Changes to the Tax Rates for International Business Companies and the Expansion of Services Qualifying for the Foreign Currency Earnings Tax Credit

The budgetary proposals for 2012 to 2013 which were delivered by the Honourable Minister of Finance and Economic Affairs Mr. Christopher Sinckler on 26 June 2012, included some new measures aimed at stimulating growth of the international business and financial services sector and attracting foreign direct investment.

These measures include:

• Reducing the rates of tax of international business companies (“IBCs”), international societies with restricted liability (“ISRLs”) and international banks; and
• Expanding the range of professional services that qualify for the foreign currency earnings tax credit under the Barbados Income Tax Act.

Reduced tax rates

Barbados continues to be an attractive international business and financial services centre for multinational corporations that are engaging in cross border transactions and are seeking a jurisdiction, which not only provides tax incentives, but also has an extensive double taxation treaty network and other favourable attributes. To date, Barbados has signed 21 double taxation treaties and is awaiting ratification on the treaties which were signed with the Czech Republic, Ghana, Iceland and Portugal.

In light of increased external pressures and challenges that are being faced by the sector, and in an effort to stimulate further growth of the sector by attracting more foreign investors to Barbados whilst retaining existing investors, a reduction was proposed to the tax rate applicable to the top income band for IBCs, ISRLs and international banks.

With effect from income year 2012, the marginal rate of tax on profits above US$15,000,000 is to be reduced from the current 1% to 0.5%. This rate will be further reduced to 0.25% for income year 2013. The table below illustrates the applicable bands and tax rates:

It should be noted that IBCs, ISRLs and international banks will continue to benefit from a foreign tax credit on income earned from foreign sources under the respective legislation.

Increase in services qualifying for the foreign currency earnings tax credit

Under the Barbados Income Tax Act, a company carrying on business in Barbados and deriving foreign currency earnings in respect of the provision of “qualifying overseas professional services” outside of the Caricom market, may apply a foreign currency earnings tax credit to the Barbados tax otherwise payable.

The range of qualifying overseas professional services currently eligible for the foreign currency earnings tax credit be expanded to include:

• Exploration, extraction and other mining,
• Oil and gas activities,
• Licensing and sub-licensing of intellectual property, and
• Shipping services.

Generally, a regular Barbados company is subject to corporation tax at the rate of 25% while IBCs and ISRLs are subject to the corporation tax rates as noted above. The expansion of the services which qualify for the foreign currency earnings tax credit would allow foreign investors to take advantage of the foreign currency earnings tax credit provided under the Barbados Income Tax Act, thereby reducing the corporate tax liability by as much as 23.25 percentage points, where the maximum foreign currency earnings are achieved.

The calculation of the foreign currency earnings tax credit and the impact on the effective corporation tax rate is illustrated below:

Therefore, depending on the level of foreign currency earnings derived by a Barbados company from outside of Barbados and Caricom, in respect of the provision of qualifying overseas professional services, the foreign currency earnings tax credit can considerably reduce a company’s effective rate of tax.

The significance of this foreign currency earnings tax credit is the ability to use a regular Barbados entity and manage the actual taxes paid, while at the same time being eligible to utilize the benefits of Barbados’ double taxation agreements. Below is a listing of these agreements.

For further details please contact your Ernst & Young advisors noted below.