Green Business & The Renewable Energy Sector
Environmental concerns and the use of renewable energy now feature prominently in our daily activities and are increasingly impacting the way we do business. Many companies have begun to implement methods or install devices which are environmentally friendly and which use renewable energy. Other companies have as their main objective the marketing and sale of environmentally friendly or renewable energy products and services. In both circumstances, the Barbados government has developed legislation to facilitate and encourage these activities. This encouragement of the sector is expressed through a number of incentives for the operation of green businesses.
The Barbados Income Tax Act (“BITA”)
Over the past eight years, the BITA has been amended to provide specific incentives for green businesses. For example,companies often seek internationally recognized environmental certification as a means of promoting their products and services. Such certification indicates that internationally accepted standards are met.
However, this certification is costly to acquire, so section 12E. 10 of the BITA was introduced as an incentive to help companies to do so. It allows a deduction of 150% of the certification cost incurred in an income year. It should be noted, however, that before a company can take this deduction, the Minister of the Environment must confirm the nature of the expenditure.
Another benefit available to green businesses is found in section 12C.1 of the BITA, which encourages companies to install water storage facilities. This section permits a deduction of a maximum of BB$3,500 of the cost of installing a water storage facility on the premises of each commercial building.
Where green business is the taxpayer’s main business activity, additional incentives are available. For example, under section 12 of the BITA, companies which have invested money in machinery or plant can claim an initial allowance of 20% of this capital expenditure. These businesses can also claim an annual allowance of 150% of capital expenditure incurred in the income year for the purchase of machinery and plant.
However, green businesses that are engaged in the manufacture of plastics from recycled materials, or the production of organic fertilizer, can claim an investment allowance of 20% of the expenditure incurred in respect of machinery or plant. The benefit of claiming the investment allowance is that, unlike the initial allowance, it is not deducted from the cost of the asset when writing down its value for tax purposes.
In addition, section 13 of the BITA provides for an annual allowance of 20% of the capital expenditure incurred for the purpose of an energy audit and the retrofitting of a building, or the installing of a system to produce electricity from sources other than fossil fuels. This deduction is taken over a period of 5 years.
The BITA also provides several other incentives for to taxpayers engaged in green business that are designed to help them attract new customers and increase their sales and profitability. For example, it provides tax relief to individuals who purchase “environmentally preferred products” for use in residential property.
Section 37 of the BITA offers a deduction of a maximum of BB$10,000 to individuals who wholly own and occupy a residential property and who incur expenditure for outfitting the property with energy or water-saving devices. Of the BB$10,000 maximum, up to BB$5,000 can be claimed against the cost incurred in buying or installing “environmentally preferred products”. A further deduction of up to BB$2,000 can be claimed against the cost incurred for a home energy audit.
In recent years, the Barbados government has intensified its focus on the development of the renewable energy sector. The variety of additional incentives are discussed below.
Small Business Development Act
A company operating a green business may also be entitled to other tax incentives that are not contained in the BITA. For example, where the company is an approved small business under the Small Business Development Act, it will be taxed at a lower corporation tax rate of 15%. Additionally, the company would be exempted from withholding tax on dividends or interest paid , import duty on plant and equipment as well as stamp duty on the execution and registration of financial documents.
If a green business can sell its products and services to customers who are resident outside of Barbados, the owner may opt to obtain a license under the International Business Companies (“IBC”) Act or as an International Society with Restricted Liability under the Societies with Restricted Liability (“SRL”) Act.
As an IBC or ISRL, the entity would be taxable at graduated rates from 2.5% down to 0.25% depending on its level of income, rather than the 25% tax rate ordinarily applied to local companies. It would also be exempt from paying withholding tax on dividends, interest, royalties, management fees or other fees paid to non-residents.
Fiscal Incentives Act
Under the Fiscal Incentives Act, those businesses which manufacture approved products under that Act may be deemed to be approved enterprises. A green business which is an “approved enterprise” under the Act would be eligible to several tax incentives. The most significant of these is complete relief from corporation tax for the period of the tax holiday as determined by the Minister of Industry. The tax holiday may vary from 11 to 15 years and begins from the day the enterprise begins production.
An approved enterprise would also be entitled to relief from Barbados withholding tax on dividends paid from the profits of the business during the tax holiday. The approved enterprise may also be granted an exemption from paying customs duty on the importation of plant, equipment, machinery, spare parts, raw materials or components that it needs for the purposes of construction, alteration, , reconstruction, extension, or for the manufacture of an approved product.
New incentives under the BITA
Amendments to the BITA in 2013 have introduced additional incentives available to green businesses. These amendments have been made retroactive to income year 2012 and are mainly focused on those persons engaged in the production of renewable energy. The Seventh Schedule to the BITA, which is attached, outlines those renewable energy systems to which the incentives apply.
The first new incentive implemented allows for an income tax holiday of 10 years for developers, manufacturers or installers of renewable energy systems and energy-efficient products.
For those green businesses which have not been granted a tax holiday, there are several other new incentives available.
Deduction for interest paid on loans
From income year 2012, eligible businesses are allowed to claim a deduction of 150% of the amount of interest on a loan for the purposes of:
- Constructing a new facility or upgrading an existing property to enable the generation, supply and sale of electricity from a renewable energy source;
- Constructing a new facility for installing or supplying renewable energy systems or energy-efficient products.
The new additions to the BITA also include a provision which stipulates that from income year 2012, and for a period of 10 years, eligible businesses are allowed to claim a deduction of 150% of the amount actually spent on training staff in the following areas:
- The generation and sale of electricity from a renewable source; or
- The installation and servicing of renewable energy electricity systems or energy-efficient products.
This particular incentive, while focused on the renewable energy sector, would also encourage additional economic activity and increase employment.
Marketing of products and services
Additional allowances include a deduction of 150% of the amount actually spent on the marketing of products that are for the generation and sale of electricity from a renewable energy source, or the marketing of products that are related to the installation and servicing of electricity systems or energy-efficient products.
Research and development
From income year 2012, eligible businesses are allowed to claim a deduction of 150% of the amount actually spent on product development and research related directly to:
- The generation and sale of electricity from a renewable energy source; or
- The installation and servicing of renewable energy electricity systems or energy-efficient products.
Exemption from withholding tax
The Barbados government is also encouraging investment into the sector by providing specific incentives for shareholders and financial institutions. These incentives include a 10-year exemption from withholding tax on dividends earned by shareholders of companies solely engaged in the installation or supply of renewable energy electricity systems or energy-efficient products.
Tax holiday on interest earned by financial intermediaries
Additionally, from income year 2012, interest earned by financial intermediaries for financing the development, manufacturing and installation of renewable energy systems and energy-efficient products will be exempt from the payment of tax for 10 years. In view of this incentive, financial institutions may now find it prudent to implement systems for identifying the relevant loans and interest income in order to make the necessary adjustments when preparing their annual tax returns.
It is important to note that any business seeking to benefit from the numerous new incentives outlined above, must meet several criteria. These criteria include a requirement for the business to be current in the payment of all income tax, value added tax, land tax and national insurance contributions. However, where the business is not current in these payments, it may still be eligible for the above incentives so long as it has entered into arrangements with the relevant authorities to settle the outstanding amounts.
It its also important to note that each incentive requires the approval of the Minister. In the face of global trends, rising energy costs, increasing demand for energy and dwindling supplies of fossil fuels, the Barbados Government has increased its efforts to facilitate green business in Barbados. By doing so, it is encouraging the fledgling renewable sector to develop and flourish.
At the same time, the reduced reliance on fossil fuels will help reduce demand for foreign currency and preserve the island’s foreign exchange reserves.
We hope that by highlighting these green business and renewable energy incentives in this newsletter, we will encourage more businesses to take advantage of them. For further details and support, please contact one of our tax professionals located in Barbados.