Barbados' Evolving Tax Structure

Barbados has altered its tax system over the past year to strengthen its public finances, address the burden of fiscal adjustment, improve domestic competitiveness and respond to the changing international tax environment. In this regard, it reformed corporate and personal income taxes as well as the value-added tax, which together accounted for 63% of tax revenue in fiscal year 2018/19 (April 2018 to March 2019).

The convergence of corporate tax rates, in response to the OECD’s criticism that foreign currency earning companies were being ring-fenced, has resulted in the creation of a new sliding scale structure that has reduced the top tier corporate tax rate from 30% to 5.5%. Simultaneously, with the elimination of most tax credits and allowances previously granted, the tax system has been simplified while the lowest rate has fallen to 1% for taxable incomes greater than $30 million. To mitigate the loss of revenue from domestic companies, government has expanded the tax base by bringing into the tax net companies formerly licensed under the Exempt Insurance Act and which were previously not subject to tax. Under the new Insurance Act, businesses offering third party insurance or reinsurance are now levied a standard corporate tax rate of 2%.

The new structure positions Barbados as one of the more tax competitive jurisdictions for corporates. Figure 1 illustrates a broad variation of corporate tax rates across countries at different levels of development. Deeper understanding of these variations requires analysis of several factors including the economic structure, each country’s overall tax structure, efficiency in collection of taxes, social infrastructure costs and financing needs.

The reduction of the corporate income tax (CIT) rate has necessitated the reform of personal income tax (PIT), in order to partially align the rate levied on businesses and individuals and to mitigate the incentive for tax evasion. Consequently, the adjustments to the personal income tax structure are expected to help alleviate the burden on individuals by reducing the effective rate on taxable income from 25% to 17% by income year 2020. This redistributive measure complements the extension of the Reverse Tax Credit of $1,300 to include persons earning up to $25,000, up from $18,000. In addition, a compensatory income credit has also been granted to persons earning income above $25,000 but below the $35,000 threshold. Figure 2 illustrates the evolution of the effective tax rate by income band.

As a result of reducing revenue from the personal income tax, government has had to modify existing taxes or seek additional sources of revenue. As the single most significant source of revenue, the value added tax (VAT) has also been the subject of reform, centred on strengthening tax administration and reducing the payment of VAT refunds. The standard VAT rate remains at 17.5% but the value added tax within the tourism sector has been adjusted from 7.5% to 10%, effective January 2020. A broad range of goods, including for basic food items, medical drugs and education services continue to be zero rated, but some goods and services, including the supply of water or sewage services have shifted from zero rated to exempt status from the current fiscal year. The new measures will raise the effective VAT rate but the degree of zero rating and the application of the reverse tax credit and compensatory income credit mitigate the impact of the standard rate.

Taken from the Central Bank of Barbados' Review of the Economy for January to June 2019.