Barbados direct corporate taxes

Barbados's tax regime must undergo some quite radical changes in the years ahead as the country aims to become compliant with the commitments of the CSME (Caribbean Single Market and Economy), and the government potentially faces quite significant losses in its revenue stream as a consequence. The country stands to lose between $75 million and $100 million in GDP as a result of tax changes already proposed and others in the pipeline as the government attempts to put the key principles of the CSME in place during 2005 and 2006.

"Insofar as Barbados will function as part of a Caribbean Single Market and Economy (CSME) after 2004, we must structure our tax system to be the most competitive in the region, and to make Barbados the preferred business centre in the Caribbean," announced Prime Minister Owen Arthur in his 2003 election manifesto.

The government also has to deal with the consequences of the 'commitment' letter which secured its removal from the OECD's 'harmful tax competition' black-list. 'Transparency' in the sense of convergence between onshore and offshore tax rates is the hardest pill to swallow. Given that the offshore sector contributes $200 million to the island's economic activity, setting a favourable level for offshore firms whilst maintaining an adequate revenue stream is clearly going to be a difficult balancing act.

Permanent Secretary at the Ministry of Finance, William Layne, says: “Convergence is a national issue and even though at the regional level you can agree on tax harmonisation, you cannot escape the fact that tax policy is a responsibility of a national government and will always be driven by national economic circumstances.”

In August, 2004, the newly elected president of the Barbados Financial Services Board, Penny Ettinger, suggested that the gap in tax rates between local and international businesses be narrowed as a step towards a converged tax system and improved national competitiveness. Ettinger, a former offshore banker and Canadian tax lawyer, said this could be achieved through a 2.5% rise in the current maximum rate paid by businesses in the offshore sector, in tandem with a larger reduction in the rate now paid by local companies from 25% to below 10%.

This would have the effect of appeasing onshore governments and putting the jurisdiction in a better position to negotiate new tax treaties whilst transforming the jurisdiction into one of the most competitive in the Caricom region for local firms, she argued. However, Ettinger acknowledged that an attempt to narrow or harmonise tax rates would need to be approached carefully by the government.

“For the Barbados Government to consider reducing the corporate tax rate overall from 25% to seven or eight per cent is going to be difficult, but on the other hand, of all the corporate tax collected in Barbados, 40% comes from the international business sector,” she observed.

Pointing to Ireland, Ettinger said there are successful precedents for the merging of dual tax systems.

However, acknowledging that a convergence of the tax system may initially deter new business and provoke some existing international businesses to leave, the BFSB president advised the government to implement such reforms slowly, over at least four or five years, whilst also bringing down the cost of doing business in Barbados. The government ran a budget deficit of 6.5% in the 2003/2004 financial year and 6% in the 2004/2005 year.

Corporation tax is being reduced to 30% in 2005 and 25% in 2006, while personal income tax is also being cut, and allowances increased.

Deputy Prime Minister Mia Mottley told parliament in July 2006 that under proposed legislation, the corporate tax rate will fall by an additional 5% to 20%. In addition, the new laws would widen the scope of duty-free imports to include raw materials as well as machinery and capital equipment in a measure designed to benefit small businesses.

Under the Income Tax Act, Barbados imposes corporation tax on 'companies': this term includes all companies incorporated or registered in Barbados, and any foreign company which carries on business or has an office or place of business in Barbados. Resident companies are taxed on their world-wide income; 'resident' means managed and controlled from Barbados. Non-resident companies are taxed only on income derived from Barbados, meaning from business actually conducted in Barbados.

The standard rate of corporation tax was 40% but this was reduced to 37.5% in 2003. For the 2005 tax year the rate was 30%, reducing further to 25% for 2006. Under proposed legislation, the corporate tax rate will fall by an additional 5% to 20%.

Branches pay an additional 10% corporation tax if profits have been remitted, or are deemed to have been remitted, unless profits are reinvested in Barbados other than for the replacement of fixed assets.

NB: If a branch has any significant level of activity in Barbados, it is likely to have had to register as an 'external company', and is treated in all respects as a company; so in Barbados at least the concept of a branch doesn't have much substance.

Profits from business and trading operations are calculated according to standard accounting principles, and include interest, royalties and rents.

Dividends received by local companies from trading and investment activities extra CARICOM in nontreaty countries attract withholding tax at various rates; until 2004 such dividends were nonetheless included in taxable profits, but as from 2005 a tax credit is given for such dividends.

Domestic dividends from resident companies are not included in taxable income (there will have been withholding tax).

The following list of permitted deductions and other aspects of calculation of the taxable base in Barbados merely summarises some of the chief points; the rules in many cases are quite complex:

Under the Barbados Income Tax Act a company may benefit from a tax credit in respect of taxes paid on foreign income pursuant to a double taxation agreement, on a reciprocal basis, where the person has paid or is liable to pay income tax in a Commonwealth country and where an international business company, international society with restricted liability or a company licensed under the international financial services act, pays foreign tax on income earned outside of Barbados. Income from an entity other than in the circumstances mentioned above currently will not qualify for the credit.

Company tax returns must be filed in respect of each fiscal year by 15th March in the year following the fiscal year if it ends between 1st January and 30th September, and by 15th June if it ends between 1st October and 31st December.

Companies must make an advance tax payment of 50% of their previous year's assessment by 15th September if their year ends by 30th September or otherwise by 15th December; then a further 50% is due by 15th March. Any balance of tax due is payable at the filing date.

Barbados-resident companies apply withholding tax at 15% on dividend payments to residents and non-residents alike; but see Double Taxation Treaties for details of withholding rates for Treaty partners.

Preference dividends paid by a Barbados-resident company are subject to withholding at 40%.

Dividends paid by a Barbados-resident company out of tax-exempt profits are subject to withholding at 45%. A company must keep a clear division in its accounts between the different streams of revenue and dividends paid out of them, and make appropriate reports to the tax authorities whehn remitting the withholding tax.

The Income Tax Act contains a schedule of withholding tax rates applying to different types of payment to non-residents:

Land Tax

Barbados levies an annual land tax at 0.6% on all unimproved land; on improved land the tax is 0.65%. For residential property, there is no tax on improved value up to $125,000, but there is a 0.10% tax on on the excess of the improved value greater than $125,000, a 0.45% tax above $350,000 and a 0.75% tax above $850,000.

Where a company that is incorporated and resident in Barbados or an individual who is a citizen or a resident of Barbados has title to land that is being used exclusively for agricultural purposes, a rebate of tax of 0.5% may be granted under certain circumstances.

If the company owning the land is non-Barbadian, or owned by a non-Barbadian company, the rates go up to 3% for unimproved land, and 2% for improved land. Some Tax Treaties include exemption from this tax.

There are also property taxes; however since 2003 the first $125,000 of a Barbadian property's value is exempt from taxation.

Stamp Duty

Stamp Duty is payable in a number of situations in Barbados; those most likely to affect businesses are transfers of real estate and shares (1%), leases (1%), mortgages (BDS$5 on the first $500, and $3 on each subsequent $500), and imported goods (varies).