The idea of directly taxing foreign financial services companies plying their trade and earning profits from The Bahamas may be gaining some traction in the industry, with an expert calling for a serious investigation into the option.
Adrian Crosbie-Jones, managing director of the Private Trust Corporation Limited (PTC), raised the corporate tax matter before attendees of the Nassau Conference on Wednesday.  Crosbie-Jones said that foreign financial institutions are already taxed on their Bahamian profits, at rates in the 25 to 35 percent range.
"The only problem is that tax is not paid here," Crosbie-Jones said.  "The tax is paid somewhere else.  So the Swiss get the benefit of the profits generated in The Bahamas that are ultimately repatriated back to Switzerland and as a result the Swiss taxpayer has a reduced tax to pay because of the endeavors of Bahamians.
"We've got to start looking at perhaps ways where The Bahamas can benefit and participate to some extent in part of that tax."
The net effect on taxes foreign corporations pay would have to be neutral, at least, Crosbie-Jones told Guardian Business yesterday.  If implemented properly he said such institutions could find they actually improve their profitability, while the country benefits from increased tax revenue receipts.
Though it may seem counterintuitive that such businesses could potentially earn greater profits under such a corporate tax system, Crosbie-Jones explained that the way Bahamian business license fees are handled creates the opportunity. Although the business license is now a tax, it is calculated based on turnover and taken out before net profits are deduced.
For illustration, if a company made $100 in gross profit and had a $5 charge for business licence fees as its only expense, it would book $95 in net profit.  Whenever those funds are ultimately repatriated and taxed, it may pay 30 percent or $28.50 to some other country.  Earnings after taxes would come in at $66.50 in this scenario, The Bahamas taking home $5.  If there was no business licence tax but The Bahamas took 10 percent of net income and the foreign company 20 percent, the company's earnings after taxes move up to $70, The Bahamas' take improves to $10, and the foreign state gets $20.
The example is oversimplified, but the underlying point stands - more government revenue and possibly greater profits for institutions through sharing the tax on net profit. The numbers are small for illustration purposes -- foreign financial institutions may together book hundreds of millions in profits any given year.
Other jurisdictions already have such practices in place, according to Crosbie-Jones, who referenced financial centers like Jersey and the Isle of Man as examples. He said they use a zero/ten percent structure where foreign companies in the financial services industry pay 10 percent and local companies pay 0 percent. If implemented locally, such a regime would also need to exclude international business companies (IBCs) operating out of The Bahamas.  Taxing them could have a number of other negative implications for the industry, not least of them being a loss of competitive position and potentially the loss of the IBC business to other players.
The jurisdiction may even benefit from others recognizing that the business licence is in fact a tax, according to Crosbie-Jones.
"You have a form of corporate tax--you have business license," he said.  "If you were to call it corporate tax, which is in reality what it is, perhaps the whole world would perceive you in a different way."
The introduction of a corporate tax regime deserves serious investigation, according to Crosbie-Jones.  It would require thorough research, and ultimately the implementation of a network of double-taxation treaties to ensure that companies would not end up paying more than they would under the current regime.
The PTC managing director also said the jurisdiction may actually be more vulnerable by not having such a tax in place.  With global regulatory trends eroding privacy as a reason to use this jurisdiction for business, factors like reduced after-tax profits could cause companies to move to jurisdictions where their net take-home was higher.  It is a tide that The Bahamas may not be able to stand against, he cautioned, potentially threatening the entire industry.  Crosbie-Jones urged stress testing of how that and other developments could impact the industry as a whole.
Without a complete study presented to the government illustrating the benefits and measures for a successful implementation, Crosbie-Jones doubted that such talk would amount to anything more than talk.  He suggested that the intellectual and research resources of an institution like The College of The Bahamas could be harnessed to do the necessary ground work.
For all the challenges involved, however, the PTC managing director is convinced that what the government is earning from the industry is 'really nothing compared to what it could be making'.
"Another $100 million to government coffers could be quite dramatic," he said.
 

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