||Last Updated: Dec 6, 2018 - 12:35:29 PM
THE HON. KEVIN PETER TURNQUEST, M.P.
DEPUTY PRIME MINISTER AND MINISTER OF FINANCE
WEDNESDAY 5THDECEMBER, 2018 AT 9:00 AM
HOUSE OF ASSESMBLY
COMMERCIAL ENTITIES (SUBSTANCE REQUIREMENTS) BILL, 2018
REMOVAL OF PREFERENTIAL EXEMPTIONS BILL, 2018
REGISTER OF BENEFICIAL OWNERSHIP BILL, 2018
Good Morning Mr. Speaker,
I rise to address this House on five (5) very important pieces of legislation that were tabled in the Parliament last week, which will have an impact on the way entities in the Bahamas are structured and are affected by administrative and tax matters going forward. The five Bills that we will debate today as a compendium of Bills, with the concurrence of the Official Opposition, are:
- The Commercial Entities (Substance Requirements) Bill, 2018;
- The Removal of Preferential Exemptions Bill, 2018;
- The Register of Beneficial Ownership Bill, 2018;
- The Non Profit Organizations Bill, 2018 and,
- The Penal Code (Amendment) Bill, 2018.
Mr. Speaker, these progressive pieces of legislation establish new regulations to govern the financial services sector in particular and to bring them into line with International Standards and domestic law as it relates to substance, equal tax treatment, ownership registration, reporting and fee requirements.
This new regulatory landscape is taking place in a context of rapid change, rising nationalism in G20 counties around the world and global upheaval in the financial services sector. It was brought about oddly, as a consequence of globalization which these same actors promoted when it was to their advantage, with many countries now attempting to curtail the unintended consequence of the free movement and access of their citizens and money to offshore financial centers for investing and management purposes. You see, when they were selling us goods cheaper than we could manufacture them at home, or they used marketing techniques to drive demand in our markets, causing increased consumer demand and capital flows from places like the Bahamas, globalism was good. As their citizens realized they could manage their affairs in international centers in a tax neutral way, and capital flowed in the reverse, globalization in terms of international financial services became bad and had to be stopped as they considered their tax base as being “unfairly” eroded. This is quite the hypocritical situation, but it is also a serious reality we have to face.
This has led to a new round of efforts by the EU and OECD countries to further tighten international financial and tax transparency standards and cooperation protocols to further combat tax avoidance and harmful tax practices or, to put it in simple terms, the movement of capital (
money) from high tax jurisdictions to low tax jurisdictions like ours, without the need for real economic substance or physical operations in the offshore financial jurisdiction.
To be clear, I wish to state at the outset, that the Bahamas has consistently maintained its right to establish domestic law, to set its own tax policy and foreign policy. There has been no conceding of ground on the principle of sovereignty or our right to exist as a well-regulated, cooperative and compliant financial services jurisdiction. We have asserted and continue to assert, that our record of cooperation in tax matters with our international partners through, MLATs, TIA and other bi-lateral cooperation agreements, has demonstrated our commitment to transparency standards and international best practices, and they have worked though we acknowledge the need for better efficiency in the processes.
As a small island state however Mr. Speaker, there are limitations to the influence or force in which the Bahamas is able to assert its position against these global initiatives. These are not only being coordinated and presented by the G20 and OECD counties but other countries around the world who are all seeking to achieve equity in the face of the CRS, AEOI and BEPS reality.
It must be emphasized for those who claim that the Bahamas has or is not fighting hard enough and those who seek to make this a political argument or debate, I remind them that this fight has been ongoing since 2000 and through successive governments with little ability to stem the tide of change. Though we might be able to debate the proactive nature of one government over the other in dealing with the substantive matters that bring us here today, there should be little debate that the actions being taken are necessary given the current climate and imperative to do all we can to protect this valuable financial services industry.
We must accept that the Bahamas is not alone in having to adjust its laws and revenue structure to comply with the global standards. All countries around the world, from big to small are faced with the same challenges. The G20 through the OECD and the EU as a bloc, have converged to establish these rules, with the power of financial and trade sanctions and penalties that would make it very difficult for countries to operate, even outside of the financial services sector, if we are blacklisted. Such blacklisting, even without the prospect of penalties, cause reputational damage that concern existing and potential investors and can significantly harm our economic stability, growth prospects. These are untenable risks for a young country with high debt, high unemployment, limited human and physical capacity.
The new provisions contained within these Bills, seek to preserve the Bahamas’ position as a significant global financial services center, and to enhance our value proposition as a premier jurisdiction of choice, for the conduct of quality wealth management and asset protection services, in compliance with international regulatory standards.
The Bahamas was asked by The European Union’s Secretariat of the Code of Conduct Group (Business Taxation)
(the EU), to address concerns (Criterion 2.2) with regards to Jurisdictions facilitating offshore structures or arrangements aimed at attracting profits, which do not reflect real economic activity or substantial presence in the Bahamas and the absence of a corporate income tax or a nominal corporate income tax, which they considered harmful to the global tax system. The Bahamas was also asked to address the absence of a searchable Beneficial Owners Registry that would allow authorized designated persons to efficiently produce information on beneficial owners of entities of interest to taxing jurisdictions.
Commercial Entities (Substance Requirements) Bill, 2018.
I will begin with the Commercial Entities (Substance Requirements) Bill, 2018.
The Bahamas has up to now had two types of corporate structures for businesses: Companies incorporated under the Companies Act, which are primarily domestic operating companies (local retailers, construction companies, etc.) that have real offices or store fronts and staff in the jurisdiction, secondly companies incorporated under the International Business Companies Act (IBC), the premier investment vehicle of choice for individual and international institutional or off shore investors, that may or may not have had an office with staff in the Bahamas.
Under the new global standard, this distinction can no longer exist and all companies operating from the Bahamas MUST demonstrate substantial economic and operational presence or have their activity reported and taxed in the jurisdiction where the substantial relevant activity is conducted so that they can be assessed for tax purposes in that jurisdiction.
The Ministry of Finance together with the Office of The Attorney General and Ministry of Legal Affairs, the Ministry of Financial Services, Trade & Industry and Immigration along with Industry representatives have been engaged in discussions with the EU and OECD and reviews of relevant domestic and international legislation for most of the year. We have benchmarked these reviews against new draft legislation to address the Secretariat of the Code of Conduct Group (Business Taxation) concerns, ensuring that we achieve the right balance of business, economic sustainability, viability and compliance with international standards and best practices. The Bill before us reflects the results of this work, extensive consultation with industry, international partners and subject experts.
As a consequence of the enactment of this substance requirement Bill, all companies carrying out, what is called “relevant activities” as defined in the Bill such as, banking, insurance, fund management, financing and leasing, shipping, distribution or service center operations, headquarter operations and holding companies with relevant activities, will be required to demonstrate that they have a substantial economic presence within The Bahamas and that they engage in real economic activity.
Mr. Speaker, these entities must conduct core income generating activities (CIGA) in the Bahamas. The types of business activities covered under the legislation for each relevant category includes:-
Banking: the raising of funds, managing risk including credit, taking hedging positions, providing loans, credit or other financial services for customers, managing regulatory capital and preparing regulatory reports and returns;
Insurance: the predicting and calculating risk, insuring or re-insuring against risk, providing client services;
Fund Management: the taking of decisions on the holding and selling of investments, calculating risks and reserves, taking decisions on currency or interest fluctuations and hedging positions preparing regulatory reports for government authorities and investors;
Financing and leasing: the agreeing of funding terms, identifying or acquiring assets to be leased (in the case of leasing), setting the terms and duration of any financing or leasing, monitoring and revising agreements, managing any risk;
Headquarters: the taking of relevant management decisions, incurring expenditures on behalf of group entities, coordinating group activities;
Shipping: the managing the crew (including hiring, paying and overseeing crew members), hauling and maintaining ships, overseeing and tracking deliveries, determining what goods to order and when to deliver them, organizing and overseeing voyages;
Distribution or service center: the transporting and storing of goods, managing stocks, taking orders and providing consulting or other administrative services.
There are also enhanced substance requirements for intellectual property income generating Included Entities. Again, these speak to the legitimacy of the activity in the jurisdiction as the domicile for taxing rights...
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