In 2020, Barbados ratified the Multilateral Convention to implement OECD minimum standards for Barbados double taxation agreements (DTAs). Since August 12, 2021 Barbados had also agreed to the principles set out in the OECD Pillar 1 and Pillar 2 solution to prevent Base Erosion and Profit Shifting (BEPS). Most recently on November 7, 2023 the Government of Barbados announced a number of tax reforms in order to ensure compliance with Action 1 of the BEPS Project, that is the digitilisation of the economy.
These developments must be viewed within the context of the 1998 publication Harmful Tax Competition, An Emerging Global Issue. Following that OECD publication was an aggressive process of “blacklisting” countries including many within CARICOM. The issue for the OECD then as it is now is geographically mobile services. Barbados and other small states responded with the creation of the International Tax and Investment Organisation (ITIO) which along with Society of Trusts and Estate Practitioners (STEP) published in 2001 Towards A Level Playing Field demanding respect for sovereignty and equality of treatment. The OECD invited countries to join the Harmful Tax Competition Forum which monitors low tax jurisdictions like Barbados. The Base Erosion and Profit Shifting Project (BEPS) saw and expansion of OECD efforts as the concerns were no longer just Caribbean and other small states but tech companies utilizing countries like Ireland.
So BEPS produced a two-pillar solution. Pillar 1 seeks to transform the international tax landscape, basing the jurisdiction to tax, not on the existence of permanent establishments but the sale of goods and services into the taxing jurisdiction. The rules require multinationals to have turn over of 20 billion euros and a profit margin above 10%. 25% of profits above a 10 percent margin may be taxed. This is known as amount A. Amount B then seeks to allow for a simpler way (other than transfer pricing rules) of taxing marketing and distribution service activities. The target here was no more than 100 tech companies. And there is a potential for Barbados to tax Multinationals which derive at least 1 million Euros from Barbados.
Pillar 2 then proposes a minimum tax rate of 15%. The rules apply to companies with revenues of over 750 million euros. If countries have an effective tax rate of below 15% (like Barbados) then there are rules which can be applied. First there is a “Domestic Minimum Tax” which can be used to tax companies in jurisdictions with a minimum effective tax rate below 15%. Second the “Income Inclusion Rule” which allows for jurisdictions which are parties to the rules to examine the effective tax rate in the low tax jurisdiction, determine the difference between the effective rate and the 15% rate and collect tax based on that tax rate difference in the parent jurisdiction. Then there is the “Undertaxed Profits Rule”, which allows a country to increase taxes on a company if another related entity in a different jurisdiction is being taxed below the 15% effective rate. The fourth Pillar Two rule is the “Subject to Tax Rule,” meant to be used in a tax treaty framework to give countries the ability to tax payments that might otherwise only face a low rate of tax. The tax rate for this rule is set at 9%.
Over several years Barbados has sought to address the issues raised by the OECD. The convergence of the tax rates on substantially all entities to a single maximum rate of 5.5% was one of the first efforts. There was also the implementation of a digital tax through amendment to the Value Added Tax Act (The Amazon Tax). Then there was the implementation of the Companies Economic Substance Act in 2018. Barbados’s response to BEPS Action 1 has been to propose (i) imposition of a tax rate of 9% for substantially all companies, which is below the optional 15%. (ii) approved small businesses will be taxed at 5.5% (iii) Multinational Enterprises which do not qualify as one of the Pillar 1 companies will remain under the current regime. (iv) Introduction of a top up tax for the companies which fall within the scope of Pillar 1. (v) Two qualified tax credits were also announced (a) A Qualified Jobs Credit and (b) Research and Development Credit. In addition, for companies which qualify monthly prepayments are now required.
Ad yet it might not be all smooth sailing. The USA has not had the congressional will to pass legislation in support of the proposals. The new international tax rules are still thought to benefit the wealthiest countries. There is still criticism that even though Pillar 1 seeks to focus on where goods are consumed it still only refers to residual profits. Despite these questions CARICOM member states in November 2022 agreed that the CARICOM DTA should be updated to ensure that it complies with OECD tax standards. CARICOM Member States also agreed to analyse the economic impact of the Two-Pillar Solution but nevertheless endorsed it. At the United Nations non-OECD countries still struggle with the notion that the OECD Agenda is set without many of the countries in the world sitting at the table. OECD members are still the wealthiest countries. There is now a proposal on the table that the dominance which the OECD has demonstrated over the last sixty years over international tax matters should come to an end. Barbados’ traditional view has been that limited member organisations like the OECD should not be allowed to set international standards.
Eastmond & Co. 