The Parliament of Barbados has debated the Estimates of Income and Expenditure for the period April 1st, 2022 to March 31st, 2023.
The Estimates reveal a deficit of some $528, 892, 256 (estimated revenue of $3,206,692,690 and estimated expenditure of $3,735,584,946). It is usual for the estimates to reflect a deficit and therefore the issue really is the size of the deficit and how the deficit is to be funded. The deficit is smaller than that incurred in 2020-2021.
FUNDING THE DEFICIT
In 2020-2021 the Deficit of $869 million was funded by incurring both domestic and foreign debt. The bigger loans were provided by the following entities.
• Interamerican Development Bank | $271.7 million
• World Bank | $200.0 million
• IMF | $96.0 million
• China | $89.9 million
CONCERNS ABOUT DEBT
Even though the World Bank is influenced by similar decision-making considerations as the IMF Barbadians tend to be a bit more concerned about loans from the IMF because of the conditions which may be attached to such loans.
These include cutting expenditure in social service areas and lay-offs from the public sector. The concern with the Chinese has to do with the fact that even though China has had a political presence in Barbados for many years, there is an increased awareness of China’s growing influence as an economic and political power internationally. There is a feeling that Barbados’ political positions will most definitely not always be aligned with those of China. Plus stories of seizing state assets for non-payment of debt are also stories which have filled social media.
TAX REVENUES CRITICAL
The Revenue is made up of tax and non-tax revenue. As expected tax revenues represent the bulk of the revenue collected by Government which amounts to 93% of total revenue. Of that taxes on goods and services (mostly VAT) and taxes on income and profits (personal and income tax) is where Government collects the most taxes.
INCREASE IN TAX TAKE Government is projecting an increase in taxes in substantially all areas over the 2020-2021 actuals. One will have to await a review of the Budget presentation to determine if this is realistic given the challenges faced being faced by the economy. Government could have a plan to increase its collection efforts or to increase taxes if the revenue earning sectors of the economy do not do better.
BIG-TICKET ITEMS With respect to Government’s expenditure the big-ticket items are (i) Education with expenditure estimated to be $581 million which reflects an increase of approximately $30 million over 2020-2021 actuals; (ii) Social Security and Welfare of approximately $466 million with an increase of approximately $45 million; (iii) Health $343 million with a decrease of about $14 million over the 2020-2021 actuals.
UNDER THE PM'S WINGS
It is interesting to note that the Prime Minister’s Office is now responsible for several aspects of the Government which one might not normally associate with that office: (i) Rural Development (The Rural Development Commission ($2,508,255) (ii) Urban Development (The Urban Development Commission $5,373,003 )(iii) Culture (The National Cultural Foundation $11,238,749) (iv) Development of Tourism Potential (Barbados Tourism Investment Inc. $3,516,575) (v) Investment Promotion and Facilitation (Invest Barbados $7,500,000.00) (vi) National Crisis Management ($10,000,000.00) (vii) Promotion of Sporting Achievement and Fitness (Kensington Oval Management $1,300,000.00). (viii) Commitment for Results Department $2,490,271.00.
While Barbados still has no meaningful integrity legislation the legislature did pass a Prevention of Corruption Bill in October 2021. One assumes that the sum of $2,564,003 allocated to the Prime Minister’s Office will begin to establish the institutional framework to start tackling one of the biggest factors retarding Barbados’ development.
POLICY GUIDANCE FROM BUDGET SPEECH
Barbadians are hoping that the return of visitors is signaling an upturn in the fortunes of the Barbados economy and individual businesses. However Barbados has been struggling for a number of years even with decent tourism figures. The Budget Speech to be presented tomorrow should divulge to Barbadians the policy framework which will justify the Estimates laid and debated in the House of Parliament.
Government delivered its Financial Statement and Budgetary Proposals on March 15, 2022 after laying and debating the Estimates of Revenue and Expenditure.
REVENUE RAISING MEASURES
When we had a quick look at the Estimates 2022-2023 we noted that tax revenues represent the bulk of the revenue collected by Government. Of that taxes on goods and services and taxes on income and profits is where Government collects the most taxes. Government in its Estimates was projecting an increase in the revenue take from taxes in substantially all areas over the 2020-2021 actuals. In the circumstances, unless there was a rebound in the economy then Government would have to raise taxes.
Retrospective Corporate Pandemic Contribution Levy
The Government proposes a one-off Pandemic Contribution Levy on corporate profits. Where a company with a net income above $5m in 2020 and 2021, is carrying on domestic business in the telecommunications, retail sale of petroleum products by dealers, commercial banking (so deposit taking and finance houses, excluding credit unions) and general and life insurance, then such companies shall be subject to a Pandemic Contribution Levy of 15% of the taxable income based on the company's financial statements for the fiscal years ended March 2021 and 2022.
This levy is a retrospective tax with respect to the 2021 income based on the Company’s financial statements. Retrospective taxation is generally shunned. Arguably it is also discriminatory in that it is based on identifying specific sectors and their taxable income as opposed to looking at the assessable income of companies across the board and perhaps then reducing the tax on taxable income.
12 Month Personal Pandemic Contribution Levy
With effect from April 1, 2022, where an individual receives an income of more than $6,250 monthly, the individual will contribute 1% of his monthly earnings as a Pandemic Contribution Levy on Income for 12 months only.
Barbadians have found themselves liable to temporary taxes which were never removed or an argument was made for extending the time frame. One must therefore be vigilant as to whether this is indeed a temporary measure.
Alternate Fuel Levy
Government has introduced a new Alternate Fuel Levy (AFL) with a fixed and variable component for vehicles not powered by diesel or gasoline.
The fixed portion of the AFL, owners of these alternate powered vehicles will be required to pay $25 per month via direct debit or standing order on the 15th day of each month which is $300 per year as the fixed portion of the AFL directly to government. The variable portion of the levy relates to annual mileage charged at 2 cents per kilometre above a 15,000kms threshold.
Government will require all electric and other qualifying vehicles to be re-registered first under the new Electronic Vehicle Registration system in May 2022 in order for the levy to be introduced from July 1, 2022.
One hopes that this new tax which seeks to mirror the variable tax on those vehicles paying at the pump will be rolled out without too much consternation to the consumer.
Increase of Excise Taxes
The Excise tax on sweetened beverages will be increased from 10% to 20% with effect from April 1, 2022. It would have been useful if one could determine whether the imposition of the 10% excise tax had had any positive impact on the consumption of these beverages by Barbadians. Government should perhaps put these funds towards a true Health and Wellness programme for the country.
Prices Internationally there have been concerns about rising prices at the pump and in the supermarkets. The Government has sought to address this through capping its tax take at the pump by capping the VAT which it collects.
At the pump
The first proposal is to cap the take from gasoline at 47 cents per litre and for diesel at 37 cents per litre, initially for 6 months. In the supermarket With respect to the cost of goods the Government proposes the capping the cost of freight used for the purpose of calculating customs duties at the pre-COVID-19 levels of US$7,350 per 20ft container and US$8,000 for 40ft containers for 12 months.
The Government of course still has no control of whether this particular measure will be passed on to consumers or whether it will simply result in larger profits to wholesalers and retailers.
The Government here proposes zero-rating items which are used in the control of ailments such as diabetes and high blood pressure. These are essentially processed foods under the labels Ensure, Enterex, Abbott, Slim Fast and Splenda.
This is an effort to assist Barbadians with the problem of non-communicable diseases. While not going far enough it can be said to be a step in the right direction. Effective April 1, 2022 that all sanitary towels and tampons, baby and adult diapers, anti-perspirants, vitamins and 2022 multi-minerals will be zero-rated for VAT purposes.
FUTURE REDUCTION IN TAXES
Reduction in Land Tax The promise to reduce land tax was always questionable given the fact that the Government has a sizeable deficit to fund. Thus the promise has been deferred. It is therefore proposed that from April 1 2023 the threshold for land tax on residential properties, below which zero land tax is due, will be increased from the current $175,000 to $300,000 and then rise to $400,000 from April 1, 2026.
Renewable Energy Tax Considerations
With respect to import duty for Used Battery Electric Vehicles the existing rate is 45%. This will revert to 10% on April 1, 2022, the same as a new Battery Electric Vehicle and consistent with other types of vehicles. Government also proposed to reduce the tariff for Fuel Cell Electric and Solar Powered vehicles, new and used from 45% to 10%. Import duty and the excise tax for new fuel cell electric vehicles would be reduced to 20%. The import duty for vehicles powered by Liquefied Petroleum Gas and Compressed Natural Gas would also be reduced to 25% from 45%, consistent with the designation of natural gases as a bridging fuel to renewable energy effective April 1, 2022 .
Tax Holiday on Purchase of Electric Vehicles
The government is now prepared to announce an Excise Tax and VAT Holiday on the purchase of electric vehicles for a period of 24 months commencing April 1, 2022 to further encourage Barbadians to purchase such vehicles.
This means that Barbadians will only pay the import duty of 10% for the next 2 years on the purchase of electric vehicles. These fiscal measures are meant to encourage Barbadians to choose eco sustainable vehicles over fossil fuel vehicles. If the measure has the desired effect it may very well not result in any loss to Government.
While there was some concern about Government’s levies on internet purchases and on sewerage it seems that the complaints were not loud enough to warrant their removal. The Government stuck to its election campaign promise of reducing land tax but kicked that particular can down the road. These tax measures then have been implemented largely to raise revenue. They are also intended to encourage Barbadians to make choices in choosing electric vehicles. It is unlikely that the tax measures to encourage health and wellness will have any significant positive effect on the health of the population. Overall absent is still a tax policy with an overarching vision for where Barbados is headed.
Given the digital revolution business found it could be located just about anywhere, thus many companies found good homes in low tax jurisdictions. This became a major concern for developed countries and decades of work for the Organisation for Economic Cooperation and Development (OECD).
Companies such as Google, Facebook, Twitter and Amazon have been on the radar for many years.
On July 1st 2021 the OECD issued a statement which indicated that 136 countries including Barbados had agreed to a new two pillar approach to international taxation. Fundamentally the first pillar looked to re-allocate taxing rights to countries which were the largest consumers of the products of Multinational Enterprises (MNEs) and the second pillar looked to set a minimum tax rate of between 10% and 15%.
The OECD statement of October 8th, 2021 sets that tax rate at 15% but for large companies with revenues above EUR 750 million (US$866 million).
This underlines the point that the more influential countries like the USA are more concerned with ensuring that they can shift the largest amount of tax generated by the largest companies to their own jurisdiction as quickly as possible. Focusing on the largest companies and carving out the extractive industries (mainly developing countries) made the proposal easier and faster to sell.
One would recall Barbados had taken several steps in direct response to OECD initiatives. It had repealed its international business legislation and set out new tax rates for all companies as follows:
• Taxable income not exceeding BBD $1,000,000 – 5.5%
• Taxable income exceeding BBD $1,000,000 but not exceeding BBD $20,000,000 – 3%
• Taxable income exceeding BBD $20,000,000 but not exceeding BBD $30,000,000 – 2.5%
• Taxable income exceeding BBD $30,000,000 – 1%
Barbados had in addition implemented an Online tax in keeping with OECD mandates. The new proposal recommends the removal of the online tax in exchange for the new taxing regime. We must wait to see if Barbados will remove this tax.
Most of the companies in the world do not meet that US$866 million threshold thus there is still scope for companies to benefit from lower tax rates in countries like Barbados depending on the rules in their home jurisdiction.
On the other hand, Barbados may also consider adjusting its tax rates upward to increase its takings from large domestic companies. Research and development is still considered to be a good reason for allowing concessionary tax rates and there may be opportunities there.
It should be noted however that these are the broad strokes of political agreement. The precise terms of a multilateral agreement are still to be fashioned.
Barbados recently held an international business summit to explore its options. It is recommended that any new government policy will place “international business” within the context of long-term economic reforms so that Barbados will no longer simply react to the OECD.
One can become consumed by the intricacies of taxation. Our new policy must be driven first by a developmental mandate for Barbadians and only then should there be a place or need for clever tax planning.
The Organisation of Economic Cooperation and Development (OECD) has perhaps achieved something potentially historic. Substantially all the countries of the world, some 133 out of 139, including Barbados have a agreed to a new global framework for taxation. It is referred to, rather clumsily, as the International Framework Against Base Erosion and Profit Shifting (BEPS). And the new approach has in effect determined that some of the bases of taxation are not as relevant to a digital economy – concepts such as residence and the permanent establishment.
It should be noted that the OECD is still not an international organisation like the United Nations (UN) or the World Trade Organisation (WTO), and hence the remarkable nature of this achievement.
And the proposals though steeped in technicalities are driven by the politics of G7 Nations, it having been admitted that the catalyst for these sudden wins in the process was the election of a democratic government in the USA eager to fund an infrastructure agenda.
The Concern of the OECD
Fundamentally it is being proposed that international rules which have evolved over time and which have developed from the use of Model Tax Treaties (UN and OECD) should be reformed to deal with what is called the digitalisation of the global economy.
The OECD’s concerns with these issues were brought to the attention of Barbados in the 1990s through the OECD Initiative on Harmful Tax Competition. At that time the OECD stated quite clearly that their concern was mobile services – what is now called the digitalization of the economy.
Even though at the time the initiative was linked to lax regulation, it was clear that OECD countries were beginning to become concerned about continued access to a shifting tax base which guaranteed their continued prosperity.
The OECD has admitted that their approach on Harmful Tax Competition was flawed and now they would argue that efforts are being made to respect the sovereignty of States and avoid discriminatory practices. The new approach is championed as one of inclusion even though this entire multilateral tax process is still very much driven by the G7.
The New Framework
There are two approaches called Pillar I and Pillar II which seek to address the issue of taxing the digital economy.
Pillar I seeks to allocate income based on the consumption of goods and services. The following are the main principles:
Then there is Pillar II which applies to all businesses. The summary proposal is provided below:
These negotiations are continuing. While the tax rules will evolve into highly technical rules the reasons are political, as was the case with the old tax rules.
The rules are meant to ensure that developed countries continue to get their share of taxes regardless of the nationality or location of the MNE.
Developed countries are after all the largest consumers of MNE goods and services. One can hear the voice of large developing countries in the equation with the exclusion of extractive industries (for example, oil and gas) as it was seen to be unfair that these countries should lose much needed tax revenue.
The voice of small states, which many of the low tax jurisdictions are, will not carry much weight except maybe in discussions about lightening the administrative burden foreseen.
October 2021 is a key milestone where the G20 is to agree to the next steps.
Then the multinational framework and the and the necessary domestic laws are expected to be developed in 2022 with implementation by 2023.
Whenever there is a shift of such proportions both countries and companies will take advantage of the possibilities while the rules are unclear and unelaborated.
What Barbados has ahead of it is (i) development of policy positions as to how it can be a beneficiary of the new rules – if taxable revenue is going to be allocated to jurisdictions then Barbados would like its share (ii) participating in ongoing multilateral tax negotiations with hopefully an interest in what the UN has proposed and is likely to propose (iii) engaging in possible bi-lateral treaty negotiations (iv) the drafting and proclamation of new domestic tax legislation (v) the repeal of the provisions in the Value Added Tax Act which gave rise to a digital tax (vi) ensuring that the necessary resources are allocated to tax administration.
While great progress has been made there is still much to be negotiated.
Barbados' Treaty starts with Europe as it was a British Colony. DTAs exist with the United Kingdom, Finland, Norway, Sweden and Switzerland. Barbados also has treaties with Canada and the United States of America. Within the Caribbean there is a CARICOM Double Taxation Agreement. as well as an agreement with Cuba. In Africa Barbados has agreements with Rwanda and Botswana. Further afield Barbados has negotiated an agreement with China.
The full list includes Austria, Bahrain, Botswana, Canada, CARICOM, China,, Cuba, Cyprus, Czech Republic, Finland, Iceland, Italy, Luxembourg, Malta, Mauritius, Mexico, Netherlands, Norway, Panama, Portugal, Qatar, Rwanda San Marino, Seychelles, Singapore, Spain, Sweden, Switzerland, UAE, United Kingdom, United States. of America and Venezuela.
Barbados is a nation which fully embraces its role in the international community. Its membership includes CARICOM, the Organisation of American States, the United Nations and the World Trade Organisation.
Barbados has modern business legislation, much of it based on English and Canadian law.
The Financial Services Commission and the Central Bank of Barbados are the key regulatory authorities for financial services.
Barbados' infrastructure is strong and implements the recommendations coming out of such bodies as the Financial Stability Forum, the OECD on tax matters as well as the Financial Action Task Force. .