Can The Bahamas retain its current offshore banking status? Since the terrorist events of September 11, 2001, concerns over financial transparency and bank secrecy have re-surfaced and the guarantee of secrecy, which at one time made many offshore jurisdictions such as The Bahamas, Bermuda, the Cayman Islands, and the British Virgin Islands attractive destinations in which to do business, is evaporating.
The efforts of organisations such as the Financial Action Task Force (FATF) and its parent organisation, the Organisation for Economic Co-operation and Development (OECD), are becoming more aggressive in their attacks on bank secrecy laws.
The FATF, created in 1989, consists of several member nations with the specific purpose of co-ordinating international anti-money laundering efforts.
The organisation is responsible for the establishment of the Financial Intelligence Unit (FIU) in several countries, including The Bahamas, to share financial information without resorting to the courts.
As recent as 1998, the OECD published a report accusing no-tax and low-tax undeveloped countries of ‘harmful’ tax competition.
The report basically condemned tax havens, such as the Bahamas, for engaging in tax practices which attracted capital from high taxed, more developed countries. It encouraged ‘tax haven’ countries to tax foreign investments and to eliminate bank secrecy.
According to official statistics, it is estimated that the financial services sector in total accounts for approximately 40 % of the nation’s GDP, which is currently valued at some five billion dollars.
Any threat to this industry can pose serious strains not only on the foreign revenue generated but it will also adversely affect the high standard of living, that many Bahamians employed in this sector, currently enjoy.
History and evolution
During the late 1960’s when tourism began to flourish, The Bahamas also began to develop and market its offshore financial centre, with the main catalyst for this growth being our tax haven status.
During that era, there were no taxes of any kind levied on investments in The Bahamas.
Also fueling growth in its offshore banking sector, was the establishment of bank secrecy laws that prevented disclosure of clients’ assets, in any form.
Only an order from the Supreme Court permitted a third party to acquire information in criminal matters about any offshore account, such as proceeds from drug trafficking. This, however, did not include tax avoidance because tax avoidance in one’s home country was not considered a criminal matter in The Bahamas.
The Bahamas’ tax haven status and bank secrecy laws were advantageous to foreign investors, in that it helped to reduce the cost of investing. Taxes had the potential to represent a substantial portion of the investment cost. In the U.S. for example, depending on the State and the type of gain, an investor could pay on average five to 28% in taxes on capital gains and up to 15% on dividends, which was recently as high as 38.6%.
Our comparative advantage….
Over time, the Bahamian offshore banking sector flourished. At one time The Bahamas was ranked third in the world as a banking/financial centre, second to London and New York. Today, however, the country’s prestigious positioning has slipped and is paired just behind the Cayman Island, which is ranked fifth in the world.
In the past, the Bahamas’ known comparative advantages were its tax haven status, its bank secrecy laws and its non-cumbersome regulations. It was these factors that made The Bahamas stand out as a premiere offshore jurisdiction.
However, in light of the recent attacks on offshore banking centers, the pertinent question is whether or not The Bahamas can retain its current offshore banking status.
Confidentiality has always been and remains a cornerstone of the successful functioning of The Bahamas offshore sector. Without the various confidentially laws engraved in the country’s offshore banking legislation, there would be very little or no benefit in foreign investors utilising The Bahamas as an offshore banking centre. Just recently, The Bahamas caved into external pressure to relax confidentially laws.
The US Treasury Department, for instance, entered into a number of tax information exchange agreements with several Caribbean countries. The Bahamas’ agreement, which was entered into on January 25, 2002, became effective on January 1, 2004 for information relating to criminal matters and will become effective on January 1, 2006 for civil matters.
This is sure to have serious implications for the country’s offshore industry and for the Bahamian economy at large.
What lies ahead?
The new regulations coupled with more rigid penalties levied on foreign investors attempting to avoid their home country tax laws, will most likely impact the offshore banking industry in The Bahamas. For example, although U.S. investors may derive some tax benefit by going offshore, the benefit is more limited due to U.S. rules taxing individuals on their worldwide income regardless of residence.
Actually, US citizens investing overseas risk penalties of up to $10,000, if they fail to report details of overseas bank and financial accounts to the US Treasury.
Taxpayers who fail to comply, face a $10,000 fine and a maximum civil penalty of $100,000 or 50% of the value of the offshore account.
Offshore centers around the world are under attack and The Bahamas is no exception.
As organizations such as the OECD and the FATF seek to apply increased international pressure, offshore centers such as The Bahamas, must become more creative and responsive to the dynamic regulatory requirements.
If we are to remain a competitive jurisdiction, we must as a matter of urgency among other considerations, seek to develop new and innovative products which are aimed at positioning The Bahamas once again, as a leading financial centre.
NB: Colina Financial Advisors Limited (CFAL) is the leading provider of investment services in The Bahamas. Since our inception in 1997, our overriding objectives have been to provide innovative financial products, practical financial advice and exceptional service to our clients in the domestic market.
Please send any questions and or comments to info@colinafinancial.com
Submitted by Colina Insurance Company to the Nassau Guardian
