Barbados with benefits
Trevor A Carmichael
Chancery Chambers
Bridgetown
Trevor A Carmichael (Bio)
John Ruskin has noted with some prescience that the highest reward for a person's work is not what they get for it, but what they become as a result. Barbados' long standing participation in the global financial services industry has brought both sets of benefits. Its old and still burgeoning financial services industry continues on a path of guided development grounded in careful experimentation. The ongoing tax treaty expansion has sought to build on the kernel of Barbados' historic success in financial management and skilful manoeuvre in the international domain. As the global financial services industry has dramatically spread to a wider net of jurisdictions in the latter half of the twentieth century, Barbados has accelerated its' product enhancement and tax treaty expansion as two pillars of success.
Barbados' tax treaties offer benefits which provide tax-planning opportunities to investors who are seeking to minimise their global tax exposure. Most of its' treaties allow for reduced withholding tax rates on dividends, interest and royalties. A case in point is Canadian domestic tax legislation, which provides that dividends paid by a Canadian resident company to a non- resident company are subject to Canadian withholding tax at a rate of 25%. However, under the Barbados-Canada tax treaty, this rate is reduced to 15%.
Tax-spring provisions
Many of its treaties also contain tax-spring provisions. These allow for foreign companies with subsidiaries that conduct business in Barbados under the Fiscal Incentives Act or the Tourism Development Act and consequently pay no corporation tax to be given credit for the Barbados taxes that would have been paid had the Barbados subsidiary not operated under the above-mentioned incentive legislation. The Barbados-UK double tax agreement contains such tax sparing provisions. In addition, the interaction of the Permanent Establishment (PE) and Business Profits Articles of Barbados' treaties offer protection to Barbadian resident companies from exposure to taxes on business profits earned in another treaty country. The treatment of two capital gains is often important to international investors since, in some of Barbados' treaties, the right to tax certain gains lies with the state where the seller is resident. Hence, in cases where the seller is resident in Barbados, and since Barbados does not impose tax on capital gains, no tax is therefore payable in either Barbados or in the other treaty country.
Benefits provision
A number of Barbados' tax treaties also contain a limitation on benefits provision. Such a provision prohibits treaty benefits from being applied to offshore companies which benefit from a special tax regime or prevent non-residents of a treaty country from enjoying benefits of a treaty. Barbados' treaties with Canada, Norway, Sweden, Finland and the UK contain restrictive clauses denying the benefits of the treaty to special incentive companies, such as the international companies (IBCs). Although the provisions of the Barbados-Canada treaty do not apply to companies that are entitled to special tax benefits in Barbados, the Canadian domestic foreign affiliates rules permit these companies, once resident for tax purposes in Barbados, to utilise special tax benefits under Canada's domestic tax legislation. As a result, such income, when repatriated to Canada, is not subject to tax in Canada. The revised Limitation on Benefits Articles of the renegotiated Barbados-US tax treaty excludes special incentive companies from benefiting the treaty provisions applicable to dividends, interest and royalties. However, this treaty still has advantages for these companies, principally under the Business Profits Article.
Individuals
There are also benefits for individuals. Barbados' more recently concluded treaties, including the treaties with China and Cuba, do not prohibit the use of special incentive entities from obtaining treaty benefits. These treaties provide significant tax-planning opportunities to investors wishing to minimise their costs when repatriating income from their investment. The treaties with China and Cuba contain favourable provisions which make Barbados an attractive jurisdiction through which investments into China and Cuba can be channelled. In April 2007 Barbados signed a historic tax treaty with Mexico which brought to fruition complex negotiations which began in October 2006. In addition to areas of great planning opportunity using withholding tax and dividend provisions, it contains the special provision which allows a resident of either contracting state to take a tax deduction, subject to any conditions provided under the income tax laws of that state, for donations to any organisation qualifying as a charitable institution under the income tax laws of the other three contracting state. The relevant article allows the competent authorities to consult each other so as to agree on whether an organisation qualifies as a charitable institution under the laws of either Mexico or Barbados.
Conclusion
With the increasing global importance of philanthropy, this provision holds great possibilities for the charity sector in both jurisdictions. It may be used creatively. Barbados has recently overhauled its charitable legislation and hopes to build on its long standing philanthropic tradition at both the micro and macro levels. In this regard, it is in the process of setting up a Centre for Philanthropy, and when such a centre is established, it will have consolidated Ruskins' two rewards, blending ultimate result with ongoing gain.