CORPORATE TAX REFORM

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.  

ANTI-CORRUPTION UNIT 

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. 

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

Pillar I seeks to  allocate income based on the consumption of goods and services. The following are the main principles:

• Allocate a percentage (20%-30%) of the profits of Multinational Enterprises (MNEs) in excess of 10% to countries which consume the goods and services provided by those MNEs. 
• In order for the companies to be taken into consideration they must have a turnover of 40 billion euros (to be reduced to 20 billion euros). Based on this it is said that there are essentially 100 companies which are expected to be affected. Extractives (mining for example) and regulated financial services are excluded.
• The entities identified will be subject to what is called a Nexus Rule. This rule is based on whether the MNE derives 1 million euros in revenue from the jurisdiction; and when the jurisdiction is small (with GDP of below 40 billion euros) that derived income is reduced to 250,000.00 euros. The purpose of this rule is to determine whether the jurisdiction meets the threshold for utilising the new tax allocation mechanism.
• It has been agreed that there would be the removal of digital taxation. One would recall that Barbados amended its Value Added Tax Act in order to implement an Online Tax which became effective in 2019.
• Finally it is proposed that efforts be made to require simplicity in administration and certainty in taxation. Certainty would come through effective dispute resolution and other matters to which MNEs confront such as transfer pricing.

Pillar II

Then there is Pillar II which applies to all businesses. The summary proposal is provided below:

• There is a proposal for a minimum rate of tax which is expected to land somewhere between 10% & 15 %.
• There is a proposed income inclusion rule which would require a parent company to top up its tax payable where it has a group member subject to a low rate of tax.
• There is the proposed Undertaxed Payment Rule which will deny companies deductions and allowances where one of its group members is subject to a low rate of tax which has not been addressed by the first rule.
• When tax falls below the minimum rate it is proposed that countries can impose source taxation (perhaps a withholding tax) on related party payments. 
• There is a substance carve out based on the tangible assets and payroll of companies.
• With the exception of the minimum tax rate these rules are considered to be purely domestic and optional.   

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.

Next  Steps

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.