The Big Idea

The Bahamas | Corporate tax debate

| March 1, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Fiscal challenges in the Bahamas have finally prompted debate about tax reform. This isn’t easy for a tax jurisdiction like the Bahamas. There aren’t many other options given low budget flexibility, a mature economic recovery and debt running around 80% of GDP. The latest review from the International Monetary Fund included explicit recommendations for tax reform, including an income tax on international companies. Current proposals still fall short on reaching fiscal targets, but any tax reform is welcome if it reduces a structural deficit running around 4% of GDP. The country’s proactive approach to tax reform suggests a stronger and more realistic commitment to fiscal consolidation that should anchor expectations for good carry returns this year.

The Bahamas still has not released all of the the mid-year budget data, but the budget statement shows a mid-year deficit of $260 million that far exceeds the $131 million full year FY2023/24 deficit target. Projected revenue only comes in at 39% of the budget. The mid-year report cites potential improvement with adoption of the cruise departure tax and the Business License Act in 2024, which would raise revenues in the second half of the fiscal year. However, most of the revenue effort depends on reducing tax evasion on maritime, property taxes and VAT through broader technical automation and administrative oversight. Spending seems quite rigid with higher debt service and a near full convergence of all the other categories back toward 2019 levels.

The 2% year-over-year increase in spending compared to 3% year-over-year for revenues implies only a gradual reduction in the headline deficit. The fiscal deficit shows a slight improvement in the first half compared to the same period last year. But it is not what’s necessary to reduce a 3.7%-of-GDP 12-month rolling deficit close to the 0.9%-of-GDP target for year end. The spending at 24% of GDP in 2023 is not too far above the 22.4% of GDP FY2023/24 target; however, revenues at 20.6% of GDP in 2023 are still far below the 25% target. This requires more a more activist approach.

The introduction of a 15% corporate tax on multinationals not only seeks to comply with OECD regulatory tax framework but also would provide critical revenues at $140 million a year. The mid-year review doesn’t rule out a universal corporate income tax that includes domestic companies above a certain threshold. The projected revenues of 1%-of-GDP on multinationals would still fall short and may require a broadening to domestic corporations. The IMF projects that additional revenues of 3.7% of GDP are necessary to accommodate additional social and capital spending while also eliminating the fiscal deficit.  The goal is to draft legislation in May 2024 and introduce to it the legislature for the next budget of FY2024/25.

The target deviation would require a higher funding program this year. However, the low gross funding needs—fiscal deficit of $400 million to $500 million versus $130 million—suggests still low refinancing risks. The mid-year budget statement confirms higher than anticipated financing from the domestic debt markets. Interestingly, the $500 million IDB backed issuance last month was not the source for the $300 million repayment of the Eurobond amortization last month.  There is also another $200 million loan tranche from the IDB that could be leveraged for another similar transaction.  The financing mix has been a combination of external sources from multilaterals and international banks as well as the high reliance on domestic markets. This should allow for a muddling-through scenario awaiting the next phase of fiscal adjustment and follow-through on tax reform.

Siobhan Morden
siobhan.morden@santander.us
1 (212) 692-2539

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