Trevor Carmichael, Chancery Chambers, considers how Barbados has continued to build on its reputation and how the jurisdiction has managed this through its robust network of Tax Treaties.
Barbados has experienced an enviable record as a tax treaty jurisdiction which offers scope for legitimate international tax planning, and secondly, as a venue for the safe deployment of internationally mobile capital. Its double tax treaties offer an array of benefits, which provide tax planning opportunities to investors who are seeking to minimise their global tax exposure. 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 which 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 Barbados 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.
The presence of its treaties reflects a consistently expanding internationalism. For the yearly contribution of Barbados' international business sector now exceeds US$130 million, and represents approximately 59 per cent of all corporate taxes. It has accounted for approximately 12 per cent of total government revenues since the year 2005. In the past twelve months, international business companies and exempt insurance companies in particular, continue to manifest significant increases; and large insurance and global reinsurance structures continue to establish and relocate their centres of operations in Barbados. Indeed, international business companies have shown significant increases over both periods of the liquidity crisis and the international recession. From licence fees alone, Barbados now collects yearly in excess of twelve million Barbados dollars. It is clearly accelerating benefits from an international sector, which may safely be seen to be outperforming in a recessionary environment. Indeed, Barbados was accorded an appropriate accolade when the OECD in its report “A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard” recognised it as the only independent Caribbean nation which had substantially implemented the internationally agreed tax standard. Furthermore, Barbados has now long met the OECD requirements for the exchange of information on request in all tax matters. It has been recognised in the Global Competitive Report with an overall competitiveness rating as third in Latin America/The Caribbean, and 44th worldwide; its soundness of banks as fourth in Latin America/Caribbean and its availability of latest technologies as second in Latin America/Caribbean, and 29th worldwide.
In addition, Barbados has been given international endorsement by agencies such as United Nations Development Program, which ranked it as fourth worldwide out of 177 countries in terms of literacy; and the Human Development Report has consistently ranked it as first in Latin America and the Caribbean and thirty-seventh worldwide out of 179 countries in its human development index. Transparency International in its corruption perceptions index has ranked Barbados as second in Latin America/Caribbean and 22nd worldwide out of 180 countries. These solid institution building and retaining features have enured to the benefit of Barbados in the recessionary environment, and have allowed its planners to continue to explore and carve out new niche areas along with strengthening its existing foundations. They have served as a buttress to the expanding tax treaty network.
THE UK/BARBADOS TREATY
A new UK/Barbados Double Taxation Treaty was signed on April 26, 2012 pending ratification. As a new treaty, it replaced the old one and there are a number of useful new provisions. Withholding tax rate on dividends is now zero, except where the dividend is paid out of income (including gains) derived directly or indirectly from immovable property, primarily real estate. In such a case, the withholding tax rate is 15 per cent, a rate which also applies to mutual funds and can include other entities which distribute their income annually. The withholding tax rate on interest payment and royalties is zero; and pensions also have a withholding tax rate of zero. The Exchange of Information Article has been updated and has taken away a criticism which had emerged from Phase 1 Peer Review protocol.
International Business Companies, International Societies with Restricted Liability, Exempt Insurance Companies and entities under the International Financial Services Act are not entitled to any "benefits" such as reduced withholding tax under the treaty. There is however no definition of the word benefit in Article 22.
TAX TREATY BENEFITS
Barbados’ tax 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. Many of its treaties also contain 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.
A number of the 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. 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. Increasingly and steadily, Barbados is being used for legitimate Cuban investment.
Barbados' treaty with Mexico contains areas replete with great planning opportunities using withholding tax and dividend provisions. It also contains the special provision which 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 and it may be used carefully and creatively.
AN EXPANDED REACH
Barbados continues to be recognised as an important jurisdiction for the manufacture of specialty products which require an excellent infrastructure with first world air and seaport facilities together with skilled and well educated labour, and a stable industrial relations climate. Such manufacture includes the specialty areas of: agro-processing, electronic components and sub-assemblies, high fashion apparel, jewellery, leather items, medical supplies, optical devices, pharmaceuticals, printing and publishing. Recently, there has been an increased interest in the setting up of such facilities which has positive implications for increased employment within the jurisdiction. Furthermore, Barbados has sharpened its efforts to become the premier location for information and communication technologies (ICT investments). The facilitating environment has been improved with training centres, for medical transcriptionists, and training grants which subsidize training of workers. Such ICT enterprises may be established under the International Business Companies legislation or the International Society with Restricted Liability Act. The novel uses of ICT technology which are increasingly used in the jurisdiction include: call centre computer aid design (CAD), customer and technical support, credit card applications, data entry and fulfilment, database management, health insurance claims processing, and health information management, optical character recognition (OCR) applications, software development, transaction processing, and web application.
Within recent years Barbados has also embarked on a carefully orchestrated policy which seeks to use the energy, talents and experience of its citizens who now live overseas, some of whom have also returned to reassure residence. This Barbadian Diaspora, as is the case of so many other jurisdictions, has for a long time, made significant economic development contributions to the homeland either by way of financial remittances to family members or the plethora of other forms of contributions. As far back as 1991 a Charter for Returning Nationals had been established and provided a set of concessions for Barbadians, to resettle in Barbados on retirement. The new policy is an attempt to clarify the obstacles which have not allowed the Charter to be optimally effective and transparent.
This sector's potential for contribution, if carefully planned, spans a wide spectrum including the important and superficially less obvious areas of philanthropy and the investment in green technologies. It has the potential to play a role in the transfer of technologies through the skills acquired overseas; and it can contribute to the tourism industry and particularly the heritage tourism niche which Barbados in the spirit of old Europe seeks to vibrantly promote. The scope for joint ventures with the "non-diaspora" also presents room for creative joint ventures. The important medical tourism area represents an important joint venture possibility. This area while "looking in from the outside" has the advantage, if well planned and conducted, of not only adding significant foreign exchange to the local economy, but also of transforming and modernizing the local health delivery systems. In August of 2012, Barbados hosted an important Diaspora linked Conference which brought together elements of culture, finance and industry, all meeting and sharing ideas in a collective way geared towards purpose and productivity. It remains a beacon to the future.
Charles DeGaulle some years ago indicated:
"Treaties are like roses and young girls,
They last while they last".
Tax treaties represent much of DeGaulle's sentiments and even more; for they do indeed also last while they bloom. The Barbados treaty network has blossomed like its gardenias, hibiscus and frangipani, all of which delight with their fragrance and enthral with their radiance. Barbados is indeed more than its treaties.
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.