What is BEPS? “BEPS refers chiefly to instances where the interaction of different tax rules leads to some part of the profits of multinational enterprises (MNEs) not being taxed at all. It also relates to arrangements that achieve no or low taxation by shifting profits away from the jurisdictions where the activities creating those profits take place.” – OECD
Brief History of the BEPS Project
In 2012 the G20 requested the OECD to develop an Action Plan to tackle BEPS “in a comprehensive manner”. In pursuance of this mandate, the OECD published in February 2013 a report entitled, “Addressing Base Erosion and Profit Shifting“. The Report identified weaknesses in the current tax rules that it claimed contributed to the incidence of BEPS and called for the development of a comprehensive plan of action to address such weaknesses.
The Report concluded that the consensus based framework adopted by countries to eliminate double taxation, while at the same time preserving tax sovereignty, had created gaps in the international tax rules which were being exploited by tax planners. Some of the gaps identified were:
- The allocation of taxing rights between the residence and the source country under existing DTAs
- Double non taxation or no or low taxation arising from the existence loopholes in the interaction of countries domestic laws.
Following the publication of its Report, the OECD developed an Action Plan in which it identified fifteen (15) action items that were needed to address BEPS.
After extensive consultations between 2012 and 2015, the OECD published on 5 October 2015, 13 papers outlining consensus actions, which it classified as the “minimum standards”, “best practices” or “recommendations”, that governments should adopt in order to combat BEPS.
The areas that are of particular relevance to Barbados are the measures addressing tax treaty abuse, transfer pricing, hybrid mismatch arrangements and harmful tax practices.
It is clear that a number of these measures may have significant adverse impact on Barbados as an international financial services centre, particularly if these require major changes to be made to the suite of legislation that govern the international financial services sector which make them less attractive to foreign investors. However, all IFCs will be required to comply with the same minimum standards. In addition, many countries have introduced measures in their domestic laws in order to comply with the BEPS project.
All of the above measures, taken together, are likely to create both challenges and opportunities for Barbados’ international financial services sector.
For example, the introduction by the UK of anti-hybrid mismatch rules have had an impact on structures established by multinationals using UK limited liability partnerships (“LLP”), which are corporations under UK corporate law but treated as transparent for UK tax purposes (i.e. as hybrid entities). This has in turn created an opportunity for the use of Barbadian international business companies as the limited partners in such LLPs in order to ensure that the tax benefits of being treated as transparent for UK tax purposes are maintained.
Perhaps one of the most important outcomes of the BEPS project is the requirement that entities established in IFCs will be required to demonstrate a greater level of economic substance in the jurisdiction in which they are established in order to be able to continue to enjoy the benefits of low rates of taxation as well as, where appropriate, protection under double taxation treaties.
This development presents Barbados with a significant opportunity to attract more international investors to establish their international operations in Barbados in order to take advantage of its quality work force, well-developed infrastructure and network of double taxation and bilateral investment protection treaties, as they seek to meet the new substance requirements.
In turn, the Barbados economy will benefit through the creation of additional jobs, increased tax revenue and the generation of much-needed foreign exchange.
However, these benefits will only materialise if there is effective collaboration between the Government and the private sector in effecting the necessary legislative and administrative changes that will be required in order to ensure that the tax and regulatory regimes applicable to the IFS are complaint with the new international standards imposed by the BEPS project, particularly in relation to what the OECD refers to as “harmful tax practices”. This will require the removal of measures in the existing regimes that have the effect of “ring fencing” the IFS from the domestic sector.
Although unlikely to be an easy task, it is a necessary evil and, if properly executed, will simplify the tax and regulatory system applicable to the IFS, thus making it more user-friendly. In addition, it should ensure that Barbados is excluded from future blacklists of the G20 and the EU.
There is no doubt that, in the short-term, the implementation of the BEPS project has created uncertainty both for investors who utilise IFCs and the IFCs themselves. However, in the long-term, a country such as Barbados that has built its reputation as an IFC on the existence of a business environment that actively supports businesses of substance, the future is likely to offer new opportunities for sustainable growth.