Bahamas Requests Approved QI Status From IRS

Mandy Robinson, Tax-news.com, London

02 November 2000

The Bahamas government has crossed its fingers this week in the hope of securing approved status from the US Internal Revenue Service (IRS) under its new withholding tax regime which comes into operation from January 1 2001. The Minister of Finance Sir William Allen says that the Bankers Association of the Bahamas has submitted an application to the IRS and he confirms that 'a number of applications are likely to be considered this week, among them the Bahamas.'

Philip Galanis, a PLP Member of Parliament, has expressed concern that the Bahamas may lose some business investors if the country does not secure approved status - in a House of Assembly debate earlier this week he said: 'It puts us at tremendous risk to lose business and much of that business will not come back.'

Approved status for the Bahamas enables financial institutions in the jurisdiction to apply for Qualified Intermediary status under which they can avoid imposing 30% withholding tax on US source income for properly documented clients, or can deduct reduced rates under tax treaties applying in particular cases. They will also not have to identify their non-US clients to the IRS. Financial institutions in offshore financial centres which are not approved by the IRS will be obliged to identify all their clients to the IRS or will have to charge (or be charged) 30% withholding tax regardless.

If granted approved status the Bahamas will be in good company - offshore jurisdictions already approved by the IRS include Barbados, Bermuda, Gibraltar, Guernsey, Switzerland, Luxembourg, Jersey, Isle of Man and Ireland.

It is Mr Galanis' opinion that these tax havens will have a competitive edge over Bermuda if it does not gain approval. He said: 'It is my understanding that those institutions that are unable to obtain qualified intermediary status are likely to see a loss of business from our jurisdiction to those jurisdictions that do qualify.'

In response to Mr Galanis' fears, Sir William Allen said: 'Of course all that can be done has been done in the sense that the application has been completed and submitted, and the Bahamas government has supported that application by making available to the IRS the actions that we are taking in relation to the FATF which we understand could be helpful in the consideration.'

In the debate Mr Galanis also questioned the proposed implementation of the Financial Intelligence Unit Act 2000. He asked why 'the government of the Commonwealth of the Bahamas has indicated that its FIU is operational and is receiving suspicious activity reports from financial institutions' when the government is only now establishing the Unit.

But Sir William confirmed that the government has already put the intelligence unit in place. He explained: 'very few countries even today establish the FIU by legislation ... there are many of them in the process of doing it now but they all have the equivalent of FIU's which operated under agencies then existing and we did the same thing but that is now unacceptable.'

Mr Galanis criticised the bill saying that it contains no provisions to prevent "fishing trips" or "witchhunts", neither are there any checks placed upon the powers of the FIU and the Minister in charge of the Unit. He argued that it awards too much power to the politicians and information collected by the FIU would be used for investigations into money laundering crimes but not for fiscal matters: 'We are opening a can of worms, a Pandora's box,' he said.

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