “does not seek to eliminate tax competition, but imposes multilaterally agreed limits on it,” said the OECD . about $ 150 billion in new revenue per year from multinational companies.

The first pillar is presented by the OECD as ensuring “a more equitable distribution of profits and taxing rights among countries with regard to the largest and most profitable multinational enterprises”.

Certain taxing rights on multinationals will be reallocated from the countries of origin of these companies to the markets where they do business and generate profits, whether or not they are physically present there.

The reallocation of taxing rights only applies to multinationals with annual turnover above 20 billion euros and profit margins above 10%, with particular emphasis on those that have benefited so much from the digital economy – like Facebook, Amazon, Apple and Google. Only 25 percent of profits above the 10 percent threshold need to be reallocated.

The OECD predicted that $ 125 billion in multinational profits would be reallocated to smaller jurisdictions as a result. However, questions have been raised as to whether companies like Amazon achieve the 10% profit margin and qualify as such.

And the 15% minimum global corporate tax, billed as generating an additional $ 150 billion in annual global tax revenue, only targets companies with annual revenue above € 750 million. The OECD / G-20 hopes that all countries will formally commit to the initiative in 2022, with implementation slated for 2023.

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