The new UK –Barbados Convention replaces the forty-two year existing Agreement. As a result according to paragraph (2) of Article 27 (Entry into Force) the 1970 Agreement as amended by the 1973 Protocol shall cease to have effect in respect of any tax from the date upon which the Convention has effect and shall terminate on that date.
In the case of Barbados that date is on or after January 1st of the calendar year next following the year in which the Convention enters into force in respect of taxes withheld at source.
In the case of the UK the date, in respect of income tax and capital gains tax, for any year of assessment is on or after April 6th next following the date on which the Convention enters into force. The date with respect to UK corporation tax is for any year of assessment beginning on or after April 6th next following the date in which the Convention enters into force.
The Convention also confirms that although its provisions do not cover the treatment of teachers as is the case under the previous Agreement an individual entitled to treaty benefits under Article 19 of that Agreement at the time of entry into force of the Convention shall continue to entitled to the benefits provided thereunder until such time as he would have ceased to be entitled to such benefits if the prior Agreement had remained in force.
Generally the treaty provides for reduced withholding rates on cross-border payments of dividends, interest, royalties, and other income, as well as the elimination of withholding taxes on cross-border dividend payments to pension funds. Importantly it reflects Article 26 of the 2008 OECD Model Tax Treaty on the exchange of tax information.
B. Key Provisions
I. General Scope
Article 1 provides that the scope of the Convention will apply only to ‘residents’ of the UK (Great Britain and Northern Ireland) and Barbados.
II. Covered Taxes
Pursuant to Article 2 the Convention only applies to all taxes on income in both countries including UK capital gains tax. Barbados does not level capital gains tax. Except with respect to the benefits provided by Article 23 (Non-Discrimination) taxes not defined under Article 2 do not fall within the scope of the proposed Convention.
Pursuant to Article 10 provides for the sharing of taxing rights on dividends between the resident and source state.
However, the proposed Convention exempts dividends from taxation in the state of which the company paying the dividend is a resident if the beneficial owner is a resident of the other state.
Other than the case where the beneficial owner of the dividend is a pension scheme where dividends are paid out of income (including gains) derived directly or indirectly from immoveable property as defined under Article 6 (Immoveable Property) of the Convention by an investment vehicle which distributes its income annually and whose income from such immoveable property is exempted from tax, the tax charged by the state of which the company paying the dividends is a resident shall not exceed 15 per cent of the gross amount of the dividends.
IV. Interest and Royalties
The provisions of Article 11 (Interest) and Article 12 (Royalties) provide for an exemption from source-country taxation for most interest and royalty payments beneficially owned by a resident of the other country.
V. Capital gains
Pursuant to Article 13 of the Convention gains derived by a resident of a contracting state from the alienation of immoveable property situated in the other contracting state may also be taxed in the other contracting state.
Gains derived by a resident of a contracting state from the alienation of shares, other than shares in which there is a substantial and regular trading on a stock exchange or comparable interests deriving more than 50 per cent of their value directly or indirectly from immoveable property situated in the other Contracting State may be taxed in that other State.
The Convention provides under Article 17 that notwithstanding that pensions and other similar remuneration paid to a resident of a contracting state shall be taxable only in that state a lump sum payment derived from a pension scheme established in a contracting state and beneficially owned by a resident of the other contracting state shall be taxable in the first mentioned state.
The Convention also provides that contributions made or on behalf of an individual who exercises employment in a contracting state (host state) to a pension scheme that is recognised for tax purposes in the other contracting state (the home state) shall, for the purposes of determining the individual tax payable in the host state and determining the profits of his employer which may be taxed in the host state, be treated in that state in the same way and subject to the same conditions and limitations as contributions made to a pension scheme that is recognised for tax purposes in the host state to the extent that they are not so treated by the home state.
For this rule to apply however the individual must not be a resident of the host state and was participating in the pension scheme or a similar pension scheme for which the first one was substituted immediately before he began to exercise employment or self-employment in the host state; and the pension scheme must be accepted by the competent authourity of the host state as generally corresponding to the a pension scheme recognised as such for tax purposes by that state.
Under these rules a pension scheme is recognised for tax purposes in a contracting state if the contributions to the scheme would qualify for tax relief in that State and if the payments made to the scheme by the individual’s employer are not deemed in that state to be taxable income of the individual.
VII. Other Income
Pursuant to Article 20 notwithstanding that income beneficially owned by a resident of a contracting state not specifically dealt in the Convention shall be taxable in that state where an amount of income is paid to a resident of a contracting state out of income received by trustees or personal representatives administering the estates of deceased persons and those trustees or personal representatives are residents of the other contracting state that amount shall be treated as arising from the same sources and in the same proportions as the income received by the trustees or personal representatives out of which that amount is paid.
Further, any tax paid by the trustees and personal representatives in respect of the income paid to the beneficiary shall be treated as if it had been paid by the beneficiary.
VIII. Miscellaneous provisions
Article 22 stipulates that where income or gains is relieved from tax in a contracting state and under the law in force in the other contracting state a person in respect of that income or those gains is subject to subject to tax by reference to the amount thereof which is remitted to or received in that other state and not by reference to the full amount thereof then the relief to be allowed in the first mentioned state shall apply only to as much of the income or gains as is taxed in the other state.
In addition, the benefits of the Convention are not applicable to companies or other persons who are wholly or partly exempted from tax under the Barbados International Financial Services Act Cap. 325; Societies with Restricted Liability Act Cap. 18B; the International Business Companies Act, Cap 77; and the Exempt Insurance Act, Cap 308A or any identical or substantially similar legislation in addition to or replacing thee laws.
Though the Convention does not define the term ‘benefits’ in this regard it is likely that it refers to the provisions dividends, interest, royalties and capital gains and not the provisions related to the exchange of tax information.