Hon. Ryan Pinder
REMARKS BY HON. L. RYAN PINDER
MEMBER OF PARLIAMENT FOR ELIZABETH
2016 / 2017 BUDGET COMMUNICATION
June 13, 2016
Introduction
Good afternoon, today I rise on behalf of the constituents of Elizabeth to contribute to the debate on the 2016 / 2017 Budget for The Bahamas. This will be the last budget communication for this Government who has worked assiduously in righting the financial spiral that the previous FNM Government had this country in. The process is not accomplished overnight, and to stabilize and put the country in a sustainable financial situation has required hard work, innovation, progressive thoughts and plans. I commend this PLP Government in staying the course in this regard, ensuring that from a financial point of view, the country is preserved for years to come. This has required not only innovation in revenue measures, but has also required for better enforcement procedures of tax collection. These are fundamental aspects good financial governance.
Budget Highlights
This budget is further evidence of the fiscal plan put in place by this Government in the beginning of its term, systematically righting the financial ship. There are some key aspects of this budget that deserve to be highlighted. The reduction or removal of duty on more than 70 items as well as the extension of The Family Island Development Encouragement Act and the City of Nassau Revitalization Act are all very significant tax savings initiatives that are in line and consistent with the promises of this Government over the years when the financial reforms and tax policies were put in place. Measure us by our promises and this budget is a demonstration of promises fulfilled.
Two other fiscal initiatives this government should be commended on are the Stamp Tax amnesty from penalties for those who have unrecorded and stampable documents. Practitioners have long suspected that there are significant un-stamped documents out there and I encourage all to take advantage of this short-term amnesty program and to ensure all historical transactions are compliant with our tax laws. Tax amnesty programs are constructive, fair and excellent revenue generating mechanisms in instances where tax is due but goes unpaid.
I want to also recognize the amendments that pertain to the valuations of real estate on their sale or exchange. This has been a vexing problem that has caused for excess and unnecessary expense as well as delays in completing the process, and paying over tax properly due the Government. Prescribing for a transparent and arms length approach to valuation of the real estate is the right thing to do and should contribute to ease of doing business. As one would see, we are almost ranked last in the ease of doing business when it comes to real property transactions and this reform should help.
In undertaking these initiatives, however, it is important from a Government policy perspective to also create policies and a framework to encourage economic growth. If one were to take a careful look at the items that have been identified to reduce duty on, you would see many are in the construction field. This I am sure was intentional, to provide a tax stimulus to the struggling construction industry of The Bahamas. This is a positive policy decision of this Government.
We should also, however, propose policy incentives that are to encourage growth to small businesses. Small businesses should have specific tax incentives to allow them to better compete against larger, more well funded businesses. We also need to develop policies to allow for small businesses to have access to capital. Our mechanisms that currently exist, The Bahamas Development Bank and the Venture Capital Fund as examples, are notoriously under capitalized and difficult to access. When they are accessed there are no parameters to assist the small businesses to succeed and thus many loans become in default. Viable capital access plans with business guidance are required.
One area that is crippling new and small businesses is the challenges with the ease of doing business. Much of this is a result of bureaucratic inefficiencies. For example, a new business might have to get inspections from numerous agencies on the agency schedule. This should be better coordinated and integrated. I know a new business who has been waiting 8 weeks now to get their business license because of uncoordinated inspections and bureaucratic bottlenecks. This has direct effect on our ease of doing business, on the growth of our economy, on the success of small businesses, and the confidence of our people. We must to better to cause for more efficiencies in doing business in this country.
We have been challenged as a country in recent years when it comes to growth, and our people are feeling it. We are challenged as a country in ensuring that in a volatile international environment that our core industries, industries that have created the middle class in this country, industries that have created over generations top level Bahamian managers and executives, that these industries are sustainable and we as a country are doing what is necessary to preserve them. In this instance I am talking about the financial services industry, and I want to spend a bit of time discussing where we are and where I think we should be going.
Financial Services industry
Overview – I love the financial services of this country, I have committed my entire adult life and certainly the last 10 years to understanding, advancing and living this industry that has historically contributed so much to the advancement of Bahamians and this country. This great industry has been responsible for the elevation of more Bahamians in senior management than any other industry in The Bahamas, it has been responsible for broadening the middle class than any other industry, and we are witnessing Bahamians now become entrepreneurs and owners in this industry. In fact, a recent industry human capital survey indicates that 80% of the industry employees are Bahamian, with half of the senior officers (the highest regulatory classification) being Bahamian. This is demonstrable evidence of the sector’s movement towards Bahamianization.
We have to preserve and advance this industry in the Bahamas for the economic viability of our country. A failed financial services industry will quickly result in a failed Bahamian economy, which will result in a failed country. In my opinion, Governments have had too much focus on foreign direct investment and tourism at the expense of properly developing the genesis of the middle class Bahamian, and current opportunity for Bahamian entrepreneurial ventures, the financial services industry. Greater understanding and greater focus is required at the policy levels as well as throughout the bureaucracy of government.
Financial Services Under Threat – Today, we are experiencing a variety of international initiatives that are presenting serious, and some believe, insurmountable obstacles to the viability of our financial services sector. Things are not good in the industry. It is not only my belief, but also those throughout industry that Government must be more focused and more responsive to and demonstrative of its stated commitment to the future viability of the industry and its value propositions. This is a current issue that requires current action.
The Central Bank of The Bahamas has recently issued correspondence to its licensees regarding the issues I will discuss in detail. In its quarterly letter the Central Bank has correctly pointed out that:
“[t]he first quarter of 2016 has seen the continuation of a number of international initiatives or trends that have consequences for both domestic and international/offshore banking segments. These trends are far-reaching and driven by several factors. Key among these has been the pressure applied for global tax transparency from governments around the world to crack down on tax evasion and tax fraud. This has caused a significant strategic shift from offshore to onshore wealth management.
Against this backdrop of market volatility, … clients have become more sensitive to risk and leverage which have resulted in declines in the number of client transactions and increases in cash holdings rather than investments in capital markets. This has ultimately led to reduced profit margins for banks …
The global wave of de-risking has gained momentum and has put significant stress on establishing and sustaining correspondent banking relationships, especially for smaller, domestic or standalone banks in international financial centres. De-risking has led to a severe curtailment of correspondent banking facilities in some jurisdictions around the world.”
These are real threats that are having an immediate impact – whilst not as systemic as in other jurisdictions such as Belize, banks have lost correspondent banking relationships, forced to close accounts, The Bahamas has lost business. I want to be clear, these are not as a result of any decision of the Government, all a result of what is happening internationally. But they are real, tax transparency had significant implications to our value proposition as a country, that being financial privacy.
The impact on revenues of our banking institutions has created real business operating pressures on the viability of some operations here in The Bahamas. The curtailment of correspondent banking both in the Caribbean as well as here in The Bahamas has caused for a loss of business and an environment of operational uncertainty throughout our industry. I will speak about these threats, why they are threats, what the impact on the industry is and why people believe that we are at a tipping point and that the Government must react quicker, be more innovative, and help create our value proposition in these changing and volatile times.
Automatic Exchange of Financial Information – Historically, the value proposition in financial services offered by The Bahamas was financial privacy. The global movement towards the automatic exchange of information attacks this very value proposition that we offer. The Bahamas has committed to a regime of global automatic exchange of financial information because we had to, it was a global standard developed and accepted, and we had to agree to remain an internationally compliant international financial centre. This is not the place to review the technicalities of this new regime of financial transparency, just to say that it is an environment where Bahamian financial institutions will have to provide financial information of clients resident in countries that we enter into a diplomatic treaty with.
For a variety of reasons, clients value financial privacy and transparency of their financial affairs is not well received. This could be as a result of risks of kidnapping, political victimization, economic piracy, and terrorism. In an industry where we cater and serve high net worth individuals, these are real issues; these are reasons why our value proposition of financial privacy was so important. That value proposition is being eroded, and the attractiveness of the Bahamas for financial services for international high net worth clients. The Central Bank of The Bahamas has recognized this threat, and certainly by anyone you speak to in the industry.
Measurable and tangible steps must be taken to demonstrate our readiness and preparation with respect to the implementation of automatic exchange of information. If we as a country are not able to evidence to the international community that we are taking this seriously, that we are operating and implementing in good faith, then we risk, at least perceived to be, thought of as uncooperative. We do not want to be in that position. That would have a number of negative consequences. It would cause the international watch dogs to place unnecessary attention on us as a jurisdiction, it could risk relations in the business sector, and as I will discuss, could have an impact on the delicate correspondent banking relations of our institutions.
Yes, preparation for this initiative is a monstrous task by any country, especially a small international financial centre like the Bahamas that has a lot of other challenges and finds itself in an election year. We in the financial services industry realize this and have agreed to work through The Bahamas Financial Services Board and that we will roll up our sleeves and provide any and all assistance to the Government. We will work on draft legislation, we will draft regulation and guidance notes, we can assist with strategy and implementation recommendations and procedures. We are committed to working together on this and stand ready, but we must actually get to work now!
Correspondent Banking Threat – I mentioned the threat to correspondent banking in the region. This is a complex issue that I will try to explain. Correspondent banking is the provision of current account and related services to another financial institution for the execution of third party payments. It is when one financial institution has an account in foreign currency with another financial institution to process transactions. This means, when you have an account at Commonwealth Bank for example, but this can be any local bank, and you look to pay a bill in US dollars, Commonwealth would have a correspondent banking relationship with a US bank to process all transactions and deposits in US currency.
Correspondent banking is fundamental to international trade, international currency transactions, and international business. The World Bank has recently conducted a survey of the decline in correspondent banking. This survey found that more than half of the local banking institutions have experienced a decline in correspondent banking relationships. Ensuring correspondent banking is key to the Caribbean region’s key financial indicators, including trade finance, foreign direct investment, tourism, international financial services and remittances. As the World Bank has stated, “financial inclusion is a key enabler for reducing poverty and boosting prosperity.”
De-risking and the consequent withdrawal of banking services risks only taking us backwards and alienating our economy from international commerce. This would have irreversible effects on the economic welfare of our people. We have experienced the loss of correspondent banking here in The Bahamas. Our independent institutions are constantly under this threat, some have had to close accounts because of loss of correspondent banking, and others are at risk and looking for options. This poses a real danger to financials services in particular but to the economy in general as we all depend on the banking system.
We have to provide the support and engaged dialogue with the United States on these issues. Moreover, we must take active steps to engage our regulatory counterparts and the large correspondent banks to apprise them of the solid regulatory regime that we have built over the years.
The effectiveness of implementation of the framework of automatic exchange also has an indirect effect on the risks related to correspondent banking. Correspondent banking matters are already influenced by the perception that the Caribbean region is lax in its anti money laundering regimes, although not true as far as The Bahamas is concerned. If we are perceived as not timely complying with implementation requirements of automatic exchange, then this would be further excuse for the withdrawal of correspondent banking. We have the ability to undertake certain measures that would provide more financial incentive for correspondent banking relationships to remain in the Bahamas of which I wills peak to a bit later.
Revenue pressures on banking institutions – On top of all of these international initiatives affecting the financial services industry, the banking industry in The Bahamas is experiencing significant revenue pressure. The Central Bank of The Bahamas correctly identifies this business risk. Revenue pressure on banks has originated from a number of areas. We have seen an evolution in the industry where there has been an increase in external management of client assets outside of banks, this has withdrawn a significant revenue source from the banking business.
As observed by The Central Bank of The Bahamas, due to outside influences, clients are sitting on more cash and not trading or entering the capital markets, this takes revenue from banks. Compliance costs have skyrocketed, putting additional operating pressures on financial institution firms. These business realities are putting strain on the operations within the financial services industry. Policies to facilitate the ease of doing business, the attractiveness of the jurisdiction, the widening of scope of offerings and services is paramount to the survival of the financial services industry and the businesses therein.
We as a country are losing our value proposition, it is more difficult to do business, and reliance on efficient and transparent government processes is difficult. There are some solutions, some options to regain a value reposition, to put operations on stable footing, to attract the type of clientele in this different environment that will redefine our business, reshape our industry, and cause for sustainable growth in what seams to be a destabilizing international environment.
Finding our New Value Proposition
Residency – With the onslaught of global automatic exchange of information we must evolve our value proposition to survive. One unique characteristic of this exchange of information initiative is that it is based upon the tax residence of the client. We have a long-standing policy in The Bahamas of awarding permanent residence to those individuals who acquire a home, current policy is with a value above $500,000. We, however, are woefully inefficient in processing these valid applications for permanent residence. We have developed a negative reputation in the international community because of our inefficiencies and lack of transparency in the process.
We also have no process, certificate or designation of being a tax resident of The Bahamas; this is also costing us business in the international community. In the industry, there is a trend of attracting higher net worth clients, with more assets, even if it means fewer clients in total. The difficulties just described are imposing significant challenges on the industry and redefining our new value proposition.
As I mentioned, there are many reasons why a client may seek financial privacy. With high net wroth clients, especially from the Latin American region, this has to do with the protection of themselves, friends, family, and their businesses. This includes protection from kidnapping, violence, and terrorism. These are real threats to these clients. These clients want to invest in The Bahamas, they want to become tax residents in The Bahamas, and they want predictability of awarding their permanent residence. This is not available currently.
Our new value proposition should be to ensure there is a framework in place to give these clients the confidence that The Bahamas is the pace to be. Because, once they come, so will their assets, their wealth, and ultimately maybe investment in the economy of The Bahamas. When these clients become tax resident in The Bahamas and not any other country, their financial information and privacy is preserved lawfully.
In order to define this value proposition, I propose the following:
1) An expedited process should be enshrined in policy and guidance that industry participants and their clients can depend on for timely processing of applications for permanent residence. The prior administration promised a 21-day turn around for purchases over $1.5 million. The reality is that this never occurred. The necessary infrastructure and attention should be given to this matter.
2) There should be focus at the Cabinet level to ensure these applications are swiftly passed through the cabinet process. This can be done with dedicated and schedule meeting, or by function of delegation. Any option that ensures timely processing would be welcome by the industry.
3) A framework for tax residency should be put in place. We can benchmark this against other jurisdictions, and frankly much of the work has been done by industry and proposed. What I propose is that if a client spends 90 days in The Bahamas, or can demonstrate objective evidence of closer connection and domicile to The Bahamas, and he pays a tax, lets say $20,000 per year, then the Government of The Bahamas issues a tax certificate to the client demonstrating tax residence in The Bahamas. If we assume just 1,000 new tax certificates each year, that is $20 million of revenue the first year, $40 million the second year, $60 million the third year, etc. This is real money for a program that should be non-controversial.
Residency for ultra high net worth clients should be our new value proposition, but can only be accomplished by way of predictability, certainty, transparency and progressive reforms. Done right The Bahamas can be the Monaco of the Caribbean, the Monaco to the Latin American billionaires, a growing financial center with a real value proposition to offer. A value proposition based on substance, not form. A value proposition that attracts clients we want, their assets, an investment in our country. I cannot emphasize enough the significance to The Bahamas and the industry of these reforms. They could literally be the lifeline to our industry, our middle class, to the economic stability of the country.
In the same way that huge concessions are given to the tourism industry and hotel developments, we must also provide support to the financial services sector. We must see residency and immigration as an opportunity to do provide the incentives that are critical for the continued growth and development of the financial service sector. We are not talking about citizenship.
Expanded Structuring Options for Tax Declared Funds – An interesting development that is underway, and in part it is due to the forthcoming global exchange of financial information, is that many of the countries we look to attract clients from, especially in Latin America, have, or are looking to put in place am amnesty for its citizens who have un taxed funds abroad. In these instances, it is an opportunity for us in The Bahamas to understand their tax systems and develop products that can be used in proper tax planning.
We should replicate our experience in Brazil, where we mastered the fund for legitimate tax planning, in countries such as Chile, Mexico, Argentina, Peru where there are either amnesty programs underway or anticipated to happen. By providing legitimate tax mitigation structures, and being flexible and attentive in doing so, we can demonstrate our value proposition to a greater marketplace and attract good, legitimate structuring business to the jurisdiction. We should act now on this as many of these programs are underway. We should seek out legal opinions on effective cross border structuring and initiate focused marketing tours in these respective jurisdictions. We must demonstrate a value proposition to new markets to attract their business.
Institutional Business Friendly – In order to expand the scope of our financial services industry, and provide greater opportunities for Bahamians to participate, and give options for those Bahamians working abroad to come home, we have to reshape our industry and our value proposition to be more attractive to commercial and institutional business. This will also contribute greatly to the preservation of our correspondent banking relationships and bring stability in an area that is much needed. There are a few distinct strategies to accomplish this.
The first is underway and we have to be focused on ensuring it is completed and in place as quickly as possible. The Securities Commission of The Bahamas has started a project of re-writing and reforming the Investment Funds Act. This is an important undertaking. We as a jurisdiction in the context of investment funds have not attracted much institutional fund work; there are not many hedge funds or mutual funds in The Bahamas. Most of our activity has been on the private wealth side. This is in part because of our legislative regime, and in part because we have a perception issue.
It is important that the new investment Funds Act is drafted in an institutionally friendly manner, and then aggressive promotions are undertaken to attract the business. Institutional business is high dollar, high premium business. It will attract large movements of currency and transactions, elements that are attractive to both our domestic banking sector, and the correspondent-banking sector.
Another strategy to broaden the industry and attract institutional business is to create the framework for commercial and trade finance. We should be undertaking international commercial banking, and we should create a commercial finance campus with designated concessions offered, much like the economic zones in the Cayman Islands. We can create a commercial finance economic zone in Freeport and attract the major commercial banking institutions. This would bring a premium industry to Freeport, broaden the scope of financial services in The Bahamas, and attract high currency transactions. Adding an institutional and commercial element to our industry is imperative to growth.
Financial Services Conclusion – We are under tremendous strain, this is true. Some see no way out. I DO, HOWEVER, see a way out, not just out but a path to growth and prosperity. This path requires immediate attention and dedication BY ALL STAKEHOLDERS, progressive policy reforms, predictable and transparent initiatives and ultimately a business-friendly operating environment. We have heard how we watch Singapore, Malta, Mauritius and Monaco mimic us then pass us by. It is time to be focused and immediate, it is time to be organized and transparent, it is time to be committed to reform, it is time to pass them by and create an industry with value added features that make us second to none.
Referendum
Before concluding I want to speak briefly on the recent referendum. I am very disappointed in the results, in the way our people allowed phobias to complicate the issue. The inequalities on the transmission of citizenship are astonishing, and as a country, we are not in good company in this regard when compared to other countries around the world. I fear that we as a country and a people still may not have matured enough to make decisions in isolation for the betterment of the country, to reduce discrimination in the Bahamas. This was a matter of citizenship, nothing else.
Maybe we should look to reform the referendum process in the Bahamas. Maybe we should be transparent and predictable in constitutional referendum. For example, maybe we should have one question on the ballot every 6 months and therefore addressed in isolation, preventing confusion on one jeopardizing all logical reforms. I fear we will not have the political will, regardless of administration, to bring this matter to the people again, denying generations the equal rights they deserve. Maybe we just have to mature as a country and a people. I would like to read an excerpt from an Opinion Editorial that was in The Nassau Guardian on June 8, 2016 entitle “The challenge for a New Generation.” READ EXCERPT
Elizabeth
I want to conclude by thanking and expressing how grateful I am to having represented the constituency of Elizabeth during this term. By the time election comes, I will have represented Elizabeth for 7 years. In those 7 years I have done everything to try to provide opportunity, exposure and education to the constituents of Elizabeth while investing in the community through capital improvement projects to make the constituency a better place to live.
I have witnessed constituents of Elizabeth who no one would give a chance attend my entrepreneurship programs, invest in their business, leverage their talent, and now are successful entrepreneurs employing others throughout the constituency. These are great success stories. Not every story is a success story, and sometimes we do everything we know to assist and empower our constituents and for whatever reason, or a combination of reasons, some out of the control of the constituent, they are not successful.
We continue to invest in our people; we continue to give our people opportunity, education and guidance. We don’t get frustrated, we develop patience and understanding, through concerted efforts we try to assist our constituents in any way we can. We as representatives are also looked to in order to facilitate employment for our constituents. This is a particular challenge, and any Member of Parliament will tell you, and the member for Fox Hill frequently makes this point, unemployment and job seeking is probable the single most vexing issue we face for our constituents.
This is a difficult process, Government can’t hire everyone, in fact, given that 70% of our expenditure as a Government goes to civil service compensation, and Government really isn’t in the position to hire. We continue to be committed to work hard to try to assist our constituents in this vexing issue.
I thank the constituents during this term to represent them and work with them in making the country, piece-by-piece, and person-by-person a better place. It truly is a difficult job, but a rewarding one when you see people genuinely advancing themselves through even our small efforts or input. We might not get everything we ask for, Elizabeth still waits on its promised Urban Renewal Center, we continue to advocate for improvements and opportunities. We represent our areas to ensure our constituency looks forward upward onward together.