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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 was reduced to 30% in 2005 and 25% in 2006, while personal
income tax has been 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.
Amendments
to the Barbados Small Business Development Act in 2007 have
provided registered incorporated small businesses with a
number of incentives. These incentives include, among others:
a reduced rate of corporation tax of 15% (instead of 25%)
on the profits of the business; exemption from import duty
on raw materials, plant and equipment imported for use in
the business; and exemption from withholding tax on dividends
and interest earned on investment in an approved small business,
or in any fund approved for investment in small businesses.
In
addition, there is the exemption from the payment of stamp
duty, under the Stamp Duty Act, on all documents related
to business where the registration of those documents is
required by law; and a deduction of corporation tax of an
amount equal to 20% of the actual expenditure incurred in
respect of the use of technology, market research and any
other activity that is, in the opinion of the Commissioner
of Inland Revenue, directly related to the development of
the business.
The
Act was first passed in December of 1999, and the recent
amendment has re-defined a small business as any enterprise
that satisfies two of the following criteria: is incorporated
under the Companies Act of Barbados; has not more than $1
million as stated or paid up capital; has not more than
$2 million in annual sales; and employs not more than 25
persons.
In
addition, several new measures were announced in the 2007
Budget by then Prime Minister Owen Arthur to further increases
the tax competitiveness of the jurisdiction. Owen announced
that from the 2007 tax year:
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Dividends
earned by resident companies, including IBCs, from holdings
in foreign (non-resident) companies would be exempt from
tax, provided the Barbados company owns more than 10%
in of the dividend-paying company and the holding is not
merely a portfolio investment.
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Dividends
paid to non-resident shareholders by Barbados companies
would be exempt from withholding taxes on the portion
of income derived from foreign sources.
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Developers
selling homes to first-time buyers at BBD150,000 or less
would pay a reduced 15% tax.
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Companies
in the construction, manufacturing and tourism sectors
achieving an internationally-recognised environmental
certificate would qualify for a 150% deduction on the
costs incurred in obtaining certification.
 Scope
of Corporation Tax
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.
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Corporation
Tax Rates
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 and 2007.
Approved
Small Buisnesses pay 15%, as do Approved Developers and business
in Special Development Areas.
Under
proposed legislation, the corporate tax rate is set to fall
by an additional 5% to 20%.
Branch
or Subsidiary
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.
Calculation
of Taxable Base
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 have attracted withholding
tax at various rates; until 2004 such dividends were nonetheless
included in taxable profits, but as from 2005 a tax credit
was given for such dividends. In the 2007 Budget, then Prime
Minister Owen Arthur announced that dividends earned by resident
companies from holdings in foreign (non-resident) companies
would be exempt from tax, provided the Barbados company owns
more than 10% in of the dividend-paying company and the holding
is not merely a portfolio investment.
Domestic
dividends from resident companies are not included in taxable
income (there is a 12.5% 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:
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Losses
can be carried forward for nine years; there are no loss
carry-back provisions;
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There
are investment allowances of 20% or 40% for certain types
of industrial plant and equipment - these do not write
down the asset value;
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First
year allowances on plant and equipment are usually 20%,
and continue at the same rate on a straight-line basis;
for industrial buildings the rate is 4%; and for commercial
buildings it is 2%;
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Balancing
charges/credits are made on disposal of capital equipment;
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There
is a tax credit of 50% of certain foreign currency export
earnings;
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Export
allowances can be claimed on certain specified types of
export outside the Caricom area; these are calculated
as a percentage rebate on tax due on export profits, and
the percentage goes up, the higher proportion export profits
form of total profits, to a maximum of 93%;
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Some
export sales promotion costs for sales outside the Caricom
area attract 150% allowances; these also apply to some
types of tourism promotion expenditure;
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There
is no group or consortium relief.
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.
Filing
Requirements and Payment of Tax
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.
Withholding
Tax
Barbados-resident
companies apply withholding tax at 15% on dividend payments
to non-residents and 12.5% to residents. Dividends paid
out of foreign source income do not attract withholding
tax. See Double Taxation Treaties
for details of withholding rates for Treaty partners.
In
2007, non-treaty country withholding taxes were as follows:
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Dividends
paid out of foreign source income 0%
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Dividends
paid from non-foreign source income 15%
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Interest
15%
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Rents
25%
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Royalties
15%
-
Management/Technical
Aid Fee 15%
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Dividends
from untaxed profits 25%
-
Services
other than Management 25%
-
Covenants
20%
-
Branch
profits remitted/deemed remitted 10%
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Barbados
Government Securities 0%
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Professional
fees 0%
Prior
to 2007, preference dividends paid by a Barbados-resident
company were subject to withholding at 40%.
Dividends
paid by a Barbados-resident company out of tax-exempt profits
were 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
when remitting the withholding tax.
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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 BBD125,000,
but there is a 0.10% tax on on the excess of the improved
value greater than BBD125,000, a 0.45% tax above BBD500,000
and a 0.75% tax above BBD850,000.
Under
changes proposed in the 2007 budget, from the 2008 tax year,
land tax thresholds will be increased thus: 0% on improved
value up to BBD150,000; 0.10% tax on on the excess of the
improved value upto BBD400,000, a 0.45% tax up to BBD1 million,
and a 0.75% tax above BBD1 million.
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).
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