Outright exemptions to offshore companiesmay undermine tax base
The IMF is concerned about international business companies’ (IBCs’) exemption from paying duties and VAT on imports and the zero rating under the VAT of certain supplies to those IBCs.
In this section, the IMF examines taxation of international companies.
68. Barbados has built up a substantial offshore sector. There are currently more than 3,500 international companies operating from Barbados, and about 40 international banks. The offshore sector consequently makes a significant contribution to tax revenue. As shown in Table 6, the sector’s contribution to corporate income tax has been above 50 per cent in recent years.
69. Barbados continues to demonstrate a commitment to meeting international standards for taxation in a rapidly changing environment. Barbados was included on the list of 35 tax havens issued by the OECD in June, 2000. Subsequently, Barbados was not included on the OECD List of Uncooperative Tax Havens due to its long-standing information exchange arrangements with other countries, which were found by its treaty partners to operate in an effective manner. OECD also found that the country was willing to enter into tax information exchange arrangements, and has in place established procedures with respect to transparency, which in some aspects had been enhanced. More recently, Barbados has moved to the second phase of the Global Forum review on Transparency And Exchange Of Information For Tax Purposes. Going forward, the tax treatment of international business
will need to respond further to new international arrangements focusing on tax avoidance by multinationals (notably the G20-OECD project on Base Erosion And Profit Shifting) and to changes in the national tax systems of its treaty partners.
70. Licensed international companies and banks are taxed according to a reduced rate schedule.International business companies (IBCs) and exempt international societies with restricted liability (ISRLs) must be resident in Barbados and engaged in manufacturing or service provision for sale outside CARICOM, or in the provision of services to another offshore company. They are taxed according to a degressive rate schedule of 2.5 per cent for profits below $10 million, two per cent (between $10 million and $20 million), 1.5 per cent (between $20 million and $30 million), and 1⁄4 per cent for profits above $30 million. Similarly, licensed international banks carrying on business from Barbados are taxed according to the same reduced rate schedule. Both international companies and banks pay annual licence fees.
71. In addition, other special tax provisions apply, including:
(a) exemption from withholding on dividends, royalties, interest, and fees paid to non-residents; normal rules apply for payments to residents;
(b) exemption from import duty on plant, machinery, equipment, raw materials, and other goods required for their business; IBCs are also exempt from VAT on those items;
(c) specified services provided to IBCs are zero-rated for VAT;
(d) the base for the personal income tax paid by specialist employees not to be found inBarbados is reduced by 35 per cent;
(e) special guarantees of future tax treatment can be requested.
Contribution to revenue.
72. While the contribution of the offshore sector to revenue is significant, its sensitivity to changes in the tax treatment can be substantial. The mission was informed that with Canada signing agreements with other jurisdictions (see below), and extending to them some of the advantages that were previously reserved to Barbados, some IBCs have moved to those countries. This tax base shifting caused an initial revenue loss, and has induced Barbados to strategically cut the one per cent tax rate (previously applied to profits above $30 million) to a 1⁄2 per cent in 2012, which ultimately resulted in a revenue loss of about $60 million. The rate was further cut to the current 1⁄4 per cent in 2013. This suggests that the offshore sector’s tax base is highly sensitive to changes in its tax treatment which would create enormous difficulties in trying to unify the domestic and offshore tax systems. It also indicates the importance of strengthening the domestic tax base, as unilateral changes by other countries can pose a significant risk to revenue.
73. As of December, 2013, Barbados has 33 tax treaties in force and it is currently negotiating some 20 more. These include its multilateral arrangement with ten other members of the Caribbean Community, and countries such as Canada, Czech Republic, Finland, Norway, Panama, Spain, Britain, and the United States. New treaties with Ghana, Portugal, Qatar, San Marino, and Singapore await ratification, and agreements with Belgium, Italy, Malaysia, United Arab Emirates and Vietnam await signature.
74. The treaty with Canada has played an important role in attracting international companies to Barbados. Under the “exempt surplus” provisions of their income tax, Canadian resident corporations escape Canadian tax on distributions out of active business income from foreign affiliates resident in treaty countries. This is available for all offshore activities in Barbados, including IBCs. More recently, however, Canada has signed tax information exchange agreements with other jurisdictions such as Cayman Islands and Bermuda, extending equivalent benefits to them.
75. Of possible concern is the exemption from the payment of duties and VAT on imports and the zero rating under the VAT of certain supplies to IBCs. Being engaged in export, such companies are properly relieved of tariffs on imports, as well as of VAT on their inputs. The issue is how best to arrive at this outcome, the risk being that outright exemption — as opposed, for example, to drawback on duties and refunds of VAT — may undermine the tax base by facilitating the diversion of exempted goods to the domestic sector.
76. The large number and diversity of international companies mean that the monitoring needed to guard against potential leakage is substantial.The mission has not looked into administrative issues in depth, but given the large number of operations and the fact that they are not subject to particular physical control increases this risk. On the customs side, it may be safer to apply drawback procedures to offshore companies; on the VAT side, zero-rating to indirect exporters, though practiced successfully in some developed countries, can jeopardize the VAT chain very significantly where administration is weak. The risks of the present arrangements may be mitigated, however, insofar as customs exemptions are in any event widely available, and the major suppliers of services that are zero-rated for offshore companies may be relatively few in number and responsible in their practices. This is reflected in the relatively little revenue forgone from this concession which in 2012 increased to about $1.2 million.
77. Many of the offshore regimes hold out the possibility of guarantees against future adverse changes in domestic tax treatment. Guarantees may be extended for 15 years in the case of an IBC, and 30 years for a ISRL, while no time limit is specified in the case of international banks. While the mission does not have full information on their current extent, this may be substantial. Such guarantees are not uncommon in developing countries (though not often for such lengthy periods). A key difficulty, however, is that such guarantees are most necessary in countries whose governments have not established a favorable reputation with taxpayers; but then the credibility of the guarantee is itself suspect. In Barbados, on the other hand, the government does appear to have built up considerable trust amongst foreign investors.
78. There appears to be no clear statement of the circumstances in which guarantees will be given or denied, rendering the system opaque. It is thus important that the issuance of guarantees be subject to scrutiny. In this respect the requirement of parliamentary approval for guarantees issued to offshore banks is a healthy assurance of transparency; but the same oversight does not apply to other guarantees. The obvious counterargument in Barbados is that international companies need to be licensed to operate in the country, and these licences can be revoked, which goes against the spirit of the tax guarantee.
1. Assess the system of duty and VAT exemptions, and the zero rating of certain services supplied to offshore companies, with a view to better safeguarding against diversion of items to the domestic sector.
2. If guarantees are to be issued, provide clear guidance on the conditions for their issuance, impose an upper limit on their duration, and make information available on their nature and extent.