Not international business as usual
BARBADOS’ OFFSHORE FINANCIAL SERVICES SECTOR is again under threat. The Organisation for Economic Cooperation and Development (OECD), G20 and the European Union (EU) are acting in concert, armed with the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS).
Once implemented, the confidentiality which once protected financial information will be critically undermined. Foreign direct investment from more developed nations is likely to be reduced. Barbados would be deprived of an essential economic resource. Given the state of its economy, the timing could not be worse.
Barbados, along with 30 other countries, was included on a “blacklist” published by the EU Commission in June 2015. According to the communication which accompanied it, the blacklist was intended, among other things, to assist EU member states with the more effective screening of non-cooperative jurisdictions and the development of a common, and more effective EU strategy to deal with them.
It is hardly surprising that in response to the most recent blacklist Barbados once more sought refuge in its treaty network and its efforts reaped early success. The conclusion of a double tax agreement (DTA) with Italy is imminent, and it will shortly commence formal negotiations on a tax treaty with Cyprus. This will not be enough. Improved transparency and greater efficiency in the exchange of information are no longer an end in themselves; they must now serve the defence of the fiscal revenue base of the EU, G20, and OECD Member States.
FATCA and the CRS will provide the OECD and the US Inland Revenue Service with the tools to they require in this fight. The OECD secretary-seneral Angel Gurría referred to it as “a real game changer”. According to Gurría, it will protect the integrity of public revenue and fight tax evasion. A recent study commissioned by the European Parliament’s Committee on Budgetary Control in 2013 estimates the shadow economy in the EU to be €2 trillion (BDS$4.5 trillion); with tens of billions of euros held offshore, unreported and untaxed. Despite the nebulous nature of these estimates, the perception within the EU is clear – it is losing taxable income.
The OECD is considering new and more restrictive DTA provisions to ensure the CRS is ultimately successful. The scope of legitimate tax planning will be narrowed. The natural result will be a decline in outflows of foreign direct investment (FDI) to low-tax jurisdictions like Barbados. We can hardly afford to let this happen. Inflows of FDI are primarily focused toward company incorporation and portfolio investments. This in turn has a multiplier effect upon the economy. Inflows of FDI stimulate employment and technological and infrastructural development. The consequential increase in taxable income provides critical support for the island’s fiscal revenue base.
In the circumstances, Barbados’ decision to support the implementation of the FATCA is surprising. It has already put in place the necessary domestic mechanism. Registration and reporting requirements have already been issued to local financial institutions. Barbados has also made similar commitments to the implementation of the CRS. It will be in place by September 2017. Amendments to the Income Tax Act will be passed shortly and will be accompanied by the Income Tax (Automatic Exchange of Information) Regulations 2015.
Barbados’ official position is that FATCA, in particular, will reduce the level of local tax avoidance and ensure that the country receives its fair share of domestically-generated tax revenue. This compliments the measures aimed at improved tax collection set out in the 2015 Financial Statement and Budgetary Proposals. It is likely that there will be a consequential and significant reduction in the corporate disposable income.
The circumstances are exacerbated by Barbados’ present economic condition. According to a recent report by the International Monetary Fund (IMF), Barbados’ economic prospects are foreshadowed by external risks, high fiscal deficit and debt levels, competitiveness challenges, and weak growth. Among other things, the IMF recommended that Barbados’ growth strategy be focused on strengthening the business environment. It is unlikely that the implementation of FATCA and the CRS would stimulate local business. The inverse is more likely.
Financial service providers must take the lead. New and innovative strategies must be designed to counter similar efforts by the G20 and the OECD. Industry stakeholders must also play their part. A collective effort in the form of public consultation is required. According to international tax expert Bruce Zagaris, the OECD will continue to impose sanctions in the way of blacklists and countermeasures against small financial-centre jurisdictions.
Intermediaries and service providers must now rely more heavily upon professional rules of conduct, reporting rules, and conflict of laws to devise investment strategies which meet the constant changes in the international tax compliance and enforcement. The focus must now shift from Barbados’ treaty network towards the interplay between the local investment structures and the tax regime which applies in the investors’ domicile. Gains made in this respect will be buttressed by an industry-wide consultative process.
In the absence of determined efforts by the private sector, the omens for the offshore financial services sector and local business are foreboding. Barbados must adapt. Its economic prospects depend on how successfully this is done.
René Akobi Butcher is the principal attorney at Butcher Williams|Attorneys-at-law. He has provided advice on cross-border corporate and commercial matters.