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Is the viability of Barbados’ international business sector under threat?

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The economically important international business and financial services sector faces risks in light of heightened global concerns. Growth in the sector – which is second in importance after tourism – has been stagnant since the onset of the global financial crisis because of regulatory changes in other jurisdictions, mainly Canada, which is the source of much of Barbados’ offshore business.

From 2001-2008, direct employment in the sector nearly doubled, from about 2 000 to over 4 000, the majority of which were locals.

The sector also became an important part of the tax base, with its contribution to Government revenues rising from 12 to 34 per cent over the same period, a 229 per cent increase from 2001 to 2007 (the peak in tax earnings), or about 22 per cent per annum.

While the global financial crisis reduced earnings and increased uncertainty, legislative changes in Canada would appear to be a key factor in the sector’s stagnation in more recent years.

Canadian companies account for approximately 80 per cent of all the business conducted in the international business and financial services sector.

Hence, changes in Canadian legislation have a particularly strong impact on it.

Two significant changes have occurred: In 2007, Canada extended its favourable “exempt surplus” tax treatment of foreign affiliates in tax-treaty countries to all jurisdictions that sign tax information exchange agreements (TIEAs).

Prior to this, Barbados had been the main destination for Canadian business investment, but the changes made other jurisdictions with lower or no taxes and a TIEA more attractive.

In response, Barbados reduced its taxation rates to remain competitive, lowering the top marginal tax rate on international business companies from 3 per cent to a range of rates from 0.25 per cent to 2.5 per cent in 2012 and 2013.

As of January 1, 2015, the Canadian government strengthened the integrity of exemption under its foreign accrual property income regime to limit the erosion of its tax base, thereby reducing the benefit of holding companies in Barbados and other favourable tax jurisdictions.

This also impacted the trust sector, which had been one of the island’s growth areas.

As a result of the Canadian legislative changes, combined with developments following the global financial crisis, such as advanced economies’ concerns over tax compliance and increased scrutiny of offshore banking centres in general, growth of the IBFS has been stagnant.

Employment has remained relatively stable since 2009 and the number of registered companies has remained at around 4 000.

Moreover, direct Government revenues have significantly declined, from $356 million in 2007 to $97 million in 2013. This represents a loss of about three per cent of GDP.

Growth prospects remain clouded.

While the sector continues to be the second most important, global competition from other offshore jurisdictions, as well as efforts from advanced economies to reduce tax arbitrage, remain challenges.

Most recently, withdrawal of correspondent banking relationships, or more broadly, “de-risking” is creating new uncertainty.

The Government continues to support the industry, including with its effort to sign double taxation agreements (18 since 2010), as well as to reform business practices and legislation, to remain competitive.

Filed under: Canada Business News

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