A new UK / Barbados Double Taxation Agreement (“DTA”), or Tax Treaty, was signed on April 26, 2012. It has yet to be ratified by both countries and will not come into force until the latter country ratifies. It replaces the previous treaty which was signed in early 1970. As the previous treaty was over 40 years old it was not up to modern standards in a number of areas, primarily withholding tax rates and exchange on information provisions.
There are a number of favourable new provisions but also a couple of disappointments. As it is a very recent document there will be ideas and thoughts on the new DTA and how it can be used as practitioners become more familiar with the provisions. In addition as new developments occur in Barbados, such as the long awaited Private Trust company legislation, there will be new opportunities to utilize the DTA.
Some of the updated provisions are:
- Withholding tax rate on dividends is reduced to zero, except where the dividend is paid out of income (including gains) derived directly or indirectly from immovable property (primarily real estate) …. in which case the withholding tax rate is 15%; this 15% withholding tax rate would appear to apply to mutual funds but can include other entities that distribute their income annually.
- Withholding tax rate on interest payments is now zero;
- Withholding tax rate on royalties is now zero;
- In general pensions have a withholding tax rate of zero:
- IBCs, ISRLs, EICs and entities under the International Financial Services Act are not entitled to any “benefits” under the treaty. In essence, they are not eligible for reduced withholding tax rates. What is unclear is whether they are entitled to other provisions of the treaty, notably the ones dealing with residence, permanent establishment and business profits. There is no definition of the word benefit in Article 22 nor is there any other comment that would provide guidance. Initial discussions with UK tax practitioners does not provide any further clarity and they indicated that the UK does not usually provide explanatory notes on treaty provisions. This absence of clarity is disappointing.
- The Exchange of Information Article is now up to date and therefore removes one of the criticisms coming out of the Phase 1 Peer Review, that being that a number of Barbados’ DTAs did not have the modern exchange of information provisions.
Preamble on word usage: each section of the DTA is called an “Article” and has a topic for it e.g. Dividends. Each Article contains provisions relating to the topic.
- Regarding the important issue of tax residency of an individual or other entity, primarily a corporation or body corporate, the standard tests are used. What is interesting is that for the tie breaker rule for persons other than an individual is to be determined by the competent authority process. The frequent use of the effective place of management test as seen in other DTAs e.g. Luxembourg, Spain, etc. is not included. In my view this is disappointing as it introduces uncertainty and a cumbersome process. In most situations the use of competent authority is a slow process. It is unknown currently as to why this approach was adopted.
- The taxation of immovable property provisions remain with few changes. It has been relocated to another part of the treaty keeping in pace with newer treaties.
- Under the business profits Article there is a welcome clause that, in the event of a change of income allocation by one country (usually because of transfer pricing), then the other country shall adjust the income allocation in that country to the extent necessary to avoid double taxation. Although Barbados does not currently have transfer pricing rules, many other countries, including the UK, do. In the absence of the provisions contained in this Article, it has often been necessary to appeal to the Barbados Inland Revenue to adjust the Barbados entity’s income to avoid double taxation. The appeal process of course raises a degree of uncertainty for the taxpayer. While the Barbados taxation authorities have, in my experience been fair to date, a provision providing certainty of process, although not necessarily outcome, is welcome.
- There is additional clarity in the Article dealing with International Traffic (which consists mainly of ships and aircraft) as to what is included in profits from the operation of ships and aircraft. There are no significant changes I can see from this added clarity.
- In addition to the reduction of the withholding tax on dividends in most cases, as noted above, most of the wording of the Article dealing with dividends has been updated. There is now an anti treaty shopping provision included in this Article.
- The comments relating to dividends also apply to the Article on interest, including the anti treaty shopping provision.
- The wording in the Article dealing with royalties has been simplified, and again an anti treaty shopping provision has been inserted.
- The new treaty Article dealing with pensions has some added complexity. Most of the Article is relatively straightforward but there are a few complex provisions that deal primarily with cross border pension plans. Accordingly if you are dealing with a situation where a person who is employed or self employed in Barbados is making contributions to a pension plan in another country then you should review that Article.
- As noted above the applicability of the DTA to IBCs, ISRLs, EICs and entities under the International Financial Services Act is, in my current view, unclear. The old DTA clearly indicated that IBCs etc were not covered by the DTA. As alluded to above the wording under the new DTA states:
“The benefits of this Convention are not applicable to companies or other persons which are wholly or partly exempted from tax under the following regimes in force in Barbados …..”
My two areas of uncertainty are:
Is it considered that virtually all of the Articles, except the exchange of information and definition type of Articles are considered to be “benefits”? For example, Article 4 on tax residency, does the ability to determine where an entity is tax resident a benefit, i.e. is greater certainty a benefit? Similarly are Articles 5 on permanent establishment and Article 7 regarding business profits considered to be benefits of the DTA?
Secondly, IBCs and ISRLs pay tax, albeit at a lower rate. Therefore, are they partly exempted from tax? The IBC Act states:
“…. In lieu of tax at the rate specified under the Income Tax Act, there shall be levied and paid … a tax on the profits and gains of the company at the following rates …..”
The definition of taxes to which the agreement applies are, in Barbados, the income tax, …. Note it is not the Income Tax Act nor do the words income tax have the first letter in each word in capital letters. I would love to argue that IBCs are neither wholly nor partly exempted from tax under the IBC Act. While many would argue it is clear what the intent of Article 22 is, I would still enjoy pushing this issue. As evidence for my position I would refer to the revised CRA interpretation of the taxation of EICs contained in their October 2010 release.
I would have much preferred the approach taken in the new Protocol to the Canada / Barbados DTA where it clearly states which Articles do not apply to IBCs etc. Why it is not the same is beyond the comprehension of the writer.
Other than that there are no other provisions that leap out at one. It will take a few weeks to consider some scenarios to see if there are opportunities or negative consequences. However, my reading of the Limitation of Benefits (LoB) Article – see point 5 above – suggests that the use of a non IBC and the Foreign Currency Tax Credit when carrying on an international business should result in full treaty benefits.
In summary a new DTA with some favourable provisions, eg withholding tax rates, some uncertainty, tiebreaker rules for companies etc and in the LoB clause and an absence of complexity as is found in the US / Barbados tax treaty.
Any errors in interpretation are mine alone. As my career as a tax partner with PwC Barbados comes rapidly to a close I would like to thank all of those in Barbados that have provided me with the opportunity to practice tax for four years in Barbados, technical challenges, the opportunity to represent Barbados as I travelled the world and most importantly those who have extended friendship to me. Happy travels though life to all.