Continuous Recession Combat
Barbados has continued to fashion policies aimed at combating the global recession and which also seek to make its economy more resilient and sustainable. Globally, policy makers are recognising that the recession is not as short term as originally contemplated, and long range strategies are therefore necessary to propel both growth and development.
The performance of the Barbados economy within the first nine months of 2011 was encouraging, bearing in mind the overall global circumstances. Indeed the fiscal deficit for 2010/2011 was officially estimated at 8.7 per cent of GDP compared to 8.9 per cent of the previous year; and the unemployment rate for the first quarter of 2011 dropped marginally to 10 per cent compared to 10.5 per cent in the last quarter of the previous year. Furthermore, the economic analysis calls for a projected further relaxation in the unemployment rate, which to a large degree will be related to the tourism and construction sectors.
Tourism itself has manifested a growing resurgence after two years of stagnation, and in July 2011 Barbados experienced its highest number of visitor arrivals within the past 10 years. Barbados' tourism continues to also manifest increased diversification and arrivals from the United Kingdom continue to be buoyant with a 14 per cent increase in the first half of 2011 over the previous year's corresponding period. Additional airlift out of Europe has been manifested by way of increased visitors from Germany. The USA as Barbados' second tourism market has also increased its visitor share also as a result of additional airlift capacity to and from the south and central parts of the United States. Regional visitors from the Caribbean continue to increase their travel to Barbados. With an increase in cruise arrival of four per cent over the previous year, it may safely be asserted that Barbados’ vibrant tourist sector is proving resilient and outperforming in the recession.
The first half of the year has also experienced large amounts of foreign exchange capital inflows, estimated at circa US$160 million, fuelled by the sale of shares in the jurisdiction’s electric utility, which generated approximately US$94 million.
On the other hand, financing to tourism and private projects amounted to US$35 million, while real estate flows contributed around US$20 million. The jurisdiction would also have benefited albeit to a lesser degree, from capital flows strictly outside of the local exchange control regime and which involve international business companies and other corporate vehicles functioning with the international business sector. In this regard, the first half of the year has recorded an estimated four per cent increase in the number of international business companies which now stand at approximately 3,130.
Barbados as a low tax jurisdiction with a very vibrant international business sector, has over the years exercised good judgment in the handling of its non punitive exchange control regime. For while it does not apply to the international business sector, it needs to be carefully guided when dealing with a robust domestic banking sector, which has the flexibility of legally operating outside of the controls. To that end, the Central Bank has been careful in placing new guidelines regulating foreign exchange market activities. It has reduced the spreads between the buying and selling rates to the public; secondly, it has reduced the spreads between the buying and selling rates used by the Central Bank to execute transactions with Banks; and thirdly Banks must now surrender five per cent of all foreign exchange purchases to the Central Bank. The prudent leadership within the Central Bank of Barbados underscores a regulatory regime which is liberal yet also very mindful of the development objectives which are part and parcel of its raison d'être. It is truly not only the classic lender of last resort but also the ultimate defender of the jurisdictions' currency value.
The Ongoing Legacy – Tax Treaties
Tax Treaty Benefits
Barbados during the recession continues to build on the legacy of its vibrant international business sector, which is anchored in the complex array of its double tax treaties. Most of these treaties offer benefits which provide tax-planning opportunities to investors who are seeking to minimise their global tax exposure. Most of Barbados’ treaties allow for reduced withholding tax rates on dividends, interest and royalties. A case in point is Canadian domestic tax legislation, which provides that dividends paid by a Canadian resident company to a non-resident company are subject to Canadian withholding tax at a rate of 25 per cent. However, under the Barbados-Canada tax treaty, this rate is reduced to 15 per cent.
Many of its treaties also contain tax-sparing provisions. These allow for foreign companies with subsidiaries that conduct business in Barbados under the Fiscal Incentives Act or the Tourism Development Act and consequently pay no corporation tax to be given credit for the Barbados taxes that would have been paid had the Barbados subsidiary not operated under the above mentioned incentive legislation. The Barbados-UK double tax agreement contains such tax sparing provisions.
In addition, the interaction of the Permanent Establishment (PE) and Business Profits Articles of Barbados’ treaties offer protection to Barbadian resident companies from exposure to taxes on business profits earned in another treaty country. The treatment of capital gains is often important to international investors since, in some of Barbados’ treaties, the right to tax certain gains lies with the state where the seller is resident. Hence, in cases where the seller is resident in Barbados, and since Barbados does not impose tax on capital gains, no tax is therefore payable in either Barbados or in the other treaty country.
Limitation on Benefits Articles
A number of Barbados’ tax treaties also contain a limitation on benefits provision. Such a provision prohibits treaty benefits from being applied to offshore companies which benefit from a special tax regime or prevent non-residents of a treaty country from enjoying benefits of a treaty.
Barbados’ treaties with Canada, Norway, Sweden, Finland and the UK contain restrictive clauses denying the benefits of the treaty to special incentive companies, such as the international business companies (IBCs).
Although the provisions of the Barbados-Canada treaty do not apply to companies that are entitled to special tax benefits in Barbados, the Canadian domestic foreign affiliate rules permit these companies, once resident for tax purposes in Barbados, to utilise special tax benefits under Canada’s domestic tax legislation. As a result, such income, when repatriated to Canada, is not subject to tax in Canada.
The revised Limitation on Benefits Article of the renegotiated Barbados-US tax treaty excludes special incentive companies from benefiting from the treaty provisions applicable to dividends, interest and royalties. However, this treaty still has advantages for these companies, principally under the Business Profits Article. There are also benefits for individuals.
Barbados’ more recently concluded treaties, including the treaties with China and Cuba, do not prohibit the use of special incentive entities from obtaining treaty benefits. These treaties provide significant tax-planning opportunities to investors wishing to minimise their costs when repatriating income from their investment. The treaties with China and Cuba contain favourable provisions, which make Barbados an attractive jurisdiction through which investments into China and Cuba can be channelled.
Barbados – Mexico Tax Treaty
In April 2007 Barbados signed a historic tax treaty with Mexico which brought to fruition complex negotiations which began in October 2006. In addition to areas of great planning opportunity using withholding tax and dividend provisions, it contains a special provision that allows a resident of either contracting state to take a tax deduction, subject to any conditions provided under the income tax laws of that state, for donations to any organisation qualifying as a charitable institution under the income tax laws of the other contracting state. The relevant article allows the competent authorities to consult each other so as to agree on whether an organisation qualifies as a charitable institution under the laws of either Mexico or Barbados.
With the increasing global importance of philanthropy, this provision holds great possibilities for the charity sector in both jurisdictions. It may be used creatively. Barbados has recently overhauled its charitable legislation and hopes to build on its long standing philanthropic tradition at both the micro and macro levels. In this regard, it is in the process of setting up a Centre for Philanthropy as originally announced.
Towards a Sustainable Economy
More recently, efforts have been made to implement measurable elements of a sustainable development policy. A recent increase in the current allowance from BB$5,000 (US$2,500) to BB$10,000 (US$5,000) for Environmentally Approved Products has been introduced under the Income Tax Act for approved installation of renewable energy infrastructure in the case of individuals and BB$25,000 per year for registered small businesses.
Further, it is now possible to achieve a write-off of 150 per cent of costs associated with the conversion to alternate energy over a five-year period for businesses whose filings with the Inland Revenue Department and Value Added Tax Division and whose compliance with National Insurance and Land Tax are all up to date; or alternatively who have made arrangements to settle their arrears. Additionally, the introduction of a one-off ‘energy grant’ commencing October 1, 2011 up to a maximum of BB$5 (US$2.5) million will further enhance sustainability.
Yet another measure is the new rebate of up to BB$5,000 (US$2,500) to farmers who retrofit livestock housing structures with the use of solar energy. Equipment will be provided by government as a part of the Tractor Cultivation Scheme under the Ministry of Agriculture, Food, Fisheries and Water Resources for on-leading to farmers at a ‘pepper-corn’ rate inclusive of insurance of the equipment.
Barbados’ cultural arena is also receiving special developmental attention. After legislative enactment, the new Cultural Industries Bill 2011 will pave the way for the continued journey into balanced development as the legislation recognises the interplay at all levels of analysis between the cultural industries and national development. It sensibly designates approved cultural agencies and gives a wide definition to cultural projects ranging from film production to product design and the marketing and distribution of cultural goods and services. Indeed, it sets up a rich plethora of tax and duty free concessions thereby recognising that culture carries costs and culture also adds currency.
Barbados' ongoing efforts to rise to the challenges of the global recession have resulted in the emergence of direct and indirect responses. Buttressed by its consistent policies as a low tax jurisdiction with treaties, a new way is evolving from which one may already detect incremental economic growth as well as a developing self sustainability, which is subtle yet stable.
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.