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 It had repealed its international business legislation and set out new tax rates for all companies as follows: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. .