In this, our 50th year of independence, the Barbados Revenue Authority (BRA) is hosting the 37th annual Technical Conference of the Commonwealth Association of Tax Administrators (CATA) at the Hilton Hotel from 7-11 November, 2016. This is significant, not only because it is the first time in 17 years that a CARICOM member state is hosting the conference, but also that it is perhaps the most critical staging of this gathering ever, for countries like Barbados.
The BRA’s communications officer Erica Lazare has said that the conference “…provides an excellent platform to share experiences on strategies for enhancing tax compliance as well as identifying opportunities for stronger coöperation between respective tax administrations…”. This article attempts to explain why having representatives from Commonwealth member states, tax advisors from international agencies and business people in the same room is so much more than that.
Under the theme ‘Enhancing Tax Compliance through Strategic Alliances‘, the conference presents a very real opportunity for Barbados and its CARICOM neighbours to influence the international discourse on issues such as tax compliance, enforcement and exchange of information. This could prove particularly important for our International Business and Financial Services sectors, and by extension economies, throughout the region. If genuinely leveraged as an opportunity to build strategic alliances, this conference could mark a turning point in the struggle to navigate and influence the constantly evolving tax transparency and disclosure regimes, which have threatened Caribbean Offshore Financial Centres (OFCs) like Barbados.
Indeed, this forum is taking place at an opportune time considering that global exchange of information regimes are being implemented regionally. CATA’s 46 members, which includes both developed and developing countries, could therefore prove to be invaluable allies for Caribbean islands facing challenges, which include meeting the implementation requirements of the US’s Foreign Account Tax Compliance Act (FATCA) and the Organisation for Economic Cooperation and Development (OECD) Common Reporting Standard (CRS). For example, although FATCA inter-governmental agreements (IGAs) with the US have been signed regionally, some islands have yet to make them effective through their legislative process. Additionally, implementation difficulties in many islands have caused a number of reporting deadlines to be extended.
Against this background, this conference presents an excellent opportunity for Caribbean small island developing states (SIDS) to obtain technical and other support from larger, more developed and influential fellow Commonwealth member states. Through this, we could potentially achieve a more efficient implementation of reasonable standards, despite our limited resources. This is critical in light of the fact that international reforms typically create frameworks that require increased infrastructure and technical expertise which come at very high cost, adding to existing burdensome compliance obligations. Perhaps more importantly, however, CATA’s forum also has the potential to strengthen our alliances in the international arena to combat unfair policies which undermine our viability as OFCs and do not give adequate consideration to the challenges peculiar to small island developing states.
International Tax Compliance & Enforcement
Not only is implementation a challenge for the Caribbean region, but we constantly find ourselves blacklisted as uncooperative states despite our best efforts in terms of compliance. As such, our international competitiveness is undermined. The blurred lines between what is tax avoidance (legal), tax evasion (illegal) and harmful/aggressive tax avoidance need to be clarified since this ambiguity often results in many countries with legitimate regimes being deemed uncooperative. Both as an organisation and as individual member states, CATA could agitate for clarification by consensus of the distinctions between these practices, with a view to arresting the creeping trend of treating them in the same way, which facilitates the negative rhetoric we face as a region. For small vulnerable economies like those in the region, we cannot afford continued ambiguity. Illustratively, Barbados – a well-regulated, responsible jurisdiction of substance – sometimes finds itself on these lists despite generally meeting its compliance obligations. Further, as noted by the Tax Justice Organisation and others, several international bodies as well as states, unilaterally create their own blacklists of “tax havens” applying standards that are not transparent and are frequently skewed by political expediency. Thus, developing countries, such as those in the Caribbean, often feature on lists which noticeably fail to acknowledge the shortcomings of large, powerful nations.
The negative assumptions which plague Caribbean OFCs like Barbados are often exacerbated by unrepresentative standard-setting bodies like the OECD, who suggest that once a country relies heavily on foreign investment and has certain business incentives such as low tax regimes, they are a “tax haven” and are “likely” to be uncooperative in curbing “harmful tax competition”. A more sophisticated and nuanced approach than this is necessary and the CATA conference presents an opportunity to begin crafting such an approach. It would, therefore, be in our best interest going forward to use it to identify allies in the fight to have credit attributed where it is due by insisting that jurisdictions be judged on their own merits and performance rather than dangerous generalisations. Further, the necessary assessments ought not to be administered by closed clubs such as the OECD, G20, G7 or G8, where many developing countries do not have a seat at the table. Rather, as advisor to the Barbados government Francoise Hendy-Yarde has often advocated, it would be preferable for the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) to evolve into the authoritative voice on international tax issues. Considering that it brings together 135 countries and 15 observers representing a number of tax and non-tax global entities, it would be a more inclusive body, which if properly empowered, could do for tax what the WTO has done for trade in attempting to balance the power dynamic within the global political economy. Should CATA and its member states support such a prospect, it would be placed firmly on the global agenda.
In the interim, CATA could serve as a platform through which smaller states can contribute to the development of policies and tax structures better suited to their needs and limited resources. This in turn would assist in the reduction of tax avoidance and evasion globally, not only in developed states. As Barbados Minister of Finance, Chris Sinckler confirmed recently international tax policies and reforms are resulting in detrimental consequences for smaller countries, with Barbados seeing losses of tax revenue in excess of $200 million from the international business and financial services sector alone. By championing the cause of SIDS in the Commonwealth and beyond, CATA could ensure that the international tax reforms are fair, reasonable and do not adversely affect the already slow development of developing states that have social and economic dependencies on these sectors. More importantly, collaboration with SIDS is crucial to the effectiveness of these international tax reforms because if countries are unable to implement, reform is in vain. Genuine inclusion of developing countries reduces weaknesses in the international tax structure that may create further opportunities for base erosion and profit shifting. Strategic alliances are therefore imperative for the global anti-avoidance initiative and tax compliance generally.
Regional/Domestic Tax Compliance & Enforcement
As is our experience in Barbados, CARICOM nationals are generally burdened by high income tax, VAT and property taxes. With many tax deductions no longer available for those making home improvements, renting or servicing mortgages etc., it has proven difficult for the average person to save or invest. At the outset of the CATA conference, Mr. Sinckler has rightly urged delegates to consider their role of advising governments to be critical to the identification of the most efficient and equitable ways to devise, impose and collect national tax revenue. Hopefully, another outcome of this gathering would be that regional tax administrators and advisors would be exposed to new strategies which prompt them to ‘go back to the drawing board’ when advising governments and revisit best practices in tax administration and policy.
To this end, Adam Smith’s four canons of taxation: equity, neutrality, certainty and practical enforcement are key. For example, the neutrality principle asserts that “every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the state.” This principle requires that taxes should be created in a way that seeks to minimize the amount paid by the taxpayer in relation to what is needed by the government treasury. It would appear, however, that this is not a principle widely applied in the Caribbean, particularly Barbados. The most recent imposition of the 2% National Social Development levy in Barbados on domestic outputs as well as the customs value of all imports at the border (with exception to goods for the manufacturing, agriculture and tourism sectors) illustrates this point. In the simplest of terms, we cannot tax our way out of recession and approximately 10 years after the financial crisis, we must finally turn our collective minds to the self-inflicted causes of our financial woes. Only then, will domestic taxation in the region begin to serve its true purpose.
Exchange of Information
Another related but distinct item identified as high on CATA’s conference agenda is the exchange of information between tax and other authorities of sovereign states. Post-financial crisis, transparency and disclosure has been at the forefront of the global regulatory agenda. This brought with it a shift from exchange of information on request under individual treaties, to the automatic exchange of information between tax authorities globally through CRS. As communicated by the OECD, the CRS is intended to lead to a truly global regime of exchanging information on financial accounts to facilitate the fight against tax evasion, money laundering, financing of terrorism and such illicit activities. Notably, Barbados and Trinidad and Tobago have already committed to begin reporting under the CRS from 2017 whilst other CARICOM islands such as St. Lucia and St.Kitts and Nevis are facing a 2018 reporting deadline.
However, the kind of automatic exchange of information the CRS contemplates has its implications, which have yet to be properly addressed. Registers of beneficial interests are similarly concerning but are currently being pushed as the next regulatory wave for transparency, particularly by the UK. Nonetheless, CATA could play an important role in ensuring that the premature implementation of ineffective measures do not result in duplications of effort, administrative burdens and wasted resources for its member states. For example, registers of beneficial interests arguably do not effectively balance the general interests of society with the rights of individuals affected by the automatic exchange of their confidential information in violation their fundamental right to privacy. A similar point formed the basis of a recently determined constitutional challenge to France’s publicly accessible trust register, which was resolved in favour of the individual rather than the state. This ruling came a few months after the UK pressured its Crown Dependencies and British Overseas Territories into implementing a similar measure and underscores the need for special care to be taken in devising tax strategies and tools.
CATA presents a forum to not only acknowledge recent developments such as this but to make the point emphatically that inappropriate economic and political influence exerted on sovereign states to hurriedly adopt every new iteration of international regulation is unacceptable. In this regard, Mr. Sinckler’s remarks on the opening day of the conference were fitting insofar as it sought to impress on the audience that the “…international tax administration practice, policy and legislative reform seems to be creating an ethos where instead of strengthening the pillars of sovereignty and self-determination… seem to be undermining these systems and creating a frustrating element of uncertainty and exasperation across many countries.” One can only hope that this point resonated with the delegates and foreshadows the kind of purpose-driven dialogue and action points Barbados and the wider Caribbean needs.
Undoubtedly, there is a need to reconsider the approach to global financial regulation, with international taxation being a huge part of that. However, if the international community is ever to develop a genuine global tax ecosystem, objective standard setting, monitoring and evaluation through a collaborative process and a truly representative organization is critical. Until then, CATA affords its members a platform that can facilitate coördinated advocacy, better collaboration and more thoughtful regulatory measures. Having its conference in Barbados at this point in time is a golden opportunity not just for the country but the region to assert its interests and influence the global conversation.