by Maria Robinson, Country Managing Partner & Tax Partner, EY Barbados
In Barbados, the entities known as the International Business Company (IBC) and the International Society with Restricted Liability (ISRL) are now things of the past. Additionally, when certain grandfathering provisions expire on June 30, 2021, the IBC and the ISRL will disappear from the island’s business landscape forever. In essence, these two entities, which have been mainstays of the island’s international business sector for more than 40 years, will simply become regular business companies (RBCs) and SRLs.
These changes are part of a raft of new legislation that the Government enacted on 31 December 2018. The new legislation ensures compliance with the island’s commitment to implementing Action 5, one of 15 action items, established by the Organisation for Economic Cooperation and Development (OECD), to curb Base Erosion and Profit Shifting (BEPS) worldwide.
Perhaps the most innovative and far reaching of these legislative changes – indeed, some have described it as a “gutsy move” – is the Government’s decision to establish one set of corporate tax rates. In doing so, it has dismantled the “ring-fencing” which enabled former internationally licensed entities to enjoy far lower tax rates than local companies. This two-tier system has long been a bone of contention with the OECD.
The good news is that the convergence has greatly reduced the tax rate of domestic companies, which stood at 30%, rather than drastically raising the low tax rate previously enjoyed by IBCs. As the accompanying table shows, the highest rate of tax for what we know as a regular business company is only 5.5%.
Corporation Tax Rates
For fiscal years beginning 1 January 2019, all corporate entities – except those that are grandfathered – will be taxed on a sliding scale as follows:
|Taxable Income (BBD)||Rate %|
|Up to < = $1 million||5.50%|
|> $1 million to < = $20 million||3.00%|
|> $20 million to < = $30 million||2.50%|
|> $30 million||1.00%|
The new low tax rates, which show only marginal increases to what former IBCs enjoyed, reflect the Government’s determination to maintain the island’s attractiveness as an international business and financial services centre. In addition, there is some optimism that lower rates will encourage local and regional companies to increase investment and employment. So, will the new tax rates established through convergence, together with other legislative amendments, attract or repel new foreign investment? We believe the former.
To begin with, while at a glance the rates imposed on the international businesses appear to have increased, there has also been a significant change to the ranges of income to which the rates apply. This means that larger companies will likely acknowledge that the new sliding scale may increase their effective tax rate by a very marginal amount of less than 1%.
What is more, there are some specific benefits that were denied to IBCs and ISRLs that will now be available to them. One such benefit is that these international companies will no longer be restricted from doing business with locals.
Another benefit is access to the island’s network of double taxation agreements (DTAs). When the countries of CARICOM are included (they are governed by a single treaty) there are some 40 countries with which Barbados has established tax treaties. While domestic companies have benefited from these treaties in the past, IBCs and ISRLs were excluded, from a number of Barbados’ DTAs, given the tax advantages they already enjoyed.
A third benefit created by the new legislation is that RBCs will qualify for the Foreign Currency Permit if 100 % of their revenues are in foreign currency. In other words, foreign investors won’t be disadvantaged by using the structure of what would have been once thought of as a “local” company.
Removing the ring-fence should also mean that foreign investors, in the form of regular business companies, can now “mesh” more closely with local companies and access local resources. The opportunity now exists also for domestic companies to showcase what they have to offer.
In summary, convergence and other legislative amendments should not diminish Barbados’ attraction and reputation as an international financial services centre. If anything, our reputation should be enhanced, since we are one of the first countries in the world to do this.