Bahamas Regulatory Initiatives Driven by Compliance and Innovation
by Aliya Allen
Published: September, 2018
Submission: May, 2019
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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:
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:
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:
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
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.
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:
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:
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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