Bahamas Regulatory Initiatives Driven by Compliance and Innovation 

September, 2018 - Aliya Allen

It is fair to say that we are in an era of unprecedented multilateralism and convergence in tax matters. The Bahamas has already committed to the implementation of the Common Reporting Standard, having already signed onto the Multilateral Competent Authority Agreement and published its list of exchange partners with automatic exchanges that commence in September 2018. For The Bahamas, 2018 has so far heralded a number of important regulatory imperatives, as the country continues to align its regulatory framework with international standards relating to transparency and taxation. In doing so, it has signalled once again that it is a responsible and compliant member of the international community. In addition, The Bahamas is evolving its financial services offering, recognizing that the age of digitization of finance is well underway, and that the shift toward substantive operations aligned with economic activity bodes well for The Bahamas – an ideal location with an ideal environment. The purpose of this article is to discuss some of these international initiatives, The Bahamas’ implementation of the same and the proposed policy initiatives and incentives encouraging substantive operations to be established here.

The EU Code of Conduct Group (the Group) was given a mandate in 1998 by the European Council to assess the tax measures that may fall within the scope of the Code of Conduct for business taxation adopted in 1997, which required that Member States refrain from introducing any new harmful tax measures, and amend any laws or practices that were deemed to be harmful in respect of the principles of the Code.

In 2017 the Code of Conduct Group extended its work from Member States to assessing other jurisdictions’ tax regimes for harmful features. Many jurisdictions were asked to commit to eliminating the identified practices and The Bahamas made commitments in early 2018 to address the following identified gaps:

  • Removing Ring Fencing – where advantages are ring fenced from the domestic market so that they do not affect the national tax base.
  • Requiring Substantial Economic Presence for entities involved in certain business activities to ensure that tax advantages are aligned with real economic activity.
  • Implementing the Base Erosion and Profit Sharing (BEPS) minimum 5 standards.

Tackling Ring-fencing, Substance and Real Economic Presence

The Bahamas has committed to removing any regulatory or administrative practices as outlined in EU Criteria 2.2, namely in assessing a harmful practice under 2.2 a jurisdiction should evaluate:

  • “Whether advantages are accorded only to non-residents or in respect of transaction carried out with non-residents”.
  • “Whether advantages are ring-fenced from domestic market, so they do not affect the national tax base”.
  • “Whether advantages are granted even without any real economic activity and substantial economic presence with the Member State offering such tax advantages”.
  • “Whether the rules for profit determination in respect of activities within a multinational group of companies depart from internationally accepted principles, notably the rules agreed upon with in the OECD”.
  • “Whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way”.

Economic Substance

The objective of the Economic Substance requirements of EU Criteria 2.2 is to satisfy the obligations under BEPS Action 5 – Countering harmful tax practices more effectively, taking into account transparency and substance

The goal of BEPS Action 5 is to realign taxation of profits with the substantial activities that generate them. Expenditure in a jurisdiction is used as a proxy for measuring substantial activity. The substantial activity requirement ensures that taxable profits can no longer be artificially shifted away from the countries where value is created.

The Bahamas’ model guidance on economic substance when published will likely be modelled after the OECD BEPS Action 5 2015 Report and the Harmful Tax Practices- 2017 Progress Report on Preferential Regimes – Inclusive Framework on BEPS Action 5. As a result, economic substance determinations will take into account specific uses of the entity in defined regimes as opposed to simply focusing on the entity itself. These defined regimes are:

  • IP Regimes, the nexus approach permits jurisdictions to provide benefits to the income arising out of that IP, so long as there is a direct nexus between the income receiving benefits and the expenditures contributing to that income. This focus on expenditures aligns with the underlying purpose of IP regimes, by ensuring that the regimes that are intended to encourage research and development activity, only provide benefits to taxpayers that in fact engage in such activity.

  • Headquarters Regimes are regimes that grant preferential tax treatment to taxpayers that provide certain services such as managing, coordinating or controlling business activities for a group as a whole or for group members in a specific geographical area. The core income-generating activities in a headquarters company could include the key activities giving rise to the particular type of services income received by the company.

  • Distribution Centre Regimes are regimes that provide preferential tax treatment to entities whose main or only activity is to purchase raw materials and finished products from other group members and re-sell them for a small percentage of profits. Service Centre Regimes provide preferential tax treatment to entities whose main or only activity is to provide services to other entities of the same group. The core income-generating activities in a distribution or service centre company could include activities such as transporting and storing goods; managing the stocks and taking orders; and providing consulting or other administrative services.

  • Financing and Leasing Regimes are regimes which provide a preferential tax treatment to financing and leasing activities. The core income-generating activities in a financing or leasing company could include agreeing funding terms; identifying and acquiring assets to be leased (in the case of leasing); setting the terms and duration of any financing or leasing; monitoring and revising any agreements; and managing any risks.

  • Fund Management Regimes grant preferential tax treatment to income earned by a fund manager for the management of funds. The focus is not the taxation of the income or gains of the fund itself or of the investors in a fund but the income earned by fund managers from the management of the fund. In terms of substantial activity the core income-generating activities for a fund manager could include taking decisions on the holding and selling of investments; calculating risks and reserves; taking decisions on currency or interest fluctuations and hedging positions; and preparing relevant regulatory or other reports for government authorities and investors.

Banking and insurance: the main concern is linked to the benefits that they provide to income from foreign activities. In terms of substance, the regulatory environment, where applicable, should already ensure that a business is capable of bearing risk and undertaking its activity. In the context of insurance, it may be more difficult to easily identify those activities and regimes that raise concerns in respect of substance versus those that do not because of the possibility that risks may have been re-insured.

The core income-generating activities for banking companies depend on the type of banking activity undertaken, but they could include raising funds; managing risk including credit, currency and interest risk; taking hedging positions; providing loans, credit or other financial services to customers; managing regulatory capital; and preparing regulatory reports and returns. The core income-generating activities for insurance companies could include predicting and calculating risk, insuring or re-insuring against risk, and providing client services

  • Shipping Regimes provide a preferential tax treatment to shipping activities and are designed taking into consideration significant non-tax considerations. The core income-generating activities for shipping companies could include managing the crew (including hiring, paying, and overseeing crewmembers); hauling and maintaining ships; overseeing and tracking deliveries; determining what goods to order and when to deliver them; and organizing and overseeing voyages.

  • Holding Company Regimes can be broadly divided into two categories: (i) those that provide benefits to companies that hold a variety of assets and earn different types of income (e.g. interest, rents, and royalties) and (ii) those that apply only to companies that hold equity participations and earn only dividends and capital gains. In the context of (i) above, to the extent that holding company regimes provide benefits to companies that earn income other than dividends and capital gains, the substantial activity requirement should require qualifying taxpayers to have engaged in the core activities associated with those types of income.

Holding companies that fall within category (ii) above and that provide benefits only to dividends and capital gains, however, raise different policy considerations than other preferential regimes in that they primarily focus on alleviating economic double taxation. They therefore may not in fact require much substance in order to exercise their main activity of holding and managing equity participations.

Ring Fencing

A review of the current regimes that could be deemed preferential ring-fenced regimes is being undertaken by policy makers. Some regimes have been identified but at this stage it is too early to tell which direction will be taken given the policy considerations and tax neutral platform on which many businesses currently operate. Industry is advocating for a balanced and fair approach.

Implementing the BEPs minimum standards – Multinational Enterprises Reporting Bill 2018: BEPS and Country by Country Reporting

The Bahamas’ Multinational Enterprises Reporting Act, 2018 closely aligns with the OECD model on country by country reporting for multinational enterprises (MNEs). In short, the objective of the MNE Bill is to satisfy the BEPS Action 13 requiring MNEs to report annually and for each tax jurisdiction in which they do business, the information set out in the prescribed Country-by-Country (CBC) Report. Countries are allowed to facilitate implementation in one of three ways:

  • Multilateral Convention on Administrative Assistance in Tax Matters (“BCAA”);
  • Bilateral tax conventions; and
  • Tax Information Exchange Agreements (TIEAs)

The purpose of the CBC MCAA is to set forth rules and procedures necessary for Competent Authorities of jurisdictions implementing BEPS Action 13 to automatically exchange CBC Reports prepared by the reporting entity of an MNE Group, and filed on an annual basis with the tax authorities of the jurisdiction of tax residence of that entity, with the tax authorities of all jurisdictions in which the MNE Group operates.

The MNE Bill applies to Groups having total consolidated group revenue of US$850 million or above and requires that each ultimate parent entity of an MNE group that is resident in The Bahamas file a CBC Report. For the purposes of the Bill the term resident means (a) incorporated in The Bahamas (b) a place of effective management in The Bahamas or (c) being subject to financial supervision in The Bahamas.

It is possible for a surrogate parent entity (an entity designated as a substitute entity to the ultimate parent entity) to perform the reporting as the parent entity.

What is included in the Country by Country Report?

Key provisions of the CBC Report include:

  • Aggregate information relating to the amount of revenue, profit or loss before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, number of employees and tangible assets other than cash or cash equivalents with regard to each jurisdiction in which the MNE Group operates.
  • Identification of each constituent entity of the MNE Group and the jurisdiction of tax residence.

Economic Substance as an Opportunity

The Bahamas is ideally positioned like few other IFCs to provide the substance and infrastructure necessary for clients who have decided to move business lines offshore. Trading on its location relative to North and Latin America, the ease of access to the United States due to significant flight service, our strong common law tradition and respect for the rule of law, good and well respected regulatory framework, political stability and constant innovation. In 2017, The Bahamas passed the Commercial Enterprises Act (“CEA”) which established a Commercial Enterprise Facilitation Unit to consider applications in specified commercial enterprises. This certificate entitles the enterprise to a specified number of work permits for persons with in-house or specialized knowledge relating to the enterprise.

The categories of commercial enterprises are broad and most Fin-Tech, Family Offices, Asset Managers, Banks and Trust Companies fall within the broad category of Wealth Management, Software design and writing, computer programming etc.

Looking to the future, the CEA allows for the development of specified commercial enterprise zones for the purposes of encouraging clusters of commercial development. One such cluster expected to be established is a Technology cluster in Freeport on Grand Bahama Island, with other Fintech clusters finding their natural home in Nassau, the nation’s capital, due to the banking and financial infrastructure already in place. Indeed, The Bahamas is already examining its regulatory framework – it already has strong Data Protection laws and legislation upholding the legitimacy of electronic contracts, signatures and transactions – with a view to developing initial token offering and digital asset exchange rules which are innovative and focused on consumer protection. The law firm of Graham Thompson is actively assisting technology companies and others in establishing offices in The Bahamas, seeking requisite approvals, and was the first firm to make application on behalf of a client for a certificate under the CEA.


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