“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.”

Lewis Carroll, Alice in Wonderland

It was over thirty years ago that Barbados established an international business and financial services sector (OFC). The sector quickly became a vital part of the Barbados economy that ranked second only to tourism in foreign exchange earnings. From the beginning, the Barbados authorities tried to design a sector that would be investor friendly, but that would avoid the features associated with jurisdictions that were often seen as offering little more than a cover for the less reputable types of international financial activity – such as money laundering and tax evasion.

By design Barbados is a tax treaty jurisdiction that relies on an extensive network of Double Taxation and Bilateral Investment Treaties for ensuring transparency and the exchange of information. In spite of often proffered arguments about the harmful effects of tax competition, the country remains a low tax jurisdiction with tax rates on the profits of international business companies that range from 0.5% to 2.5%. There are no withholding taxes on dividends and capital gains are tax exempt. It has a strong regulatory framework comprising the Central Bank of Barbados, the Financial Services Commission and the Ministry of International Business. Not the least of its advantages as an OFC is that it has developed a remarkably wide range of international business types giving investors a great deal of flexibility in the choice of investment instruments.

The design of the Barbados financial services sector complements other characteristics of the island such as geographic location, climate, skill endowment, political stability and social cohesion, modern banking and financial services, access to modern IT communication means, and good infrastructure. In quality of life, it ranks 5th in per capita income in the Western Hemisphere, and 57th in the world in the UN’s Human Development Index.

As the number of OFCs and the volume of transactions they attracted grew worldwide, rich industrialized countries united to find ways to reduce or eliminate the tax and confidentiality advantages OFCs offered. For example, they deemed the mere existence of low tax jurisdictions as detrimental to international financial stability and argued that they facilitated the allocation of investment to less than optimal purposes and activities and are therefore harmful to global welfare.

These arguments have not gone unchallenged. Conservative think tanks argue that the existence of low tax jurisdictions put downward pressure on tax rates, and that this leads to a more efficient use of tax revenues.

Aided by the OECD, the IMF and the EU, blacklisting is a favorite technique employed by rich countries to call into question the legitimacy of OFCs. However, attempts to define OFCs in such a way as to exclude OFCs in rich countries (e.g., Delaware in the US or Luxemburg in the EU) have been exposed as nothing less than a double standard. For its part, Barbados has successfully challenged its inclusion on more than one blacklist. This success is partly due to the fact that it has been from the outset a low tax – rather than a no tax – jurisdiction and that this provides explicit and transparent standards for information exchange and avoidance of tax evasion.

The latest assault on OFCs has come in the form of the OECD’s Harmful Tax Competition Project. There are now two internationally agreed standards on the exchange of information for tax purposes:

  • Exchange of Information on Request (EOIR)
  • Automatic Exchange of Information (AEOI)

These standards are similar to those contained in the US Foreign Accounts Tax Compliance Act (FACTA) to which Barbados is a signatory. After initial resistance, nearly all OFCs – including Barbados – have agreed to these stricter standards of information gathering and sharing with foreign governments. The majority of signatories have been judged to be ‘compliant’ or ‘largely compliant’ (The Bahamas and Cayman Islands) with the new standards. At the time of writing Barbados was assessed to be ‘partially compliant’. The Barbados review is ongoing.

It remains to be seen if this more binding form of coöperation will decrease the attractiveness of OFC investment. The list of OFCs who have agreed to the new standards and that are judged to be compliant in one degree or another suggests that OFCs may have found a way to co-exist with the new standards for transparency and information exchange. The bad news is that the EU is calling for yet another blacklist of OFCs more squarely aimed at capturing corporate investors. The good news is that EU credibility in blacklisting was damaged by publication of their last blacklist, which was found to be so unashamedly political, it was criticized by the OECD and had to be abandoned not long after it was published.

About the Author

Charles Skeete - Former Executive Director & Senior Advisor, IADB

Charles Skeete is the former Executive Director and Senior Advisor, Plans and Programs, Inter-American Development Bank.