Riding the Waves of Change: Balancing Compliance with Confidentiality

On the 27 October 2014, The Bahamas joined 93 other jurisdictions adopting the new OECD’s Automatic Exchange of Information standard (AEOI).   Over the past five years there have been dramatic changes in the global architecture for the exchange of information largely due to the efforts of the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum).

As the catalyst for change, the Global Forum spearheaded the implementation of the Exchange Of Information on Request (EIO) standard in 2009, which has now been widely accepted and is touted as responsible for effectively countering tax evasion for a number of jurisdictions. The Bahamas is now set to embark on the implementation a new Common Reporting Due Diligence Standard to counter tax evasion and avoidance, which calls for the automatic exchange of financial account information. With the first AEOI exchanges set to begin in September of 2017, how is The Bahamas preparing itself and what will this mean for the jurisdiction as one of the premier offshore financial services centers?

This article considers the measures being taken by the Government of The Bahamas to ensure compliance with AEOI standard and the perceived future for the jurisdiction as an offshore financial services center.

Bahamas Advantage

Following on a ‘blacklisting’ event by the Financial Action Task Force in 2000, and a successful exercise of removal from the group of blacklisted nations, the Government of The Bahamas has sought to maintain a balance between complying with the agreed international standards while safeguarding its financial services industry. The Bahamas has evidenced its commitment to implementing the globally accepted standards for fair tax competition by adopting the AEOI standard with an implementation date of September 2018.

The jurisdiction has chosen not to enter into the OECD’s Multilateral Competent Authority Agreement that will activate automatic exchange of information, based on the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (OECD Convention). The OECD Convention is a multilateral legal instrument to be entered into with multiple partner jurisdictions which will establish the basis for all forms of international cooperation in tax matters and will include, inter alia, EIO, AEOI and spontaneous exchange of information. The Bahamas has instead opted to implement the standard through bilateral agreements solely with interested and appropriate partners that demonstrate the ability to meet comprehensive and objective standards on confidentiality, safety and proper use of information exchanged.

Article 26 of the OECD Model Tax Convention on Income and Capital which serves as the basis for the development of the evolving standard for transparency and information exchange, requires that there be strict confidentiality of the information exchanged. On the basis of the foregoing, The Bahamas requires counterparties to bilateral agreements with the government to have the legal and administrative framework in place to ensure that any information to be exchanged meets the standards on confidentiality, data safeguards and proper use. This will prevent the risk to the security and safety of clients whose information may be disclosed to acounterparty without an appreciation for the value of the strict confidentiality of any client data received.

The potential danger which would result from the automatic exchange of client sensitive data is real, particularly for clients from certain countries where the risk to personal safety is of grave concern. This consideration was a motivating factor for the jurisdiction in establishing a method of compliance that safeguards the privacy of client sensitive data.

Negotiating bi-lateral agreements, while a lengthier process, will prevent The Bahamas committing to the spontaneous exchange of information on a multi-country basis. The implementation of the infrastructure necessary to effectively accommodate automatic exchange on a multi-country basis would create unbearable costs and administrative burdens on The Bahamas as a developing jurisdiction. This position is supported by the G20 and other major international financial centers.

The Bahamas is one of several countries which have opted to implement the standard in 2018. Following the lead of The Bahamas, a number of the countries known as ‘early adopters’ who initially committed to implementing the standard in 2017, have since changed their position to become 2018 adopters.

The Bahamas’ Ministry of Financial Services and The Bahamas Financial Services Board have been working along with the private sector to ensure that the jurisdiction is engaged throughout the AEOI standard development process and will be well prepared at the implementation date. The Bahamas is also a member of the OECD’s AEOI Working Group and accordingly a key player in understanding the Global Forum’s objectives and facilitating its ability to implement the standard in the most efficient manner.

The Future of The Bahamas as an IFC

The acceptance of the AEOI standard by The Bahamas does not mean that there is no future for the jurisdiction as an offshore financial centre. The Bahamas maintains a set of unique systems in place to attract revenue from many major developed nations and as long as it is able to distinguish itself by offering lower levels of tax than onshore competitors in connection with its offshore structures and product offerings, tax payers will take advantage of the ability to structure their affairs through its low or tax neutral platforms.

Tax mitigation, avoidance of forced heirship, asset protection and other legitimate uses remain relevant to high net worth individuals, families or companies seeking to place their assets in safe, credible well regulated offshore financial centres like The Bahamas. The OECD recognises that a framework for fair tax competition can enable business to move capital to locations where it can optimise return without impeding the aim of national governments to meet the legitimate expectations of their citizens for a fair share in the benefits and costs of globalisation.

Both onshore and offshore jurisdictions can benefit from the global and financial connectivity which permits clients to utilize offshore financial centres to mitigate tax liability within the limits of the relevant laws.

The Bahamas has many advantages that will aid in its continued success as an offshore financial center, including, reputable banks and trust companies; a wide range of products and services; a stable government and economy; and an appreciation for adhering to international standards for tax transparency while preserving the safety and security of its client base.

List of Sources

The following sources were used to prepare the foregoing:

Ministry of Financial Services public statement concerning The Bahamas Adoption of the OECD Standard for Automatic Exchange of Information, October, 2014; www.tribune242.com;

Bahamas adopts OECD tax information standard; K. Quincy Parker, The Nassau Guardian; 20^th November, 2014; www.tribune242.com;

Bahamas ‘Got Everything Needed’ On Tax Exchange; Neil Hartnell, The Tribune; October 31^st, 2014; www.tribune242.com;

Top Bankers Praise Bahamas’ Terrific Response to OECD; Neil Hartnell, Business Editor, The Tribune; November 13^th, 2014; www.tribune242.com;

Appeal to WTO on OECD Harmful Tax Competition Initiatives Not Ruled Out; Monday February 19^th, 2001; www.bfsb-bahamas.com;

Standard for Automatic Exchange of Financial Account Information: Common Reporting Standard; www.oecd.org.

Automatic Exchange of Information: What it is, How it Works, Benefits, What remains to be done; www.oecd.org.

Global Forum on Transparency and Exchange of Information for Tax Purposes: Tax Transparency 2014; Report on Progress; www.oecd.org.

OECD Promoting Tax Competition by Richard M. Hammer, and Jeffrey Owens. www.oecd.org;