Millions of holidaymakers flock to the Bahamas each year, drawn to the allure of the nation’s sun, sand and sea.
The tiny archipelago — made up of 700 islands and cays about 97 kilometers off the coast of Florida — is also home to many rich expatriates, offshore banks and multinational companies. The islands have a rich history: They were populated by the indigenous Lucayans when Columbus first made landfall in the Americas in 1492, and became a haven for pirates in the 17th century. A former British colony, the Bahamas achieved independence in 1973 but remains a member of the Commonwealth.
Although a small-island developing state, the Bahamas is a high-income country with a GDP per capita of $31,458, according to the World Bank. Tourism, the country’s golden goose, accounts for more than 50% of the nation’s GDP and employs more than half of the population.
However, recent events have shown just how vulnerable the country’s top industry is to external shocks. The Covid-19 pandemic brought tourism to a virtual standstill in 2020, and with it came mass layoffs and an increase in people seeking government assistance. The decline was short lived however; the economy began to rebound in 2021 thanks to eased travel restrictions.
The Bahamas is also a major offshore center; financial services is the second pillar of the Bahamian economy, bringing in 10% to 15% of the nation’s GDP. More than 200 licensed banks and trust companies operate in the Bahamas, offering clients private banking, trusts, fund administration and other services.
Hubert Edwards, head of the Economic Development Committee for the Bahamas-based think tank Organization for Responsible Governance, says the Bahamas’ attractiveness to foreign investors is the result of deliberate policies.
“The Bahamas has been very deliberate and intentional in positioning itself as an investor-friendly jurisdiction over the years,” Edwards says.
He notes that the practice of offering considerable concessions and more tax breaks to foreign investors has long rankled Bahamian entrepreneurs. Some have complained about feeling like second-class citizens in their own country while successive administrations rolled out the proverbial red carpet for foreign investors.
But the impact of foreign investment on the economy cannot be denied. In the 1990s, South African hotel magnate Sol Kerzner transformed a languishing resort property on Paradise Island into his company’s flagship Atlantis brand. The project came at just the right time: At the start of the decade, the Bahamas was facing economic problems due to a U.S. recession and reduced tourists arrivals. In 1992, unemployment was over 14%. By the end of the decade, unemployment had fallen to 7.8% due in part to major investments in tourism.
The Atlantis resort opened its doors in December 1998 and with more than a billion dollars invested into the property it quickly became a world-class destination. The resort is also the Bahamas’ largest private sector employer, with around 7,000 workers on staff. Other notable foreign investments include the multibillion-dollar Baha Mar resort in New Providence, which opened in 2017 and employs about 5,000 people.
Several factors make the Bahamas an appealing jurisdiction: its proximity to the United States, low-tax environment, stable government, considerable business concessions to foreign investors and a currency that is pegged to the U.S. dollar.
The country does not have income tax, capital gains tax or inheritance tax. Companies must pay a nominal yearly business license fee to operate and make monthly National Insurance contributions for employees. The government gets the lion’s share of its revenue from customs duties on imports and a 10% value added tax on most goods and services.
Economic design
After World War II, Bahamian politician Stafford Sands, a controversial figure known as the architect of the modern Bahamian economy, devised a tourism strategy that marketed the Bahamas as a year-round vacation spot. Before this, the country’s tourism product was constrained to a three- to four-month season that catered mainly to wealthy travelers.
“We in the islands are poor in most natural resources,” Sands said in a 1956 Miami Herald article. “We have no oil or minerals, no rich agricultural lands producing coffee or sugar, and by the standards of many of the overpopulated islands of the Caribbean to the south of us, no surplus manpower. We do, however, have one inexhaustible natural resource of inestimable value: our superb and matchless climate.”
Over the ensuing decades, the Bahamas was able to leverage its beauty and climate to attract scores of tourists and foreign direct investment (FDI). While the money pours in, there is also concern about detrimental environmental effects caused by prosperity. In 2019, Carnival Cruise Lines was ordered by a US court to pay $20 million in fines after admitting to dumping plastic and other waste in Bahamian waters in violation of a previous probation order. Environmentalists have also raised the alarm about damage to the sea bed and marine life due to dredging for large-scale resorts.
Several laws were enacted during the 1950s and 1960s, and remain on the law books today, which give foreign investors steep concessions to do business in the Bahamas. They include the Hotels Encouragement Act, which allows investors to import construction materials, furnishings and fixtures for hotel development duty-free and exempts hotel and resort owners from paying property tax for the first 20 years of their operations.
The 1955 Hawksbill Creek Agreement, signed between American financier Wallace Groves and the country’s colonial government, created a free-trade zone on the island of Grand Bahama. This allows for businesses operating in a designated area to enjoy duty and tax concessions until 2054. This agreement and corresponding legislation — which has gone through several amendments — transformed Grand Bahama from a poverty-struck island to the second largest economy in the Bahamas.
According to a Central Bank research paper, “a construction boom” was sparked in the two decades following 1949, mostly due to the country’s lack of income taxes.
“By the mid-1960s, there were over 40 hotels and residential clubs — 32 of which had been constructed since 1949 — moreover, there were 43 airfields throughout the Bahamas, and Nassau alone accounted for air traffic of up to 65 flights daily,” A. Gabriella Fraser wrote. The country now boasts more than 300 hotels, and visitor arrivals are soaring after a pandemic slump. Bahamian officials expect to welcome 8 million visitors to the country by the end of 2023, which will break 2019’s record of 7.2 million tourists.
While the government was growing the tourism industry, another sector had emerged — financial services. The Banks and Trust Companies Regulations Act was passed in 1965 to regulate the emerging industry.
In 1946, there was only one commercial bank in the country. By 1967, Fraser wrote, that number had grown to around 70 banks and trust companies, “which were governed by strict secrecy policies, a major attraction to the foreign investor.” Today, there are more than 200 of these entities in operation.
According to James Smith, a former Finance Minister and governor of the Central Bank, the country’s offshore sector has come under significant pressure from the Organization for Economic Cooperation and Development (OECD) and the European Union, prompting the Bahamas to make adjustments to its financial services laws that have caused the area to shrink.
The sector has dwindled sharply since the 1990s, he adds. “The amount of people employed has shrunk, and the amount of institutions that are being licensed — in the 1990s, we had about maybe 600 to 700 institutions — it’s now down to about 230,” Smith adds.
The banking sector employs an estimated 3,600 people, and Central Bank figures show that number has steadily declined since 2018. But the Bahamas has one of the world’s largest ship registries, with more than 1,500 vessels carrying its flag including tankers, cargo ships, cruise ships and yachts.
Tax haven
What initially made the Bahamas’ offshore banking sector successful also led to stumbling blocks along the way. The country has gained the reputation of being a tax haven that facilitates the hiding of assets belonging to the wealthy elite.
In 2000, the Bahamas was blacklisted by the Financial Action Task Force on the basis that it was one of several countries that was “uncooperative” in the global fight against money laundering. At the time, the Bahamas called the label “unfair,” noting it had introduced anti-money-laundering laws in 1996.
Still, the country quickly got to work to enact a suite of laws meant to strengthen the financial services regulatory regime. The following year, the Bahamas was removed from the blacklist, along with the Cayman Islands, Liechtenstein and Panama.
But the tax haven label has been hard to shake despite law and policy changes meant to comply with changing international regulations on banking secrecy laws. Since the initial blacklisting in 2000, the Bahamas has repeatedly been targeted by international regulators over perceived gaps in anti-money laundering and terrorist financing laws and being seen as a nation that facilitates tax avoidance.
Last year, the Bahamas was added to an E.U. blacklist in part due to a deficient economic substance reporting system. In an effort to meet new global tax standards, the Bahamas passed the Commercial Entities (Substance Requirements) Act in 2018. This law requires certain companies to verify that they are carrying out legitimate operations and are not simply dodging taxes in their home jurisdictions via yearly electronic filings. Bahamian officials conceded that the framework set up to receive these filings could not provide the in-depth analysis required by the E.U.
Attorney General and Financial Services Minister Ryan Pinder said the government expects to be removed from the E.U.’s blacklist by the end of 2023, with a new reporting system and legislative changes meant to address deficiencies on the way.
At a G77 nations + China forum in Havana in September 2023, Bahamian Prime Minister Philip Davis outlined the consequences the country could face if it is not taken off the E.U.’s blacklist this year, explaining that the Bahamas’ insurance coverage by European reinsurers could be reduced by 25% in the event of a catastrophic hurricane.
“The climate crisis is largely created by industrialized countries, many in the global north,” Davis said. “The effect of the climate crisis is felt disproportionately by small developing countries like the Bahamas. This is exacerbated by the arbitrary blacklisting of these same vulnerable countries such as the Bahamas from the very same countries that are responsible for the climate crisis.
“For example, when it comes to insurance, these blacklists result in any remittances from European reinsurers on claims being automatically reduced by at least 25%. A significant percentage of the monies owed is punitively retained by the E.U. We are thus poorer and less able to rebuild because of the effects of the climate crisis.”
Davis called on the G77 nations to support a movement before the United Nations for the U.N. to replace the OECD and E.U. as the adjudicator of global tax policy.
A new tax
The country’s low-tax environment has been a prime economic driver for decades.
But the Bahamas is poised to shake up the status quo: It is considering implementing a corporate income tax. This comes after the Bahamian government and more than 130 other jurisdictions signed on to a G-20/OECD proposal in July 2021 to implement a 15% global minimum corporate income tax for companies with revenue over €750 million by 2024.
This year, the Bahamian government released a green paper revealing the corporate tax proposals. The document outlines scenarios where multinational corporations earning more than €750 million would be taxed at 15% while other companies would continue to operate under the status quo of yearly business license fees.
Other proposals include a corporate income tax being applied to all companies in the Bahamas at different rates. Michael Halkitis, minister of economic affairs, said in March that the country could gain $140 million a year in additional revenue if the tax is implemented. But Smith thinks the country should drag its heels in implementing a corporate income tax and does not agree that it will drive up government revenue in any meaningful way.
“We have a longstanding policy on no income taxes, no corporate taxes,” Smith says. “I don’t think we should move away from that at this stage, that served us well. I don’t see how it’s going to increase substantially any revenue. All it will do is actually stop corporations from coming here because of the regime and it would (scare off) some corporations who are already here.”
The Bahamas has also weathered recent economic headwinds with remarkable strength. In 2019, monster storm Hurricane Dorian barrelled over two islands in the archipelago, destroying infrastructure and killing 74 people. A few months later, the Covid-19 pandemic swept through the world, bringing global tourism to a screeching halt. Tens of thousands of people lost their jobs, the public health system was strained, and government debt ballooned to fund unemployment and food assistance. The back-to-back crises wielded a $13.1 billion blow to the Bahamian economy, according to a 2022 joint report by the Inter-American Development Bank and U.N. Economic Commission for Latin America and the Caribbean.
Tourism began to show signs of a recovery in 2021, thanks to pent-up travel demand. In May 2023, Central Bank of the Bahamas Governor John Rolle said the country’s stopover visitor numbers had rebounded to 97% of pre-pandemic levels in the first quarter of 2023, and the Bahamas was on track for 4% economic growth this year.
Unemployment — estimated to be as high as 20% during the peak of the pandemic — has fallen to 8.8%, which is lower than the pre–COVID-19 figure of 9.5% in 2019.
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