FHA TAX ALERT – Barbados 2016 Budget

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FRANHENDY ATTORNEYS TAX ALERT

Growth Returns to the Barbados Economy. Trajectory is Not Assured. No Additional Direct Tax Measures to Support the International Business and Financial Services Sector (IBFSS). Emphasis on Public-Private Sector Partnership to Spur Growth in the IBFSS

Summary of the  2016 Budgetary Proposals:

  •  Removal of the imposition of duty on yachts remaining in Barbados waters for more than six months will be removed and replaced with an annual licence fee of BBD$2,000 per boat.
  • An increase in the Bank Asset Tax from of 0.2% to 0.35%.
  • Levy to be introduced at a rate of 2% on the customs value of all imports with the exception of goods for the manufacturing, agriculture and tourism sectors. It will also apply to domestic output. This measure will assist with offsetting the costs of financing public health care, and servicing of a loan intended to provide the Sanitation Services Authority (SSA) with a new fleet of trucks and to procure parts for the existing fleet.
  •  Creation of duty free shopping zones in Barbados to enable Barbadians and visitors to make purchases in foreign currency only. Possible areas include City of Bridgetown, Holetown, Hastings andWorthing and the two main ports of entry.
  •  Increase in Non-contributory Old Age Pension  by $10 per week or $40 per month. National Insurance Scheme Department to resume increases for contributory pensions to keep pensions in line with inflation.
  •  Creation of a special fund of $50 million with resources from the Industrial Credit Fund for grants and soft loans to fund existing small and medium sized businesses and business start-ups.
  •  Provision of a new regime to provide fiscal incentives to be granted to local producers is in the final stages of being crafted.

Measures Related to the IBFSS

In his presentation of the 2016 Tax Budget, Minister with responsibility for Finance, the Hon. Christopher Sinclair, M.P delivered a set of proposals which focused heavily on new tax measures. These included a social responsibility levy, support for tourism infrastructural projects and relief for yacht-owners, old-age contributory and non-contributing pensioners, manufacturing, small business and the retail sector.

The budget was delivered within the context of BREXIT; G20 and EU plans for the blacklisting of countries based on criteria developed by the OECD; the European Commission’s’good tax governance agenda;  and the rapidly developing elements of the 15 pillars of the OECD Base Erosion and Profits Shifting (BEPS) international tax reform agenda.

The treatment of the international business and financial services aspects of the Barbados economy was light.

Unlike this year’s budget presented by Minister Sinckler’s, his Canadian counterpart’s 2016 presentation focused on that country’s response to certain aspects of BEPS which will certainly impact on Barbados when they are implemented.   Minister Sinclair’s remarks on the sector highlighted modest declines in the number of new International Business Companies and Societies with Restricted Liability licences processed during the previous fiscal year.

The Minister also reported the closure of six banks.

There was no announcement on new products or services to be introduced, or revamped by the government in an effort to increase investment in the IBFSS. There was no discussion about possible tax-based incentives for the sector; nor were plans announced  to increase business facilitation or any treatment about how the government planned to provide stimulus to the sector during the next fiscal cycle.

The Minister’s greater focus on other aspects of the economy promoted one local accounting firm to question whether this lack of narrative on the IBFSS was indicative of that sector’s marginalisation.

FHA  Analysis

We have noted the reduced narrative about the IBFSS. While we do not discount the importance of a comprehensive treatment of what is – arguably the largest driver of growth and earner of foreign currency for the island – we believe that this is not indicative of a retreat from the sector. Rather based on statements coming from the President of the Barbados International Business Association, Greg McConnie, immediately following the Minister’s presentation, we are of the view that the lack of tax-related  measures for the IBFSS points to a recognition of the need for a greater focus on non-tax measures to sustain, protect and grow the sector.

Background and International Context

At the time of its preparation Barbados would have been managing a Supplemental Review process related to its commitments to the OECD Global Forum on Transparency and Exchange of Information Programme. At the same time, the country would also have been making the transition to exchanging tax information on an automatic basis, alongside its longstanding practice of sharing such information ‘on request’ pursuant to the ‘Exchange of Information’ provisions in its tax treaty network which now stands at 36.

This network includes the following treaty partners:

United Kingdom, USA, Canada, Qatar, Luxembourg, Czech Republic, Cuba, Panama, Venezuela, Iceland, China, Malaysia, Malta, Portugal, Rwanda, CARICOM, Mauritius, Botswana, the Seychelles, the Netherlands, Mexico, Austria, Switzerland, Italy,Bahrain, Singapore, San Marino. (Agreements with Ghana and the United Arab Emirates are awaiting signature. Barbados’ treaty with the Slovak Republic is awaiting ratification by the Slovak government.)

Indeed, unlike the case with other countries now making announcements in their Budget statements about implementing the  automatic exchange standard by becoming a signatory to and ratifying the the OECD Multilateral Convention on the Mutual Assistance in the Collection of Taxes (The Convention) – as was the case with the Bahamas earlier this month –  Barbados has already signed the Convention. Additionally, Barbados has also completed its ratification end of the process.

Commitment to automatic exchanges, is one three criteria announced by the OECD which will determine whether countries will be blacklisted by the G20 at its Leaders Summit in July 2017. Although not confirmed it is also likely that this will be one of a number of criteria expected to inform the European Union’s own iteration of a ‘uncooperative/tax haven ‘blacklist.

Given the  other aspects of tax diplomacy that continue to engage countries, like Barbados, who are considered significant IBFS centres; which include (1) the expected loss of the UK as a modulating ‘voice’ in ongoing EU attempts to apply its BEPS-plus ‘good tax governance’ agenda to its trading partners and beneficiaries of their donor funding within the the African, Caribbean and Pacific Group and   (2) the still pending decision on the best method to assure access to the beneficial ownership information on  companies and trusts through publicly accessible  registers; at the moment, the big ticket issues related to the IBFS sector are less about new and improved domestic tax incentives but rather Barbados’ orientation and response to these and other external drivers .

The following report on statements made by Greg McConnie, President of the Barbados International Business Assocation (BIBA) , released within hours of the conclusion of the Finance Minister’s Budget, in part, informs our perspective on the Minister’s treatment of the IBFSS :

” The President of the Barbados International Business Association, Gregory McConnie, has outlined the Association’s plan to promote the island’s international business sector in the year ahead. The plan is intended to respond to the many challenges the island’s international business sector faces, including the ongoing OECD Base Erosion and Profit Shifting (BEPS) initiative and the “Panama Papers” revelations.

The plan includes working with the Government to ensure the importance of the international business sector to the island’s growth is understood. The Association intends to support the Government in its efforts to promote Barbados to international bodies and so avoid the island being grouped with other international financial centers as a “high-risk tax haven.

McConnie said the Association will continue its work with the Government and the Central Bank to overcome the challenges arising from the de-risking initiatives of international banks, and will work with the Government to revisit the definition of a “financial institution” for the purposes of applying anti-money laundering and countering the financing of terrorism (AML/CFT) regulations.

McConnie also said that the Association will collaborate with the Government on the development and implementation of a suite of legislation serving the international business sector, including pursuing the passage of Limited Liability Partnership legislation currently in draft form, implementing the Incorporated Cell Company legislation recently adopted, and reviewing and modernizing the Limited Partnership legislation to make it a viable investment entity.”

Conclusion

As is the case with other private sector bodies, BIBA receives an annual subvention from the Barbados government. This has been the government’s commitment for over ten years and has been a feature of its annual budgetary allocation to the IBFSS through the Ministry with responsibility for the sector. Although not discussed in the 2016 Budget statement, this allocation is an important aspect of Barbados’ support for the sector. This commitment complements other examples of Barbados Public-Private Sector partnerships (PPP) including the Barbados Social Partnership.

For this reason, while the absence of an expansive statement by the Minister of Finance on the IBFSS is stark, we need more evidence to support a view that suggests a retreat from the IBFSS by the current administration.

Instead, we are persuaded that given that the pressure points for the IBFSSS are increasingly externally-driven, BIBA’s public commitment to stepping up its work with government over the coming year, in certain strategic areas, demonstrates the sector’s recognition that tax diplomacy, marketing, and product refinement are not solely within the purview of government. Rather, BIBA’s post-budget announcement makes the point that,as is the case with other successful Barbados PPPs , sometimes the private sector must augment a national budget in non-tax areas which, we submit,  at the the present time, is a judicious use of Barbados’ severely  constrained financial circumstances.

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