FATCA: The Erosion of the Financial Services and Service Providers in The Bahamas

First Published: 2013-08-20

An International Banker shared thoughts on the Inter Government Agreement The Bahamas signed with the US recently for the implementation of the Foreign Account Tax Compliance Act (FATCA).

Recently there have been two items published by The Nassau Institute which reflect the current scenario of the day – namely:

(i) It is Governments who inflict the biggest burdens upon their people.
(ii) More Americans are giving up their citizenship due to various domestic policies being pursued by the US Government.

As will be deduced these issues are related.

“Let’s further tax the rich” is an all too common phrase that has been raised in several countries.   Such a topic is invariably raised by the respective Governments of the day in order to deflect from the real economic problems that they face. Furthermore such a rallying call is easily accepted by the masses, whether uneducated or not, simply because they believe that they will not be adversely impacted by such a mandate. Little do they realise that such an action could detrimentally impact job growth – a case of not seeing something or an act of denial even though it is a scenario that is present already.

It has been frequently referenced that when there is a shortfall in a Government’s budget the immediate reaction is to focus on increasing revenues. For some strange reason Governments do not seem to take a “business-like” approach and also review their expenditures. It is also because of the “un-business like” approach that Governments do not focus on whether the disbursements they undertake are spent prudently and/or necessarily. There is so much waste in all Government enterprises that would not be allowed to exist in a commercial business. However very little attention is paid to this issue and one can only possibly presume that it is due to the fact that it is not the Government’s money – it is the peoples’ money yet the people have little or no say on how their monies are spent. If Government was a public company there would be a tremendous outcry from the shareholders yet because it is Government it only seems to breed a significant helping of complacency.

Reverting to the slogan “Let’s further tax the rich” is a particularly futile cry when examined in real terms. In America they refer to the top one (1%) per cent – this is the group of individuals from whom the bulk of the personal tax revenues are earned. One (1) per cent is a small number and thus it is fairly simple to understand that even if a Government doubled the taxes paid by this portion of its citizens it would only represent a “drop-in-the-bucket” against the current deficits. In other words “taxing the rich” is not the solution let alone a viable solution.

Another claim used recently by Governments is that too many of their citizens are evading taxes by “hiding” their monies overseas. Unfortunately the impact of citizens placing their monies overseas is a “fairy-tale” which nobody can substantiate but results in phenomenal numbers being “thrown-out” without a shred of substantive evidence to support the numbers. Unfortunately this position is also far too easily accepted by the masses simply because they believe that they are not adversely impacted – i.e. “it sounds good to me” syndrome.

It is this latter claim that specifically hurts The Bahamas – a country erroneously designated as a “tax haven”. It is a term which has become despised (black listed) by the majority of Industrial Countries.   Yet for many years, The Bahamas and other tax-havens ran their countries efficiently without the need for high and/ or punitive personal taxation. Initially this targeting of the tax havens resulted in certain treaties being negotiated whereby the “little” partner had neither resistance nor recourse as the playing-field was decidedly not level. In the specific case of The Bahamas it signed a Mutual Legal Assistance Treaty (MLAT) with the USA. This was later followed by Tax Information Exchange Agreements (TIEAS). Both of these steps started the slow erosion of The Bahamas as a reputable jurisdiction for “Offshore Banking”, wealth planning etc., that appealed to many of the world’s citizens. The adverse effect of these treaty processes is clearly reflected in the diminishing number of licensees published quarterly by the Central Bank. However the above steps were still insufficient to satisfy the appetite of the USA and certain European countries (viz – Britain, France, Germany, Spain and Italy) which led to and support of the introduction of FATCA.

This is a particularly burdensome Act which requires considerable effort to extract, collate, and report.  The information yet to be clearly defined is to be collected and either sent or exchanged with other countries. It calls for the creation of a huge analytical spreadsheet. The “driving” Governments however have not taken into account the cost of producing such information as all they see is this large “pot of gold” of additional revenue that they will collect. At the outset I commented that this alleged revenue was totally unsubstantiated and it will almost surely come as a shock when reality “hits” home. By way of example, it was only recently reported that the United Kingdom and Switzerland had entered into an agreement for the payment of a tax on monies held by UK residents in Swiss banks. The amount this year was estimated by the Treasury and included by the Chancellor in his budget was GBP 8 billion. The reality has transpired that the amount is less than one-tenth of the estimated figure and has now left a big hole in the current budget.

The impact of FATCA has not yet been evidenced by The Bahamas as it is in the processing of signing an Inter Government Agreement (IGA) with the USA. It has been reported that The Government of the Bahamas have negotiated some concessions with regard to reporting exclusions. Whatever the form of IGA signed with the USA it will prove to be a very costly exercise. In reality this means that, via the IGA, The Bahamas will need to collect the information from its licensees, massage and collate same into a format that will enable The Bahamas to report such data in the required format to the USA. At this time The Bahamas does not have a department that can handle such a complex exercise and furthermore it is unlikely to be able to staff the department with persons of the right skill sets. All this is in addition to the licensees themselves having to develop systems and staff to capture the requisite data.

It is disappointing that FATCA has progressed this far – again I can only put it down to complacency. Only now, when we are too far down the road is meaningful resistance being heard – e.g. the States of Florida and Texas have filed suit with the Federal Government on the basis of unconstitutionality. Both of these States will lose a considerable amount of business /revenue now being offered to their non-US resident client base – for example a Mexican is not going to continuing his banking with a US bank if he believes that the IRS are going to report his assets/income to the Mexican Authorities (please note that not all Mexicans are members of a drug cartel!). Now comes the fact that many more Americans are giving up their citizenship in order to avoid the aggressive and invasive tactics of the US Government.    Without doubt the persons who are giving up the citizenship are part of the earlier referenced one (1%) per cent which underlines the Law of Diminishing Returns. I am somewhat surprised that another body in the USA, namely the ACLU, has not voiced protest over this Act especially when they try and impose their views on many other less important civil liberty issues. Does this mean that individuals will not have any rights to confidentiality anymore? Are we all to be stripped naked? – not a pretty sight!

I have long been an advocate that most people will accept paying some form of taxation providing it is reasonable. What will be reasonable to some will seem excessive to others and vice-versa however a consensus should be achievable. The Governments of the USA and UK have had taxation in effect for many years during which time their respective tax codes have needed “fixes” i.e. a band-aid, from time to time. This has led to the current situation where the respective tax codes comprise of more band-aids that substance. Over recent months there have been many examples of large multi-national companies paying minimal or nil taxes in certain jurisdictions where they do business. The focus of the reporting was not that these companies were breaking any tax codes, they were all 100% legal, instead they were deemed as not paying their moral share of tax to the country in which they generated sales. How does one assess the value of one’s moral obligation? – this is becoming a totally absurd scenario but again it provides a distraction from the fundamental issues arising out of world economic slowdown and the deficits of several countries. I find this situation very frustrating especially as I see a simple answer – shred the current tax codes of the USA and UK and start all over again – use the KIS approach or even the Forbes flat tax system. The answer is simple as should be the tax code yet it is going to take someone unshakeable fortitude to tackle the project – the respective current leadership does not have it.

In conclusion I wish to add that apart from the above issues of MLAT, TIEA and FATCA there are moves been pushed by the OECD (a group that really needs to review the compliance of its own members to the foregoing) that all countries should maintain public registers showing the beneficial owners of companies in their respective jurisdictions. Again the UK and most recently the USA have also “jumped” on this bandwagon of full disclosure of the actual beneficial owner. All this is being deceptively done under the umbrella of money laundering and anti-terrorist funding as opposed to the reality of determining various tax bases – i.e. anything but the real truth. At this time I do not know if this will be successful especially as the USA has a significant number of companies using nominee shareholders and in several States that even permit bearer shares. Will complacency lose out again? The nominee shareholder, or corporate veil, is a very important tool used by many legitimate people especially from Latin & Central America who live under a real threat of kidnapping if their total wealth becomes known to everyone and all. In my opinion such a move will essentially prove to be the “death knell” for The Bahamas as an offshore centre. Quite simply there is no ongoing purpose that The Bahamas can usefully and profitably serve – all assets and income are to be reported, all beneficial owners are “open” to the world, The Bahamas is not the cheapest jurisdiction from which to operate. At this time I do not see a marketable advantage/niche that The Bahamas can offer.


Law Abiding Citizen.

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