The last three years have been challenging for all sectors of the Barbados economy and the international business sector has been no exception. However, there are encouraging signs that the sector is on the way to recovery, certainly in terms of the number of international business entities that have been incorporated during 2010. In addition, it would appear that a large percentage of the existing international business entities have renewed their licences for 2011.

Prospects for 2011

 

For many years Canada has been and continues to be the largest market for the Barbados International Business (“IB”) sector. During 2009 the Canadian government introduced a change in Canadian tax policy and legislation, under which dividends paid by foreign affiliates that are resident in countries that have entered into a Tax Information Exchange Agreement (“TIEA”) with Canada would be entitled to receive the same exempt surplus treatment as dividends paid by foreign affiliates that are resident for tax purposes in Barbados. To date Canada has signed 11 TIEAs, only one of which (that with the Netherlands Antilles) has entered into force and is negotiating with 14 other countries.

Clearly, Barbados will face competition for business in the Canadian market from countries, such as the Cayman Islands, that enter into TIEAs with Canada, once those agreements enter into force.

On the positive side, the Canada Revenue Agency (CRA) has released an Interpretation in which it confirmed that dividends paid by Barbados Exempt Insurance Companies (EICs) and Qualifying Insurance Companies (QICs) out of active business earnings in Barbados will be eligible to qualify as exempt surplus.

Since the amendment to the definition of exempt earnings in the 1995 Federal Budget, there have been conflicting views as to whether the active business earnings of a Barbados EIC could qualify for exempt surplus treatment. In fact, in Technical Interpretation 9600675 CRA held that active business earnings of an EIC derived in Barbados did not qualify for such treatment.

 

In its new Interpretation, CRA has concluded that an EIC is liable to taxation in Barbados under the Barbados Income Tax Act (BITA) because Barbados asserts jurisdiction to tax the EIC under the BITA based on the central management and control of the EIC being in Barbados. CRA also accepted that the EIC is subject to Barbados most comprehensive form of taxation even though it enjoys a time-limited exemption from actual income tax under the Exempt Insurance Act…

In addition, CRA has stated that, where a dividend was received before February 26, 2007 by a Canadian corporation from an EIC that is a foreign affiliate and the dividend was assessed previously as being paid out of the taxable surplus of the affiliate, the dividend will be accepted as paid out of exempt earnings, provided a valid objection or appeal was submitted. Further, if the dividend was received on or after February 26, 2007 and the dividend was reported as paid out of taxable surplus, an amended return will be accepted provided that the request is made within the prescribed time limits for an assessment or reassessment.

As a result of the new CRA Interpretation, it is likely that a number of QICs will elect to convert to EICs. However, it is also expected that the removal of the uncertainty in relation to the exempt surplus entitlement of the active business earnings of EICs will result in an increased number of such companies being established in the future by Canadian companies.

New opportunities are also expected to arise in Mexico following the entry into force of the Barbados/Mexico Double Taxation Agreement in January 2010 and the subsequent removal of Barbados from the Mexican “blacklist”, thereby eliminating the need for Mexican residents to report for tax purposes their investments in entities established in Barbados. These developments have created significant opportunities for Mexican investors to utilise Barbados as a hub for some of their outbound international investments. One such opportunity that has emerged is the use of captive insurance companies by Mexican companies for reinsuring their commercial risks in the international market.

Many years ago it was predicted that Barbados could become the gateway for investments into Latin America from the rest of the world and vice versa. That goal is still attainable but its achievement relies on the expansion of Barbados DTA network in region.  Currently, Barbados has DTAs in force with Mexico and Venezuela and a DTA with Chile pending. However, it is understood that the Barbados Government intends to continue in 2011 to pursue DTAs with a number of other countries in the region, including Colombia and Brazil.

It is expected also that a number of pending DTAs will be signed and/or ratified during the course of the year, including those with Belgium, Czech Republic, Ghana, Italy, Panama, Portugal, Luxembourg, Spain and Vietnam, which will help to create opportunities in other markets, such as Europe, Africa and Asia.

From a legislative and regulatory point of view, the long awaited legislation governing the regulation of service providers and the establishment of the Financial Services Commission are expected to be enacted during the course of the year. In addition, consideration is being given to the introduction of legislation to enable the establishment of private foundations in Barbados. If enacted, this legislation will increase the attractiveness of Barbados as an international financial centre in a number of civil law jurisdictions in Latin America and continental Europe.

About the Author

Ben Arrindell
Ben Arrindell -

Ben is a director of Cidel, currently consulting on business and product development opportunities utilizing Barbados’ treaty network. Prior to joining Cidel, Ben was an international tax and managing partner of Ernst & Young, Barbados. In this capacity, he provided international tax services to international clients, including many major multinational companies and high net worth individuals. Ben has over 25 years of experience in both the UK and Barbados.

Ben has served as adviser to the Barbados Government since 1998 on double taxation treaty strategy, the development of new legislation, and the impact of international tax developments on the Barbados International Business Sector. In this capacity, he was a member of the Barbados Government team that negotiated the removal of Barbados from the OECD’s list of tax havens in 2000. Ben participated in Barbados’ tax treaty negotiations with a number of countries including Canada, China, Italy, Spain, Mexico, the Netherlands, Luxembourg and the US.

Ben has made a significant contribution to the development and amendment of new and existing legislation in Barbados. He is currently a member of:

The United Nations Committee of Experts on International Cooperation in Tax Matters,
The Barbados Government’s Joint Policy Working Group and spearheaded the Group’s Strategic Planning Subcommittee which developed the Barbados International Business Strategic Plan 2007-2012,
The CARICOM Working Group on Fiscal Policy,
The Barbados Government’s Working Group on the Economy,
The Barbados Government’s Council of Economic Advisers, and
The Board of Directors of the Barbados Private Sector Association of which he is also the Chairman.

Ben is also a frequent speaker worldwide on international tax matters.