In a presentation to members of parliament and senators on The Bahamas/United States Tax Information Exchange Enabling Legislation at the British Colonial Hilton, Rowena Bethel, legal Advisor to the Ministry of Finance explained that the convention tax was thrown in as an added incentive but the most important aspect for The Bahamas was attaining the Qualified Jurisdiction (QJ) status as a large majority of the financial institutions in The Bahamas invest in U.S. Securities.
Without the agreement, these institutions would be applied a 30 per cent withholding tax on income derived from U.S. investments.
This threat of the increased withholding tax led to the financial services sector in The Bahamas heavily petitioning the government to obtain the Qualified Jurisdiction status, which would allow them to remain competitive in the financial services area.
The U.S. gave The Bahamas a provisional QJ status in 2000 but made an extension to the full six years conditional on The Bahamas signing a TIEA with the U.S. before the provisional period expired, this led to extensive negotiations during 2001, which ended in the TIEA being signed in Jan. 2002.
The TIEA is not retroactive and will apply to criminal tax matters after Jan. 1, 2004 and civil tax matters after Jan. 1, 2006. The agreement also specifies that requests which must be made in writing and contain specifics can only be made after reasonable efforts of obtaining information by the Internal Revenue Service (IRS) have been exhausted.
Ms Bethel outlined that there were certain grounds under which The Bahamas could deny disclosure of information.
“The Bahamas does not have to disclose information where it determines that such would be contrary to its national security, public policy, outside its normal practices of the law, statute barred in the U.S., or would breach trade secrets or process.
“Another further condition to the agreement is that after disclosure, no further disclosure of the information can be made to any other government or agency outside the IRS.”
Ms Bethel stressed that this agreement which will last for six years was not a tax treaty but a tax information exchange agreement, which means that the agreement is not enforceable as a treaty in the U.S. but simply places obligations on the jurisdiction that are party to the agreement.
The Bahamas’ agreement is similar to model tax information exchange agreement developed by the U.S. in 1984 to facilitate information exchange by other countries.
“It is in fact different than the one the OECD has promoted,” she said.
Ms Bethel further explained that the previous arrangement developed by the U.S. to provide its authorities access to information from other countries that would enable it to access the tax liability of its tax payers within this region; the Caribbean Basin Initiative was not sufficient to attract all the players that the U. S. was interested in for tax information exchanges.
This lead to the IRS developing another mechanism to induce jurisdictions to enter into tax information exchange agreements and “the end result of this was their qualified intermediary qualified jurisdiction programme.”
“The difference with this arrangement is the U.S. is not just asking for information; there were concessions granted to countries that entered into it, primarily the access to their markets for the purpose of investment in securities which was vital to the continued sustainability of our financial services industry.”
Ms Bethel stressed that previously, The Bahamas one of a few jurisdictions that currently do not provide information exchange on criminal tax matters. With the agreement, which was negotiated in the best interest of the country provided advantage gains most notable preferential market access to U.S. securities, as well as “the Qualified Jurisdiction status which all our major competitors enjoy.”
By Martella Matthews, The Nassau Guardian
