Barbados overhauls corporate tax regime, slashes tax rate on local companies more than 20 per cent
Credit: Caribbean 360
BRIDGETOWN, Barbados, Thursday November 22, 2018 – Barbados will harmonize its domestic and international corporation tax regimes, by December 31, 2018, slashing the tax burden for some local companies by up to 29 per cent.
Prime Minister Mia Mottley announced in the Barbados Parliament on Tuesday, November 20, the ambitious target to overhaul a 40-year-old system that had provided a preferential low-tax regime for international business entities.
This comes only a month after the corporation tax on domestic companies was raised from 25 to 30 per cent in a bid to boost flagging state finances.
Prime Minister Mottley explained that the convergence of the tax systems was to fulfil commitments made to the Organisation for Economic Cooperation and Development (OECD) by the previous Freundel Stuart administration.
She said a failure to remove the differential taxation policies for domestic and international companies registered in Barbados would make the island non-compliant with the OECD’s Base Erosion and Profit Shifting (BEPS) rules and expose it to severe penalties for harmful tax practices.
The overhaul of the tax system will see the repeal of the International Business Companies Act, the Societies with Restricted Liability Act, and the Exempt Insurance Act.
Companies previously categorized as international business entities will automatically become Regular Barbados Companies, removing decades-long restrictions that prevented them from selling their goods and services within the domestic market. Where insurance companies are concerned, an amended Insurance Act will provide for three classes of licenses, including Captives that will continue to only pay a license fee and remain zero-taxed.
As a result of the move toward convergence, most corporate entities in Barbados will be taxed on a sliding scale of 5.5 per cent for those companies with taxable income up to BDS $1 million (US $500,000) down to 1 per cent for those with taxable income over BDS $30 million (US $15 million). Insurance companies will be taxed at a rate of zero to 2 per cent depending on their class of business.
Mottley explained the choice was either to to raise tax rates on international business entities to the levels paid by domestic companies, or lower the rates for domestic companies. Given that international companies contributed double the corporate tax revenue of their domestic counterparts, she indicated that it made more sense to keep the tax rate competitive for international companies.
The Prime Minister also sent a signal to the domestic companies who would be relieved of much of their tax burdens that she expected to see more reinvestment from them in the local economy.
“With these new tax rates I lay down a challenge to domestic companies that there must be benefits to the country of sharply lower corporation tax rates. Barbadians will expect these benefits be in the form of higher local investment, more enfranchisement of employees and better pay,” she said.
Mottley indicated that further tax overhauls were coming in 2019 and promised a national dialogue on plans to shift from a direct to more indirect tax system.
“The broad tax principles we are following are that we shall lighten taxes on work and productivity such as personal income taxes or corporate income. The burden of taxation will fall on consumption and wealth, such as VAT, petrol taxes, user fees and Land Tax. We will protect those most vulnerable through the use of the innovative Reverse Tax Credit,” she said.