To Resist or Not To Resist: That is the Question

First Published: 2003-12-16

The Bahamas has a key decision to make, capitulate and surrender or stand firm and resist. The future of the financial services industry of the Bahamas is at stake.

The primary objective of the OECD is the unfettered disclosure of financial information by financial institutions and professionals in the Bahamas in respect of their customers and clients in order that foreign taxes can be levied on the income and gains realized by such customers and clients.

Is it in the national interest of the Bahamas to capitulate to the OECD and its tax information requirements and procedures?

Before the Bahamas answers this question there should be a thorough and careful analysis in the “sunshine” and not behind closed doors. To date the Government has been very circumspect about releasing any information. It is drafting the legislation with an attorney retained by the Bahamas Financial Services Board (BFSB) and, in fact, has forbidden him to disclose to the BFSB the nature and content of his consultations with the Government. This state of affairs is unacceptable. Under such circumstances how can the BFSB possibly represent its members? It cannot.

The debate needs to be brought out into the open.

Firstly, there is no debate over the requirement of the Bahamas to comply with the recommendations of the Financial Action Task Force (FATF) in respect of anti-money laundering measures. The Bahamas must fully support the FATF and dedicate the necessary resources to fulfil its commitments in this regard. The OECD-s tax demands, however, are another matter. We must be careful not to blur the line between the FATF and the OECD and unnecessarily surrender to the OECD-s tax demands in the name of satisfying the legitimate requirements of the FATF.

The OECD-s demands and objectives are set out in a report titled, “Harmful Tax Competition an Emerging Global Issue” published in 1998. The Bahamas was characterized as a “Tax Haven” and labeled as an “Uncooperative Tax Haven” in the OECD-s follow up report in June 2000. The Bahamas has until 31st July 2001 to commit to the OECD that it will eliminate its “harmful tax practices” i.e. commit to disclose tax information. Failure to make such a commitment will result in the Bahamas being “Blacklisted” and subject to “Defensive Measures”.

The possible “Defensive Measures” are listed in the OECD report as follows:

1. To disallow deductions, exemptions, credits, or other allowances related to transactions with Uncooperative Tax Havens or to transactions taking advantage of their harmful tax practices.
2. To require comprehensive information reporting rules for transactions involving Uncooperative Tax Havens or taking advantage of their harmful tax practices, supported by substantial penalties for inaccurate reporting or non-reporting of such transactions.
3. For countries that do not have controlled foreign corporation (CFC) or equivalent rules, to consider adopting such rules, and for countries that have such rules, to ensure that they apply in a fashion consistent with the desirability of curbing harmful tax practices.
4. To deny any exceptions (e.g. reasonable cause) that may otherwise apply to the application of regular penalties in the case of transactions involving entities organized in Uncooperative Tax Havens or taking advantage of their harmful tax practices.
5. To deny the availability for the foreign tax credit or the participation exemption with regard to distributions that are sourced from Uncooperative Tax Havens or to transactions taking advantage of their harmful tax practices.
6. To impose withholding taxes on certain payments to residents of Uncooperative Tax Havens.
7. To enhance audit and enforcement activities with respect to Uncooperative Tax Havens and transactions taking advantage of their harmful tax practices.
8. Not to enter into any comprehensive income tax conventions with Uncooperative Tax Havens, and to consider terminating any such existing conventions unless certain conditions are met.
9. To deny deductions and cost recovery, to the extent otherwise allowable, for fees and expenses incurred in establishing or acquiring entities incorporated in Uncooperative Tax Havens.
10. To impose “transactional” charges or levies on certain transactions involving Uncooperative Tax Havens.

The OECD is not able unilaterally to impose any or all of the above “Defensive Measures”. Rather each individual member of the OECD will individually have to implement them. The OECD includes Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, UK and USA. The odds of the membership acting in concert are probably very low. In addition, certain member countries, such as Switzerland and Luxembourg, will act in their own self- interest in a manner that will conflict with the objectives of the OECD itself.

Undoubtedly the most important member of the OECD, as far as the Bahamas is concerned, is the USA. For a complex set of reasons, it has unilaterally committed to enter into a Tax Information Exchange Agreement with it. But even here, based upon Senator Army-s letter to Treasury Secretary Summers, there may be little support in the United States Senate for the imposition of any coordinated “Defensive Measures” against, inter alia, the Bahamas.

The Bahamas has for many years held the principle of confidentiality sacrosanct. Only last year Bahamian BFSB delegations toured Europe-s capitals extolling the virtues of The Bahamas, especially our position on confidentiality. Billions of U. S. Dollars have been deposited with Bahamian financial institutions in part because of the Bahamas- policy in this regard. The vast majority of these funds are legitimate. We have an obligation to these persons and we should not callously abandon them. There is no shame in upholding our belief in the right to privacy and confidentiality. The Bahamas stands to gain substantially in the international financial services arena if we champion this cause. We should not support the OECD-s bid for Orwellian control over private affairs.

The Government cannot expect the members of the Association of International Banks and Trust Companies (AIBT) to be very vocal since the vast majority of them are foreign institutions requiring work permits to retain their senior management in place. It consequently falls to the local professional community to rally to the cause and demand a role in the determination of policy.

The Government should not act as a monopolist in the decision making process. It would benefit by a more open disclosure of position papers and early drafts to ensure a constructive debate. Hopefully the Government has learnt a lesson in this regard from its recent experience with its Labour Bills. The Government should not risk the spectre of 5,000 middle class Bahamians taking to the streets to protest the potential loss of jobs owing to the country-s capitulation to the OECD.

Unless the Bahamas maintains a comparative advantage over financial centres such as London, financial institutions will not have a rational reason to maintain or establish operations in the Bahamas. We cannot compete on the same playing field as London, New York, Toronto, Zurich, Geneva, Singapore or Hong Kong. We must have an advantage and at present those advantages are confidentiality and the lack of complex, onerous regulation. We are in danger of losing both.

If the Bahamas stands firm and does not capitulate to the OECD, it will be “blacklisted” in August 2001. As stated above we may be subject to one or more “Defensive Measures”. There is no guarantee that such sanctions will be implemented in a concerted manner by the OECD membership or at all. Further, it is not a foregone conclusion that any such sanctions will have a deleterious effect on the Bahamas. However, in the event any such sanctions do cause serious harm the option will always be open for the Bahamas to capitulate to the OECD and make the demanded “Scheduled Commitment” thereby having the sanctions lifted and being removed from the “Uncooperative” list and placed on the “Cooperative” list.

The Bahamas has a history of being cautious and such caution is certainly merited now. In the future, resistance to the OECD may well be a badge of honour. The case for immediate capitulation to the OECD is not compelling.

Let the debate begin!

Date: 2nd November, 2000
Author: Lennox Paton

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