In this evolving global environment, tax authorities in countries around the world continue to focus their attention on international transactions and international business conducted through low-tax, international financial centres. In particular, they are eager to capture more tax revenue to help offset the effects that the recent global recession has had on their economies.
With these two factors in mind, many international financial centres have taken a closer look at their taxing mechanisms: in essence, they are seeking to streamline tax collection and also encourage investment by facilitating business and maintaining attractive tax regimes.
Generally, many jurisdictions determine their right to tax based on a person’s domicile and/or place of residence. Whilst the concept of domicile is often simply determined, the question of residency is far less simple. This is so because many jurisdictions differ in their criteria for determining residency.
As a result, it is often possible for one person to be deemed a tax resident in more than one jurisdiction.
Once this happens, the issue arises as to whether this person should be subject to tax in more than one jurisdiction on the same stream of income.
Where one stream of income is liable to double taxation, the associated tax consequences can act as a major hindrance to the viability of international transactions.
Many governments have recognized such double taxation, with its effect on international income, as a serious potential blow to international business and investment. They have chosen to address the issue through the use of double taxation agreements. These agreements prescribe the rules that are to govern the taxation of specific items of income earned by residents of two contracting jurisdictions.
The benefits of double taxation agreements
Double taxation agreements, also known as tax treaties, limit the rate of taxation that may apply to certain types of income such as dividends, royalties, and interest. Tax treaties also enhance cross border trade by providing a level of security to investors; that is, being bilateral in nature, the provisions of tax treaties are unlikely to change frequently.
Therefore, using a treaty to arrange cross border transactions may offer some protection against rapidly evolving domestic policy and can enable investors to consider and implement more long-term strategies. This security and protection is particularly beneficial when investing in developing countries where a changing economic environment may require frequent and fundamental changes in tax policy.
In addition to these direct benefits, tax agreements also add a measure of certainty at the international level as to how a particular multi-national transaction will be treated by the tax authorities of the jurisdictions involved. Such agreements help to protect international transactions from adverse tax consequences arising from unilateral changes in the policy of a tax authority, or changes in local legislation.
Barbados – An extensive treaty network
In the competitive international business market, Barbados has always sought to establish itself, not only as a legitimate international business and financial services centre, but as the premier financial services centre in the region. To this end, the Barbados Government continues to vigorously pursue the expansion of the country’s double tax treaty network.
Currently, Barbados is a party to 26 double taxation agreements that are in force, including the CARICOM  treaty which is a multi-lateral treaty between the eleven CARICOM member states. This treaty network includes both developed and developing countries from all corners of the globe, as well as a number of large financial centre jurisdictions. Barbados has double taxation agreements with:
An additional three tax agreements have been signed and are awaiting ratification, and Barbados is actively negotiating several more treaties with other jurisdictions to expand its treaty network.
Although its relationships with countries on the African continent continue to grow, Barbados has recently been focusing on developing tax treaties with various Latin American countries. Tax agreements with Mexico, Panama, and Venezuela are now in place and have the potential to bring about significant investment opportunities throughout the region.
Versatility of the treaty network
The Barbados double taxation treaty network can provide significant benefits to an international corporation seeking to streamline the tax profile of its investments in a region such as Latin America.
By way of example, Mexican tax law ordinarily provides for withholding tax at the rate of 10% to be applied to interest paid by a resident of Mexico to a non-resident bank. However, under the provisions of the tax agreement between Barbados and Mexico, such interest may only be taxed at the reduced rate of 4.9% when paid to a resident of Barbados.
To take advantage of this reduced rate, an international corporation can establish a Barbados International Financial Services Company (“IFSC”) to provide a financing loan to another group entity in Mexico. Through this structure, the interest payments made to the Barbados IFSC will be entitled to the reduced rate of withholding tax under the terms of the Barbados-Mexico treaty.
This interest income will be subject to tax in Barbados at the rate of tax applicable to IFSCs, which is between 0.25% and 2.5%, depending on the level of income. Dividends paid by the IFSC to its shareholders will be exempt from withholding tax in Barbados.
With its extensive, ever-expanding treaty network, Barbados is uniquely positioned to act as an international hub for many tax-efficient investment structures. The island continues to offer exciting opportunities for international companies and individuals seeking to reduce their overall tax liabilities.
1 The Member States of the CARICOM double tax agreement are Antigua & Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines and Trinidad & Tobago.
2 Agreements with Ghana, Portugal, and Qatar have been signed but not ratified.
3 This structure is subject to certain conditions and to the tax reform that is currently being carried on in Mexico.