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BEHIND THE HEADLINES: Stable offshore financial sector

Tony Best

BEHIND THE HEADLINES: Stable offshore financial sector

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A time when few things seem to be going right for Barbados, the credit rating downgrade by Wall Street among them, the use of the word “stabilized” offers something of a respite.
    It is being used to describe the nation’s offshore financial sector.
“The preliminary indications are that it has stabilized,” said Richard Francis, Standard & Poor’s lead analyst for Barbados when asked about the fortunes of the offshore financial services sector, a key prop of the economy.
 “It certainly went into a decline but it seems to have stabilized a bit.”
Francis knows what he is talking about. He recently returned to Wall Street from Barbados after meeting key decision makers in the government, the private sector, opposition in parliament and the labour movement.
As he sees it, the performance of the offshore financial sector is crucial to Barbados’ economic and financial well-being and there was a real sense that Barbados may have put the worst of the serious challenges behind it.
Canada, a main pillar of the sector, remains a sensitive area because it remains under increased scrutiny from Canadians who complain that little was being done by the Stephen Harper administration in Ottawa to force large Canadian corporations and wealthy individuals to pay their fair share of taxes to the country’s revenue agency.
Across the Canadian border and into the United States, Washington is still keeping major corporate and wealthy individuals under the microscope with stiffening banking rules that are unnerving everyone. That’s why it isn’t good news for Barbados and its Caribbean neighbours that the European Union’s (EU) Commission is manoeuvring its troops to attack corporations which may not be paying their fair share of taxes to their home countries.
Although the EU’s actions are primarily aimed at intra-European corporate transactions, the plans can ultimately adversely affect Barbados, The Cayman Islands, The Bahamas, Switzerland, Bermuda and the Turks & Caicos Islands.
“We can no longer afford freeloaders who reap huge profits in the EU without contributing to the public purse,” Algirdas Semeta, the EU’s tax commissioner, said a few days ago, explaining why a tough stand is being taken against corporations.
Admittedly, the new moves announced last Monday are aimed at preventing American, European, Canadian, Japanese and other firms from abusing tax laws within the EU; cross- border tax avoidance is the term being used by some in Brussels. The real fear in and outside Europe is that once the proposed rules are in place, the commission would find ways to spread their tentacles into countries outside of the area, including the Caribbean.
The EU has set its sights on the firms that create legal entities in Europe to avoid paying taxes at home. Google, Starbucks, Inc., and Apple are four that come quickly to mind. For example, Apple made US$74 billion in profits in four years but ended up paying little or no corporate taxes during the same period. How come?
The corporate giant exploited a loophole in Ireland’s tax code and while it acknowledged that by creating entities it didn’t pay the taxes that otherwise would have been due, it rejected out of hand that it was engaged in corporate tax evasion.
What’s interesting in all of this is that the commission is getting ready to attack a mechanism that Barbados uses to attract foreign corporations to its shores and that is its double taxation treaty network with 33 countries. Incidentally, Barbados has more than 4 000 registered entities on its books that are doing for their owners what Apple has acknowledged its creations are doing for it: paying taxes that are due but not the amounts United States Senate investigators insist they should be paying.
   The EU intends to change a 1990 law which was enacted to allow corporations to avoid paying double taxation within the area but is now being exploited through cross-border transactions of subsidiaries.
   “The tactic involves a hybrid loan, which has characteristics of debt as well as equity and can thus be treated as tax deductible debt payment in one country and a tax exempt dividend in another,” explained Tom Fairless of the Wall Street Journal.
“The commission said that if such a loan payment is tax deductible in the subsidiary’s member state, it must be taxed where the parent is established.”
   That’s not all. The EU wants a rule that’s enforceable in all of its member-states to ensure that taxes are imposed “on the basis of real economic substance” instead of “artificial arrangements,” such as those employed by Apple.
   But there is trouble lurking in the shadows for the commission. Both Austria and Luxembourg are threatening to prevent any of the proposed changes if Brussels fails to crack down on bank secrecy and tax evasion to endorse the proposals. They have their eyes set on Switzerland and Lichtenstein.
If Barbados hasn’t already done so, it shouldn’t undertake a study to determine how the EU’s plans would affect the island’s offshore sector, assuming that the plans would see the light of day.
In recent times, Barbados has delayed taking action that would forestall any negative fallout from external events and when the repercussions are felt anyway, the cry is, if only we had acted sooner.