Corporate Tax Reform

Through its Base Erosion and Profit Shifting (BEPS) initiative, the Organisation for Economic Cooperation and Development (OECD) deemed that Barbados’ international business sector was ring-fenced from the domestic sector and that the associated tax regimes were harmful to international tax competition. This has been a long-standing criticism of the OECD and the Barbados government, under threat of being blacklisted by the OECD and the European Union’s Tax Code of Conduct Group, reformed its international business sector regime by harmonising the legislative and tax frameworks for domestic and international companies.

The legislative change has resulted in amendments to 11 pieces of legislation and the repeal of 5 pieces of legislation governing the international business sector and integrating their governance and regulation in harmonised acts for banking and insurance. In addition, new legislation was enacted to make provision for all entities operating in Barbados to have specific evidence of economic substance and also for the grant of foreign currency permits to certain entities.

The decision to converge local and international tax rates represents a bold initiative.  The corporate tax rate for domestic companies (25%) and those operating previously in the International Business and Financial Services Companies (0.25.-2.5%) will now transition to the structure set out below.

With the convergence of these rates, other revisions to the tax system have become necessary, including the inclusion of exempt insurance companies into the revenue base, the removal of the tax credit for foreign currency and, effective January 1, 2019, the reduction in permissible allowances under the Income Tax Act to those related to capital, renewable energy and research and development.

Initial scenario testing suggests that the change should be broadly revenue neutral but the change will give rise to increased reliance on international corporate taxes, low taxes for domestic companies and a need to reform other domestic taxes to safeguard the revenue base. The convergence of the tax rates becomes effective tax year beginning January 1, 2019 but it is not anticipated to impact tax revenues collections significantly until FY2020/21.

This new tax environment creates the potential for increased foreign exchange inflows from the international business sector but this could be partly offset by higher dividend outflows by foreign-owned corporates. At the same time, it creates an opportunity for profitable companies to invest and improve their competitive position against non-Barbadian firms.