“A triple whammy that has hit Barbados.”
Owen Arthur, a former Prime Minister and Minister of Finance, was lamenting almost six months ago that the declining fortunes of Barbados’ international business sector may hold a vital key to the nation’s economic recovery.
The triple whammy Arthur had in mind was “no growth in the sector”; a steep decline in revenue; and a “loss of foreign exchange that has hit Barbados”.
Inexplicably, the international business sector is one of the great unknowns among Barbadians when it comes to its importance to the country’s economy. That’s an unfathomable fact of life for an area that, in the words of Arthur was the “fastest growing new sector since Independence that has added the greatest to Barbadian prosperity”. But with revenue plummeting from $356 million a decade ago to $95 million in recent times, you don’t have to be a financial Solomon to figure out that it has fallen on hard times.
But more trouble may be on the horizon for the sector.
With a new government in Ottawa headed by Justin Trudeau, the Prime Minister, whose father Pierre Elliot Trudeau was a good friend of Barbados’ first Prime Minister Errol Barrow, and with a new but erratic occupant in the White House in Washington, the big elephant in the room is tax reform in Canada and the United States (US), the North American economic behemoths that can determine where Barbados’ offshore sector goes from here.
In Canada, the Trudeau administration is searching for ways to hit corporations and wealth managers in their pocketbooks while across the border the Trump administration may have promised more than it can deliver – repeal of Obamacare and replacing it with a poorly designed American Health Care plan that may be unable to pass Congressional muster; construction of an ill-conceived multibillion-dollar immigration wall along the US-Mexico border; and tax reform for the wealthy but trouble for the working poor – and the impact could be felt in Bridgetown, the Cayman Islands, The Bahamas, Bermuda and the British Virgin Islands.
Indeed, the fallout may land on most, if not all, small offshore sectors.
“Corporate tax reform is being discussed more and more in Washington but where it is going the picture isn’t quite clear,” said Bruce Zagaris, an international tax law expert who advised Barbados for more than a dozen years. “Barbados is going to be affected should the proposals now being considered by the Trump Administration or by the Republican majority in the House of Representatives become law.”
Republicans are convinced they have a once-in-a-generation chance to reform the US corporate tax code so that firms and rich individuals who use tax regulations can reduce their obligations to the Internal Revenue Service. For instance, they are proposing a border adjustment tax (BAT) that would, if enacted, eliminate the 35 per cent corporate tax rate and replace it with a 20 per cent rate that would be applied to profits from domestic sales and imported materials.
Stated simply, profits from exports would be exempted from corporate taxable income. That step would give US corporate export sales a tax-free concession while hitting imports, a manoeuvre designed to raise US$1.1 trillion in revenue over a ten-year period. They would offset revenue losses the Treasury Department suffers from cuts in corporate taxes, explained Bloomberg Businessweek.
However, the BAT has triggered considerable controversy because it may discriminate against importers in violation of US double taxation treaties and the rules of the World Trade Organisation. But the single most important move that would affect Barbados’ offshore sector was made towards the end of last year.
It was an agreement on “multilateral instrument”, an international treaty which Zagaris pointed out would adversely affect by modifying all double tax treaties across the globe. Essentially, the “instrument” would limit the ability of multinational firms to engage in improper tax planning. At least 100 countries and territories have endorsed it and on November 24th last year opened its provisions for signature on December 31.
“Basically all of the OECD [Organisation for Economic Cooperation and Development]countries and the G-20 states were among the 100 jurisdictions,” explained Zagaris. “That’s going to mean that using double tax treaties to benefit multinational is going to be greatly reduced and Barbados is going to be affected.
“Because Barbados, unlike many small international financial jurisdictions, has used tax treaties as one of its main elements, it (instrument) has the potential to impact Barbados.”
As a remedy, “Barbados can turn to more investment treaties which it already has. For whatever reason, Barbados hasn’t been negotiating more of them. Barbados can find other things like regional headquartered companies and attract multinational firms that want to have regional headquarters in a jurisdiction where taxes are low, electronics are state-of-the-art and is a nice place to live,” said Zagaris.
But the biggest threat to Barbados may come from Canada, whose government has vowed to crack down on places which attract corporations and rich individuals that are seeking to lower their tax obligations to the Canada Revenue Agency (CRA).
The Trudeau administration plans to spend more than CAN$444 million over five years so that, CRA, the Canadian equivalent of the Barbados Revenue Authority, can enhance its surveillance of taxpayers bent on circumventing the system by engaging in sophisticated and creative methods to avoid taxes. CRA is hiring more auditors and tax specialists to work in its intelligence systems, boost verification and heighten investigations.
Diane Lebouthillier, Minister of National Revenue, has made it clear the Trudeau government isn’t letting up.
“Hiding income and assets in foreign jurisdictions to avoid paying taxes is a serious issue that robs all hard-working Canadians of important services,” said the minister. “By increasing our collaboration with our international partners, Canada is taking an active role in ensuring a fairer tax system, where tax cheats face consequences for their actions.”
The truth is that Canada, the US, Britain and rich nations find that Barbados, Luxembourg, the US, Bermuda, Jersey, the Cayman Islands, the Bahamas, Guernsey, Mauritius and Singapore have carved out a competitive niche for themselves in international finance by off-shoring capital gains and profits.
“Many of these jurisdictions strive to meet international standards for cooperation between tax authorities,” Neil Mohindra, a public policy analyst in Toronto, wrote recently in the Financial Post.
Still, they are routinely and derisively labelled as “tax havens”, which conjures up images of secrecy, tax evasion and money laundering. Several states in the US engage in the identical business but they are not referred to as tax havens.
Unfortunately, Oxfam, the worldwide organisation that can be found in many of the world’s neediest places, joined the critics of small offshore jurisdictions by coming up with a deeply flawed list of the worst tax havens. It was a disservice to the countries involved while exonerating Delaware, Vermont, California and a host of other jurisdictions that objectively do the same thing.
