Barbados offers favourable prospects for multinational corporations (“MNCs”) with business interests in Latin America that are seeking a jurisdiction to structure their international investments. Barbados’ extensive network of double tax treaties coupled with its favourable corporate taxation regime has made it attractive to MNCs wishing to improve their tax efficiency. To date, Barbados has signed 21 double taxation agreements (“DTAs”) including DTAs with Cuba, Mexico, Panama, Spain and Venezuela and is seeking to negotiate DTAs with more Latin America countries and has also concluded bilateral investment agreements (” BITs”) with 9 countries including Cuba and Venezuela. The benefits of the BITs include the provision for the compensation of losses, the granting of the most favoured nation status and national treatment provisions, protection from unfair expropriation and nationalisation of investment and procedures for fair and equitable settlement of disputes arising.
Barbados has a range of entities such as International Business Companies (“IBCs”), International Societies with Restricted Liability (“ISRLs”), International Financial Services Companies (“IFSCs”), and Exempt Insurance Companies (“EICs”), which MNCs can use to structure their international transactions. The benefits of using these special incentive entities include, low tax rate of 2.5% down to 0.5%1 on business profits, and 0% in the case of EICs, exemption from withholding taxes on dividends, interest, royalties, fees or other income paid to a non-resident of Barbados, foreign tax credits in respect of taxes paid outside of Barbados. Moreover, these entities are free from Barbados’ exchange controls regime.
In addition to the foregoing, MNCs can use a regular Barbados company (“RBC”) to provide certain “qualifying overseas professional services”2 to persons resident outside the Caricom market. Ordinarily, a RBC is subject to corporation tax at the rate of 25%. However, where the RBC derives assessable income from the provision of qualifying overseas professional services, in computing the tax payable on such income, a foreign currency earnings credit (” FCEC”) would be applied against the tax otherwise payable. The application of the FCEC can reduce the RBC’s corporate tax liability by as much as 23.25 percentage points, where the maximum foreign currency earnings are achieved. Further, any dividends paid by a RBC out of foreign-sourced income are exempt from withholding tax in Barbados. In addition, where the RBC is engaging only in international business, similar to that of an IBC, a blanket waiver of exchange control can be obtained.
Below are examples of tax planning opportunities available to investors through the interplay between Barbados’ DTAs and international business legislation.
A Panamanian MNC which owns intellectual property (“IP”) and is seeking to licence the IP to a Canadian company, will suffer withholding tax in Canada at the full domestic rate of 25% on the royalties paid to the MNC by the Canadian company, as Panama does not have a DTA with Canada. Therefore, to mitigate the withholding tax in Canada, the Panama MNC can incorporate a Barbados RBC and transfer the IP to the RBC. The RBC will in turn licence the IP to the Canadian company. Since RBCs are not precluded from taking advantage of the benefits of the Barbados/Canada DTA, any royalties paid by the Canadian company to the RBC will be subject to withholding tax at the rate of 10% under the Barbados/Canada DTA. The RBC will be entitled to the FCEC, thereby reducing its effective tax rate. Any dividends paid by the RBC to the Panama MNC will be exempt from withholding tax in Barbados.
The Barbados/Mexico DTA also provides tax-planning opportunities for foreign MNCs seeking to finance investments in Mexico. Ordinarily, under Mexico tax law, interest paid by a resident of Mexico to a non-resident bank is subject to tax at the rate of 10%. However, interest paid to a bank in a treaty country such as Barbados would subject to withholding tax at the rate of 4.9%. Therefore, a MNC can establish a Barbados IFSC to provide loan financing to a related company in Mexico and reduce the applicable withholding tax. The interest received by the IFSC will be subject to corporation tax in Barbados at the rate of 2.5% down to 0.5% depending on the level of income. Any dividends paid by the IFSC to foreign MNC will be exempt from withholding tax in Barbados.
In addition to the above tax incentives, Barbados has developed a progressive, well-regulated environment supported by modern legislation and grounded in a long tradition of transparency. Barbados has undergone a number of enhancements to its regulatory regime over the past several years, continuing its commitment to adhering to the highest international regulatory standards. Its other attributes include its well-developed infrastructure, state-of-the-art telecommunications technology, highly qualified and experienced professionals, economic and political stability and an international airport with daily flights to major cities such as London, Miami, New York and Toronto.
Barbados therefore has the right mix to consolidate its position as a gateway to Latin America.
1 This rate has been reduced to 0.5% from 1% by the Minister of Finance effective income year 2012 by means of the 2012 Financial Statement and Budgetary Proposals. The rate will be further reduced to 0.25% for income year 2013. The IBC Act is being amended to reflect the rate changes.
2 Under Barbados’ domestic tax legislation, the term “qualifying overseas professional services” is defined to include, among others, information services, e-commerce services, surveying services and engineering services. This legislation is being amended to expand the range of qualifying overseas professional services to include exploration, extraction and other mining, oil and gas activities, licensing and sub-licensing of intellectual property and shipping services.