International Financial Centres (IFCs) must comply with an ever-expanding alphabet soup of international rules developed to promote tax fairness and transparency. Non-compliance puts jurisdictions at the risk of certain blacklisting, reputational fallout, loss of business and, critically for small IFCs, macroeconomic repercussions. Navigating this regulatory landscape demands strategic planning, nimbleness and innovation despite resource constraints.
The G20/OECD Base Erosion and Profit Shifting (BEPS) Project is one of the most far-reaching global tax initiatives of modern times. It recognises that global tax rules have failed to keep apace with an increasingly integrated global economy, allowing multinational enterprises (MNEs) to avoid taxes by capitalising on mismatches in different jurisdictions’ tax rules in order to artificially shift profits to low or no-tax jurisdictions. The 15-point BEPS Action Plan seeks to ensure that taxation is aligned with profit-making economic activity and value creation in order to reduce tax avoidance and protect countries’ tax bases.
In 2017, several of Barbados’ preferential tax regimes were identified by the OECD Forum on Harmful Tax Practices (FHTP) as “potentially harmful”. By January 2019, Barbados had delivered on its commitment to abolish or amend these problematic regimes. Barbados’ policy response to the BEPS challenge is instructive as it has achieved compliance with BEPS Action 5 while in the midst of an IMF-sanctioned economic recovery and restructuring programme. Although the legislative changes only took effect from January 1, 2019, and are still in their infancy, the Barbados policy response could serve as a road map for other IFCs in navigating a post-BEPS world.
Joining the Inclusive Framework on BEPS
In 2017, Barbados became the 101st jurisdiction[i] worldwide to sign on to the Inclusive Framework on BEPs which was established in January 2016 to promote the involvement of non-OECD members, like Barbados, in the BEPS initiative. Barbados’ international business sector is second only to tourism as the country’s most important export sector.[ii] The BEPS initiative’s focus on aligning taxation with value creation and substance-based activity is a ‘win-win’ for ‘Brand Barbados’ which has always prioritised the attraction of businesses which generate substance and value in our economy. Joining the Inclusive Framework was a strategic move to ensure Barbados had a voice on BEPS implementation and future rule-making.
The Barbados’ regimes found to be “potentially harmful’ under Action 5 on Harmful Tax Practices, one of the four BEPS minimum standards, included, but were not limited to, the regimes for International Business Companies (IBCs), International Societies with Restricted Liability (ISRLs), and Exempt Insurance entities.
These regimes were barred from conducting business with domestic residents; and the low tax rates they enjoyed (compared to the much higher tax rates paid by domestic companies) led to charges of ‘ring fencing’ - where a preferential tax regime is isolated through legal and administrative barriers from the domestic economy.
The current Government of Barbados (GOB), which came into power in May 2018, was faced with a dual dilemma. First, the GOB had committed to amending or repealing those regimes to ensure their BEPS-compliance by December 31, 2018. Second, this reform had to be done in mere months in the context where much of the Government’s policy space was monopolised by stabilising and restructuring the Barbadian economy.[iii]
After extensive consultations with the private sector (including the BEPS Taskforce) and a comprehensive review of Barbados’ international business legislation, the GOB decided on its course of action. The International Business Companies Act was repealed, and the Societies with Restricted Liability Act was amended to remove provisions relating to ISRLs. No new IBC or ISRL licenses have been issued after December 31, 2018. This took care of the ringfencing problem as now all companies and SRLs may serve both domestic and international clientele.
Entities, except intellectual property (IP) entities which were licensed before October 17, 2018 will be grandfathered in and continue to enjoy current benefits until June 20, 2021. IBCs and ISRLs which were not grandfathered have, by operation of law, become Regular Barbadian Companies (RBCs) from January 1, 2019. The foreign currency earning credit was abolished. Entities with 100% foreign currency earnings are eligible for a foreign currency permit allowing them to enjoy the benefits they previously enjoyed. Barbados also repealed the Exempt Insurance Act so that all insurance companies, including captives, were brought under the Insurance Act under three new classes. The Financial Services Act was repealed, while the Financial Institutions Act was amended to create four licensing categories for institutions which generate 100% foreign currency.
A major dilemma was what tax rate should be adopted now that there would be no distinction between IBCs and RBCs. IBCs had benefited from a very low tax rate while RBCs, at that time, could be taxed at a rate as high as 30 per cent.[iv] Imposing a tax rate that was too high would scare away existing and potential investors, while one that was too low would affect Government’s budgetary coffers. After input from industry stakeholders, Barbados became one of the first countries to converge its domestic and international corporate tax rates downwards. For fiscal year 2019 onward, the assessable income of all corporations in Barbados will be taxed on a regressive sliding scale of between 1 - 5.5 per cent. Captives will pay a license fee and be zero taxed, while the two other classes of insurance will be taxed at a rate of 2 per cent.
This tax reform was, of course, not without sacrifice for Barbados whose economic recovery requires a reduced fiscal deficit. On the flipside, the GOB’s bargain is that not only will the lower corporate tax rates increase Barbados’ competitiveness globally but that, more importantly, corporations domiciled in Barbados will parlay these windfalls into greater investment, research and development, and employment, which will have a stimulating impact on the economy.
The GOB saw the BEPS challenge as an opportunity to strategically reposition ‘Brand Barbados’. Faced with intensified political and economic pressure by their home tax authorities to show substance-based activities, prudent investors have become more discerning about the compliance level of the jurisdictions in which they invest. Barbados can now boast of being fully compliant with BEPS Action 5.
Investors are also taking into account other factors, such as a jurisdiction’s access to a well-educated and trainable labour force, economic and political stability, the availability of high-quality professional services firms, and good infrastructure. Barbados ticks these boxes and more.
The GOB’s entry into an agreement with the IMF shows the country’s commitment to returning to sound macroeconomic health. After suffering more than 20 successive downgrades by ratings agencies over the past 8 years, Barbados received its first two ratings upgrades (one by Standard & Poor’s in November 2018[v] and the other by CariCris in January 2019[vi]), showing that confidence in ‘Brand Barbados’ is returning. This is in addition to a growing pipeline of investment projects currently in the works. The GOB has also recommitted to boosting the island’s competitiveness and investor appeal by proposing reforms which would improve business facilitation.
Although Canada remains the main source of Barbados’ international business, the island has sought to leverage its geographical location and its impressive tax and bilateral investment treaty networks to act as a conduit, for example, for Canadian and Chinese companies seeking to do business in Latin America and Africa. Additionally, geopolitical developments such as Brexit bring challenges but also opportunities. Barbados is already seeing enquiries from UK businesses and firms looking to explore new markets using Barbados as a base.
Responsible Innovation – ‘Smart Barbados’
In a world where digital technologies are revolutionising global business, IFCs can no longer rely on cost as a major value proposition but must differentiate themselves by offering innovative products and solutions which meet and exceed their clients’ needs. Therefore, the loss of the previous preferential regimes was seized as a catalyst for responsible innovation.
The new Government has made no secret of its commitment to making Barbados a global fintech hub through the idea of a ‘Smart Barbados’. Indeed, being home to the indigenous-formed, but internationally renowned fintech mover and shaker BITT Inc., Barbados is well-poised to be a global hub for fintech innovation.
The GOB has embraced new technological initiatives, such as the Bridgetown WiFi Corridor, the Central Bank of Barbados’ establishment of a regulatory sandbox, the collaboration with BITT Inc. and the Central Bank of Barbados, and the Financial Services Commission on the mMoney national payment system. Barbados is also exploring opportunities for attracting international businesses in renewable energy, medical research, and education, for example, which have sustainable development benefits for the island.
In the midst of a major restructuring programme, Barbados has managed to achieve its compliance with BEPS Action 5. Its response was not merely reactive, but a road map whose constituent steps included reforms which sought not only to effect compliance but seized an opportunity to strategically reposition Barbados as an attractive global business hub for businesses seeking to establish a presence in a well-regulated jurisdiction where they can meet economic substance requirements.
[ii] Barbados has a long-established history in international tax rule participation. It had also joined the Global Forum on Transparency and Exchange of Information for Tax Purposes in September 2019.
[iii] Barbados is currently undergoing a homegrown but IMF-sanctioned four-year structural adjustment programme under the IMF’s Extended Fund Facility called the Barbados Economic Recovery and Transformation (BERT) programme.
Alicia D. Nicholls is an international trade consultant with over a decade of experience providing bespoke trade research and advisory services to a variety of clients. She is currently a research fellow and part-time lecturer with the University of the West Indies. Miss Nicholls is the founder of the Caribbean’s leading trade policy and development blog, www.caribbeantradelaw.com, since 2011. She also presents regularly at both regional and international academic and industry-related conferences and webinars. While she maintains an interest in all issues affecting Caribbean trade and trade policy, her specific research focuses primarily on global financial regulation and small States, foreign investment law and policy and international business.