Canadian TIEA’s – Storm Clouds On The Way?

As of the date of this article Canada has signed a number of Tax Information Exchange Agreements (“TIEAs”) with a number of countries including competitors of Barbados in the area of International Business. Many are trying to guess how much of a negative impact this will have on the International Business Sector (“IBS”) of Barbados. […]

By Russ Jones

August 28, 2010

As of the date of this article Canada has signed a number of Tax Information Exchange Agreements (“TIEAs”) with a number of countries including competitors of Barbados in the area of International Business. Many are trying to guess how much of a negative impact this will have on the International Business Sector (“IBS”) of Barbados.

Prior to TIEAs Barbados had an advantage over its Caribbean neighbours in terms of attracting subsidiaries of Canadian companies. This was due to provisions under Canadian Tax law which permitted subsidiaries of Canadian companies to repatriate exempt surplus, a Canadian tax term, by way of dividend without the dividend being subject to tax in Canada. Before TIEAs this favourable tax treatment was only extended to countries which had a Double Tax Treaty (“DTT”) with Canada, which Barbados did.

However, a while ago Canada amended its tax law to extend this favourable repatriation treatment to countries that would sign a TIEA with Canada. This means that Barbados no longer has a competitive advantage over the likes of Bermuda, British Virgin Islands (“BVI”) regarding exempt surplus. As many of these Caribbean countries have a zero corporate tax rate, compared to Barbados rate of 1% to 2 ½%, then for a company that is producing sizeable profits then a move to Bermuda or BVI would appear very attractive. There is a further issue in that Barbados insurance companies known as Exempt Insurance Companies (“EICs”), which are taxed at a corporate rate of 0%, have been denied the exempt surplus treatment as the Canada Revenue Agency (“CRA”) had previously stated that since the rate was zero then, due to other provisions under Canadian Income Tax law, EICs could not avail themselves of the favourable treatment of exempt surplus. More on this later.

When Bermuda prematurely announced it had signed a TIEA with Canada, there was concern in Barbados that the IBS could be dealt a serious blow both in terms of attracting new companies and the possibility of existing companies leaving Barbados for other countries. To date significant activity of this type has not happened.

However, Canada has now signed TIEAs with Bermuda and BVI to name just two and Bermuda in particular has been very aggressive in exploiting this perceived advantage. At least one company has sent out literature stating why Barbados should no longer be used due to the fact it does impose a tax rate, albeit a very low tax rate. Accordingly the concerns of Barbados are again resurfacing.

It is the view of this author that there will be some negative fallout as a result of these changes to Canadian tax law along with competitors of Barbados signing TIEAs with Canada.

However, in a number of situations, both tax and non-tax, Barbados will have advantages that Bermuda, BVI or Cayman either cannot overcome or are very unlikely to overcome.

Tax Advantages

Barbados is distinctive from virtually all of these other jurisdictions in that it has an existing tax treaty network that is currently expanding rapidly. Breaking out the individual Caricom countries that have signed the Caricom Tax Treaty, Barbados has just under 30 DTTs in force with several more soon to follow and negotiations with other countries either underway or planned. While there are certainly situations where the Barbados tax treaty network is not important for international tax planning where other countries are involved, there are situations where the treaty network is very important especially since Barbados has treaties with many of the world’s leading industrial countries including the US, UK and China to name a few. It is very unlikely that Bermuda, BVI or Cayman will ever have such a network.

While these countries are also signing TIEAs with other countries as a result of the Organization for Economic Cooperation and Development (OECD) grey list and black list, it does not automatically give them “legitimacy” from a tax evasion perception from many of the taxation authorities. While it is usually the Minister of Finance that signs treaties or TIEAs, it is the taxation authorities of the various countries that are tasked with interpreting and enforcing that country’s tax laws e.g. the IRS in the US, Inland Revenue in the UK and CRA in Canada. As long as they continue to harbor their concerns and perceptions about the perceived tax havens, these countries may still be in for challenging times. This will be due in part to the attitudes of the very companies that Bermuda, BVI etc. will be trying to attract. As we know, governments around the world are very focused on tax evasion and aggressive tax planning. Since the companies that will be asked to move or set up in these no-tax jurisdictions are under moral pressure from both government and shareholders they may not be willing to move to a country that has a had a history of both tax avoidance and poor governance. Already, Bermuda has had a number of companies with a US parent company, leave due to the perceptions of not paying their fair share of taxes. To be fair Barbados does face some of this tax avoidance pressure but it has, in my experience, been quickly dealt with when the treaty network and regulatory system of Barbados is brought up. Remember, the Central Bank of Barbados rejected the attempts by Alan Stanford to set up a bank in Barbados several times.

Non-tax Advantages

In many situations a zero tax rate is not enough to convince a company to relocate. Many companies that do international tax planning have substance in a country such as Barbados in terms of employees and office space. In addition they need a good infrastructure system to carry on their business; this can include a supply of local labour, good air links, reliable and modern communications systems to name a few.

This is where the other countries really begin to show their flaws. While not a large country, Barbados has a population of about 280,000 people, excellent air links to the US, Canada, the UK and now Brazil (Sao Paulo), a highly educated and literate labour force (98+% literacy rate and mandatory school through the equivalent of high school). Many of the Caribbean competitors have very low population (EG BVI – 28,000), a very shallow labour pool as a result, lower literacy rates and air links that are not as good as Barbados nor as extensive.

If you are a company that has a real presence, in terms of substance of the business, then it is hard to not consider Barbados as the only real alternative. In addition, in the view of this author, with governments putting international tax planning under close scrutiny, companies will need more substance in the countries in which they operate. In tax terms this can be expressed as moving from the current mind & management test under common law to the OECD concept of effective place of management which implies greater substance that just a company name on a door.

The Future

For Barbados to assume that things are okay because of the above comments then it is mistaken. It must continue to expand the treaty network but even that is insufficient. Both government and private industry must actively seek out new markets as evidenced by the efforts focused on Mexico. In addition however, both groups must also increase the education of the pool of people with international tax experience through education and training. Having 40 treaties sounds great but if there are only a dozen people in Barbados with the experience many opportunities will be missed. While mentioned by others, Barbados must also permit international law firms to set up business in Barbados. The reasons are not to create competition per se but to bring international connections and networks to the legal profession, like the large accounting firms have done, and to also provide experience and education in the area of international business to the legal profession.

There is also one issue that remains outstanding as of the date of this article. For a country such as Bermuda, which has a zero tax rate, to be able to take advantage of the exempt surplus rules, while Barbados EIC’s cannot is an unfair anomaly that must be addressed quickly. It is my understanding this issue is being discussed with Canada but I am not aware of a specific date for the matter to be resolved.

Barbados still has many advantages over other jurisdictions in the arena of international tax planning as well as numerous opportunities. Only by embracing change and seeking to continually improve will Barbados realize its true potential in international business.

Russ Jones

Tax Partner, PricewaterhouseCoopers

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