Is Barbados’ attractiveness to Canadian international business under threat?
International investment is currently caught in the “interesting times”. Canadians seeking to make international investments, particularly in multi-jurisdiction structured international investments, for tax, corporate or other planning purposes, face the increasing dichotomy between the political encouragement and business facts required globalisation and the push back from the base erosion profit sharing agenda which is now being globally implemented. This seems to create uncertainty as to the ability to structure an international group of companies, with ongoing strategic investments, using the most effective treaty and tax basis.
The concepts behind base erosion profit sharing are to ensure that taxation generally will occur in the jurisdiction where the revenue is generated. This accords with the political concepts of fairness underlying the recommended tax changes, and is not intended to hamper the ability to expand globally by corporate groups. What this means is that investment can be made into and through lower tax jurisdictions, provided that it is a real investment. The investment in the jurisdiction where the lower tax is to be imposed must constitute a real business enterprise, actual presence, actual production, and actual business activity.
Barbados and its ongoing requirements for investment and access to its international tax, lower tax, regime requires the active business involvements and activities which should avoid the tax sanctions of base erosion profit sharing tax rules which are emerging. The requirement for a real, economic, producing investment in Barbados in order to access the lower tax rates provides an underpinning which will support the validity of a multi-jurisdiction structure.
Barbados is a moderate tax jurisdiction, not a no-tax jurisdiction. In the current environment, this makes Barbados an attractive jurisdiction because of Canada’s willingness to maintain the dual tax treaty, a willingness Canada does not have with lower or no-tax jurisdictions. Barbados’ policy of continuing to tax entities active in the country means the current number one issue challenged by Canadian tax regulators for tax avoidance on income earned in Barbados relates to whether the income is in fact active business income and not simply an attempt to use Barbados as a tax planning jurisdiction. The decision on the part of the Barbadian Government to maintain some taxation on entities operating in Barbados means that Canada will continue to treat Barbados as a planning jurisdiction.
Barbados should be identifying sectors that can be properly, fully, and effectively located anywhere in this global economy, with full technological capabilities of operation and transmission from anywhere. Development in these areas both meets Barbados’ interests of improving employment, skills and training and the new challenges which have been put forward both by Revenue Canada’s attack on tax structured arrangements without sufficient active business in Barbados. Sectors such as health care, pharmaceutical and chemical research, electronically based technology among others can be suitable for development in Barbados. In order to make these attractive offerings Barbados must present itself as a business location, and not strictly a financial and tax structuring jurisdiction.
Support for research and development and access to information and training regarding the sectors of interest will need to be enhanced. Immigration, and other aids to ease of relocation, permitting the establishment of research and development and fully functioning business units, need to be identified, structured, advertised, and appropriate connections made.
Alison Manzer is a partner in the financial services group at Canadian firm Cassels Brock.