Dr Trevor Carmichael examines how Barbados goes into 2012 with a stable economy guided by a vibrant and expanding treaty network and appropriate regulatory regime.
Barbados' international business development has been premised on a policy of pragmatism, which has mirrored its overall global relationship since its 15th century settlement. Its business product mix is characterised by, on the one hand, some international insurance companies that pay a licence fee and zero tax, and on the other, international business companies that pay a low corporation tax, albeit not infrequently a yearly sum, which in some cases is in the million dollar plus category. This dualism highlights and indeed cements the jurisdiction’s pragmatism and flows in to its overall approach to financial planning and economic development modelling.
In 2011 three substantial events occurred which in turn carry the potential to accelerate the consistent success of the Barbadian financial services industry and indeed to add further depth to the jurisdiction in its quest to remain a welcoming and available home for internationally mobile capital.
Treaties and More Treaties
Barbados' ongoing tax treaty expansion has sought to build on the kernel of its historic success in financial management and skilful manoeuvres in the international market place. As the global financial services industry has dramatically spread to a wider net of jurisdictions in the latter half of the 20th century, Barbados has accelerated its own product enhancement, particularly through the vehicle of vigorous tax treaty expansion and protection.
Barbados double tax treaties offer an array of benefits, which provide tax planning opportunities to investors who are seeking to minimise their global tax exposures. Most of the treaties allow for reduced withholding tax rates on dividends, interest and royalties. Many of the treaties also contain tax sparing provisions. In this context, some allow foreign companies with subsidiaries that conduct business in Barbados under the Fiscal Incentive Act or the Tourism Development
Act and consequently pay no corporation tax, to be given tax credit for the Barbados taxes which would have been paid had the Barbados subsidiary not operated under the abovementioned incentive legislation.
Treaty development has therefore been a consistent feature of the Barbadian approach to international business. Accordingly, new treaties are not only negotiated and signed, but existing treaties will from time to time undergo amendment as the exigencies of international financial activity as well as respective domestic policies of treaty partners call for mutual fiscal adjustments. In 2011 one such adjustment and one new treaty both augur propitiously for a bright Barbadian future.
Canada Barbados Treaty Revisited
On 8 November 8 2011 Canada and Barbados signed a Protocol, which amended their long standing Double Taxation Agreement that came into force on December 22, 1980. Since the treaty's introduction many changes in international taxation have taken place and the amending protocol of 2011 is therefore consistent with international best practice.
When the Protocol is implemented by Canada and Barbados, the main changes to the existing Treaty will result in the introduction of a modernised exchange of information article and an expansion of the list of persons currently covered by the limitation of benefit provision in Article XXX(3). Barbados was held under scrutiny by the Global Forum on Transparency in regard to its double tax treaties, on the basis of presumed outdated exchange of information provisions. The protocol therefore deletes Articles XXVIII and replaces it with new provisions.
As with the new Double Tax Treaties and Tax Information Exchange Agreements (TIEAs), the scope is broadened to include all domestic taxes of every kind and description imposed by the Contracting States.
Article XXX(3), which is the Limitation on Benefits Provision as it currently reads in the current treaty, only precludes its applicability to companies which are entitled to special benefits under the Barbados International Business Companies Act (IBCs) or to companies entitled to any special tax benefit under any similar law enacted by Barbados. The expansion of the provision to a broader class of persons and entities is significant, especially for Barbados trusts.
So too are the many discrete changes to the Treaty, which when adopted will result in the jurisdiction continuing to be a more attractive destination for Canadian outbound structures than other low or no tax jurisdictions which have recently entered into Tax Information Exchange Agreements with Canada.
Significant changes are found in the introduction of a new corporate dual resident tie-breaker rule in Article IV(3) of the Treaty and an important revision to the existing language of the Limitation on Benefits. The new provision provides that Articles VI to XXIV of the Treaty shall not apply to IBCs or any other entity described within that provision. Hence, IV (Residence) and XXVII (Mutual Agreement Procedure (‘MAP’) of the Treaty will apply to IBCs in circumstances where those companies would otherwise be considered residents of Barbados pursuant to Article VI(1). Hence, an IBC, which would otherwise be a resident of Barbados for purpose of Article IV(1) and is challenged by the Canada Revenue Agency (‘CRA’) as having its central management and control in Canada, and thus is a resident of Canada, would now have protection as a dual resident corporation of the benefits which flow from the new corporate dual resident tie-breaker rule.
A New Luxembourg Treaty
After the signing of a double tax treaty, the necessary ratification by respective governments is generally eagerly awaited, as professionals plan in patient expectation. The Double Tax Treaty between Luxembourg and Barbados has now been ratified and presents a useful regime for dividend distributions, with a zero per cent withholding tax rate on dividends distributed to a company (other than a partnership) which holds directly at least 10 per cent of the share capital of the distributing company for an uninterrupted period of 12 months prior to the decision to distribute dividends. In all other cases, a maximum withholding tax rate of 15 per cent is expected, which is the same as in Luxembourg's internal law.
The definition of ‘dividends’ under the treaty also includes income derived from silent partnership (‘le parts de bailleur de fonds’) as well as payments and interest on bonds, where, over and above the fixed rate of interest, a right of assignment is granted for supplementary interest varying according to the unretained earnings. However, interest and royalty payments are only taxable in the state of residence of the beneficial owner presenting a zero per cent withholding tax.
Furthermore, the treaty's definition of royalties includes the remuneration for the use of or the right to use industrial, commercial and scientific equipment. With respect to the elimination of double taxation, the treaty provides for Luxembourg the exemption with a progression model, except in the case of dividends and income earned by artistes and sports persons for which a tax credit for income which is already subject to tax in Barbados is expected.
Luxembourg therefore serves as a useful conduit for Barbadian investors who are seeking to invest in European assets. The treaty offers planning scope for Luxembourg-based investors who seek to invest in Barbados. As with any effective treaty, it offers balanced mutuality of benefits.
A New Regulatory Authority
The international liquidity crisis of 2008 and its accompanying recession further highlighted the already strident calls for increased regulation of the global financial services industry. These two global developments added a larger dimension to the canvas which hitherto had been painted by the self imposed arbiters of the quality of regulation in the so called ‘Offshore Financial Centres’. The OECD, and the Financial Stability Form were forced to recognise and accept that the need for sound regulation was as urgent in the comfort of their developed economy jurisdictions as in the often chastised offshore financial centres.
Furthermore, over the past three decades, the role of the regulator has changed by way of ongoing responses to the stresses within the global financial architecture. Essentially, regulation seeks to promote efficiency, integrity and transparency in the market place so that investors are protected and financial stability assured. The global trend of a movement towards one regulator - or few regulators - within a jurisdiction has not escaped the attention of Barbados' decision markers.
Hence, after some deliberation and planning a new Financial Services Commission came in to operation on 1 April 1 2011. It has resulted in the reduction of the number of regulators undertaking supervisory roles for financial institutions from three to two. Consolidation has taken place in respect of all insurance companies and pension funds structures under the Mutual Funds Act, as well as the credit unions and securities market, since all are now subsumed under the Commission. The regulation of domestic and international banks, however, remains under the care and control of the historically very efficient Central Bank of Barbados.
The new regulatory thrust will be of immense benefit to the jurisdiction's financial system and climate, particularly in the area of domestic and international insurance. For although the regulation of international insurance remained safely conducted, experience with a few recent Caribbean wide insurance debacles served to show that despite all available good intentions the institutional structure of the department made it virtually impossible to withstand government entreaties. The present Commission therefore represents that third stranger of neutrality in a vortex of sometimes competing and coalescing forces.
Barbados goes into 2012 with a stable economy and society, buttressed by a vibrant and expanding treaty network and guided by the appropriate regulatory regime.
Sir Trevor Carmichael QC
Sir Trevor Carmichael, KA,LVO,QC. was born in Barbados and educated at Harrison College and the University of the West Indies, Mona, Jamaica. After pursuing post graduate studies in the United States, he was called to the United Kingdom Bar as a member of the Middle Temple in London and the Barbados Bar in December of 1977. He is a member of the International Bar Association, the Inter-American Bar Association and a Committee Member of the Inter-American Bar Foundation as well as an associate member of the Canadian Bar Association. He holds membership in the International Tax Planning Association, the International Fiscal Association and was one of the parties responsible for establishing a Barbados Chapter of the International Fiscal Association of which he is Charter President. He is the Barbados Country Chairman of the International Litigation Committee on Business Law of the International Bar Association and a former Deputy Secretary General of the International Bar Association. He is a Life Fellow of the Institute for Advanced Legal Studies in the United Kingdom, a Life Member of the Commonwealth Magistrates and Judges Association and a member of the International Law Association.