Tax Information Exchange Act, 2003

First Published: 2003-10-30

Back in November 2000, just one month before the government passed the 11 bills of Christmas as a result of the “Blacklisting of the Bahamas” by the OECD, we cornered a friend of ours who manages one of the more respected private banks in Nassau to interview him on the effects of the OECD action. The effects of those 11 pieces of legislation are now known to all.

Now in October 2003, The Bahamas faces the prospect of implementing an Act to legitimise a “Tax Information Exchange Agreement signed with the United States back in 2002.

With this in mind, we pigeon holed another banker friend (BF) of ours to ask him a few questions about the proposed Tax Information Exchange Act, 2003 (proposed Act). Here is the result of our conversation.

Nassau Institute: The proposed Act refers to an exchange of tax information between two countries. What reciprocity is there for The Bahamas?

BF: As The Bahamas is not a nation that imposes direct income tax, there is no readily apparent reason it should be acting as a vassal tax collector for the United States of America, or any other sovereign nation or supra-power. Since we do not anticipate requests of the USA for tax information exchange on Bahamians resident in the USA, what reciprocal benefits can we reasonably expect if reciprocity is the key to negotiating any agreement.

Nassau Institute: What then can The Bahamas expect to gain from the proposed Act?

BF: If it is conceded that there is no or little reciprocity for The Bahamas, we can expect to gain little or nothing in return. What is in the best interest of The Bahamas and the Bahamian people? If this TIEA is to proceed in its present form, The Government of The Bahamas and Bahamians need to be fully informed as to the benefits expected to accrue. Is this yet another bill to kill or devastate our already severely depressed financial services industry in the wake of the 11-piece financial services legislative package? Can we afford to send over 4,000 financial professionals and associates to the unemployment queue? If we are serious about this legislation, we should, as a government, negotiate something in return that generates fair value in exchange. . . something that will make up for what we can expect to lose in the process?

Nassau Institute: Can the country expect to reap big dividends from the Tax Convention business from United States Corporations?

BF: It has been advanced that the TIEA will bring us the long sought after tax convention business. However, even this will only directly benefit the major and larger hotels with ample convention space. How many hotels can accommodate large conventions, other than Atlantis and Radisson? While the tourism industry needs to bolster their sagging profitability, convention tax deductibility is not likely to be much of a factor in selecting competing host convention sites. In considering hosting conventions whether in The Bahamas or elsewhere, larger American companies' corporate meeting planners rarely consider tax deductibility as a significant or material factor. The most significant factors in their decision-making are the quality of the hotel and its facilities, location, convenience, and most importantly cost. Notwithstanding tax deductibility does lower net cost and while we offer convenience as a result of our proximity to the USA, cost is prohibitive relevant to other competitive domestic and foreign sites. The point here is that tax deductibility is not a significant factor in the decision. (The recently published Tourism Task Force Report is ample evidence of high costs of Bahamian hotels.) Further, the benefits of TIEA should not be seen for the additional tax convention business to the tourism industry generally, and specifically to the major hotels, at the expense of our second largest private industry: financial services.

Nassau Institute: Are we negotiating with a “gun to our heads?”

BF: We have heard repeatedly the argument that the 11-piece financial services legislative package was negotiated with a gun to our heads. Have we not learned from this experience after almost three years? Have we not seen the decline in our financial services industry? Prior to that legislation, we boasted of over 400 licensed banks and trust companies. Three years later, licensed banks and trust companies are under 300; and, of those 300, many are still in the painful throes of extremely costly compliance catch-up (KYC) with many not expected to meet the extended deadline of December 31, 2003.

Nassau Institute: What about the right to confidentiality and financial privacy?

BF: The right of confidentiality, particularly the right of financial privacy, is the most telling and compelling of all justifications to reject this Bill in its entirety. With other legal acts, and in particular the recent Patriot Act, supplemented by the Sarbanes-Oxley Act, 2002, the USA has virtually eliminated its citizens' rights to financial privacy. That is no reason for The Bahamas to do the same. The right of confidentiality and financial privacy is enshrined in our Constitution. It is a long-held practice in this country and most democratic nations around the world. It should not be abandoned nor in anyway compromised; in fact, it should be strengthened. It has firm grounding in the earlier successes of the financial services industry in The Bahamas.

Nassau Institute: What is the potential impact on our sovereignty?

BF: While The Bahamas may have been negotiating with a gun to its head, that is no reason to again negotiate with a gun to our head in other international agreements, including the TIEA. Although we are a small country, the negotiating process involves at least two parties with each bringing to the table something that the other wants or needs. Negotiations should never be conducted in the absence of goodwill and fair dealing, nor should it be under duress or fear. Without that 'something' to give for 'something' in return, there is really nothing to negotiate. If we were to agree to their demands with nothing in return, then we have been abjectly defeated. With little or nothing to bring to the table, certainly no benefits can be expected. Will we suffer fool's gold as a vassal tax collector for the USA, and possibly later for other countries, including the EU and other member-states of the OECD? We have plenty of demands that we can make in exchange for TIEA and the USA is likely to give up even more than we might ask. And, our sovereignty is not negotiable?

Nassau Institute: If we sign on with the USA, what about other countries or trade pacts?

BF: Once a precedent has been set with the signing and implementation of a TIEA with the USA, negotiations for TIEA’s will be demanded by other states, including the EU and OECD member-states? Upon the original signing of intent of a TIEA, then Prime Minister Right Honourable Hubert A. Ingraham unequivocally promised that the only TIEA to be signed would be with the USA. Will the PLP Government be willing to back up that pledge with or without a gun to its head?

Nassau Institute: Should we want tax competition rather than tax harmonisation?

BF: Much has been said in the last 2 or 3 years about the OECD's initiatives and posturing over global tax harmonization. This has resulted in The Bahamas blacklisting, paving the way to the forced 11-piece financial services legislation with its resultant damaging effects. The US-based think tank, Center for Freedom and Prosperity ("CFP"), has lobbied hard with great success on the issue of tax competition, not the tax harmonization programs proposed for tax havens by OECD. The OECD, and particularly those member-states in the EU, have forged unilateral global solutions to the real world problems their member states face, caused by their own high tax welfare policies. Some of these countries, e.g., France and Germany et al, with their high-cost welfare states and unfunded pensions are bankrupt. CFP argues quite convincingly that tax harmonization is bad tax policy; countering with the argument that tax competition is essential for global competition and economic growth. CFP advances the notion that these high-tax nations have no other real world alternatives but to reduce taxation to minimize flight capital by their own citizenry, instead of demanding other countries to become their vassal tax collectors.

Nassau Institute: Will there be “fishing expeditions” through Multiple Identification of Taxpayers?

BF: It has been strongly promised by Government officials, including those from the Ingraham Administration, that no TIEA will permit "fishing expeditions". How can we be assured of that? While the Bill states that information requests must identify the taxpayer for whom the tax information is sought, it does not appear to prevent a request that includes multiple taxpayers.

Nassau Institute: What is “foreseeably relevant or material?”

BF: This nice legal phrase is used throughout the Bill. That language poses further threats of permissible "fishing expeditions". This language could force the Minister to permit such information requests without satisfying himself that there is reasonable evidence of tax offenses. However, this may be difficult for him to do in the absence of specific knowledge and expertise in the underlying foreign tax law or tax administration policies. The use of the word "foreseeably" opens up Pandora's box…. as merely a suspicion of past or future tax offenses could justify such a tax information exchange request.

Nassau Institute: Do you think the Minister will have excessive power of enforcement if the proposed Act becomes law?

BF: The Bill foresees the Minister of Finance issuing regulations for the enforcement of the Act, but does not seemingly address controlling the use and abuse of excessive power. Also, the Act does not indicate the methodologies and processes as to how the Minister will determine if the information request application is reasonable opposite the claims or suspicion of the requesting state. Is it expected that the Minister can correctly determine, on the basis of a fully completed request application, the validity or reasonableness of the information requested based on his judgment or determination (or that of Ministry staff) alone?

Nassau Institute: Is there any protection for the provider of information in the proposed Act?

BF: While the Bill does provide some assurance that the provider of the information requested is protected by not excluding or restricting the right of any person aggrieved by judicial review of the Supreme Court, it does not go far enough in protecting the information provider from criminal or civil charges. Further, the information provider is at risk of civil or criminal charges if he should provide false, altered or misleading information, whether intentionally or not.

Nassau Institute: Does the proposed Act provide any protection for the taxpayer?

BF: There is nothing in the Bill to indicate that the aggrieved taxpayer, whether or not a resident of The Bahamas, has any right to, or knowledge or defence of, the information request and its potential claims, charges or consequences. This amounts to a unilateral ex parte petition. The Bill should request additional information on the request application, to advise whether or not the requesting state has informed the taxpayer of the claim, investigation and his rights (if any). The answer to this question could aid the Minister in determining if the request is justifiable and reasonable and/or if a "fishing expedition". It could possibly prevent legal action brought by the aggrieved taxpayer for losses incurred as a result of unauthorized disclosure of confidential information. (It is believed to be a rare case in the USA that a taxpayer would not be notified by the Internal Revenue Service, prior to investigation or claims on a taxpayer, as such action is normally a last resort after years of collection attempts prior to taking the case to the tax court or pursuing tax fraud.)

Nassau Institute: We read something about an Advisory Committee. Do they have any power?

BF: Reasonable consideration by the Minister on the advice and recommendations of the Advisory Committee is not assured based on the language of the Bill. Consequently, it may appear to be simply a political non-substantive appointment that would render the Committee powerless and ineffective in rendering any advice and recommendations as a matter of public policy and interest. This would be especially evident should there not be either public consultation or the case where the Minister simply refuses to listen, reason or accede to the Committee's advice and recommendations.

Nassau Institute: In closing, if you were Prime Minister for a day, what would you do with the proposed Tax Information Exchange Act, 2003?

BF: I believe the proposed TIEA bill should not be permitted to proceed and if it is to proceed, then it should be substantially amended.

Nassau Institute: Thank you very much for your time and effort.

BF: You are very welcome. Hopefully it will help the lawmakers with their deliberations.

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