The Golden Age
For many years, Barbados was the tax treaty country where the foreign affiliates of Canadian corporations could generate exempt earnings while suffering the lowest domestic income tax rate through the use of International Business Companies (IBCs). As a result of this privileged position, Barbados enjoyed a steady flow of Canadian businesses desirous of establishing IBCs. In this environment, the Barbados international business sector experienced strong growth and became the second largest economic engine of the country after tourism. The volume of business was such that the IBCs contributed the majority of the corporate tax revenues of the Government of Barbados and funded a significant portion of the infrastructures of the country.
While the low tax rate of Barbados IBCs was appealing to Canadian businesses for the reason mentioned above, it made Barbados relatively unattractive for businesses from other countries looking for a zero-tax offshore environment. Consequently, the bulk of the international business coming to Barbados originated from Canada and this concentration made its international business sector vulnerable.
Budget 2007: The Paradigm Shift
At the occasion of the March 2007 Federal Budget, Canada announced that it would extend the favourable exempt earnings treatment to affiliates operating in any country willing to enter into a comprehensive tax information exchange agreement (“TIEA”) with Canada. This measure was aimed at encouraging tax haven countries to conclude TIEAs, thereby facilitating the fight against tax evasion.
This change in Canadian tax policy operated a paradigm shift for the Barbados international sector but the brunt of it was not felt right away because of the uncertainty as to which tax havens would agree to sign TIEAs with Canada.
During the last few years, Canada has signed TIEAs with a number of tax haven countries offering a zero-rate corporate environment (e.g. Bermuda, Bahamas, Cayman Islands, Netherland Antilles, Turks & Caicos). However, most of these TIEAs have only come into force last year. Therefore, Barbados has just recently started to experience the exodus of Canadian-owned IBCs and the decline in its corporate tax revenues derived from IBCs. Some of these TIEA countries, especially those with greater geographical proximity to Canada than Barbados, are aggressively courting Canadian businesses and enticing them to move their Barbados operations.
Facing the Change and Building the Future
1. Establishment of the Appropriate Tax Environment to Retain Canadian Business and Compete for New Business
Barbados is gradually expanding its network of double taxation agreements (DTAs) in an attempt to attract international business from new sources and reduce its reliance on Canada. The success of these new initiatives largely depends on Barbados’ ability to offer a competitive tax environment. Considering that Canadian-owned IBCs still by far represent the largest component of Barbados’ international business sector and the fierce competition for new business among offshore jurisdictions, a swift move to a zero-rate elective environment may be the only answer to stop the exodus of Canadian-owned IBCs and allow its international business sector to compete on a level playing field with other offshore jurisdictions for new business, not only from Canada but from other parts of the world. Given that business executives have a duty to maximize returns for their shareholders and the fact that tax considerations were the driving force behind the establishment of foreign affiliates of Canadian businesses in Barbados, it may be wishful thinking to consider that any measure falling short of a zero-rate elective environment can stop the exodus and allow Barbados to compete for new business in the future. Allowing IBCs to elect to pay no tax would not hinder Barbados’ ability to negotiate new DTAs because IBCs already get carved out from the application of most new DTAs (alongside with other entities benefiting from a special tax regime).
2. Adoption of an Attractive Legislative Framework for Fund Administration
Because of its current tax and legislative framework, Barbados has not been in a position to attract a significant share of the international fund administration and management business. However, compared to some other offshore jurisdictions (such as Cayman and Bermuda), Barbados has a large and well-educated workforce and competitive wage levels. These would constitute great advantages should Barbados wish to raise its profile as a fund administration and management jurisdiction. The adoption of cutting-edge mutual fund, securities and limited partnership legislation combined with targeted efforts to attract international fund administration firms from Canada, the U.S and other countries could lead to significant employment growth in the Barbados international business sector.
3. Enhancement of Infrastructures for Electronic Commerce
Likewise, Barbados could attract more electronic commerce business and associated employment provided it improves its internet connectivity to North America and the other major onshore markets.
In sum, the Barbados international business sector needs to reinvent itself to meet the current challenges and take advantage of new markets to promote its future growth.