Barbados conducting review on OECD-designated preferential regimes

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1 26 October 2017 Global Tax Alert News from Americas Tax Center Barbados conducting review on OECD-designated preferential regimes EY Global Tax Alert Library The EY Americas Tax Center brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Copy into your web browser: Tax/Americas-Tax-Center---borderlessclient-service Executive summary In response to the latest report from the Organisation for Economic Cooperation and Development s (OECD s) Forum on Harmful Tax Practices (FHTP), 1 the Barbados Government announced it will review the operation of the current low tax regimes in Barbados - including the International Business Company and the International Society with Restricted Liability regimes. These regimes allow for the payment of a very low rate of tax in Barbados. It will remain possible to establish new entities under the current regime until at least June 2018 (18 October for entities not holding intellectual property (IP)). Entities already established at that date will be grandfathered until June 2021, ensuring there is no immediate impetus to restructure for many groups with existing arrangements, and a sustained period of certainty for new implementations. Details of a new regime are likely to be made public during 2018; favorable regimes are expected to remain a key part of the Barbados tax system, with suitable amendments in order to ensure that the revised regime is compliant with international law and practice for the years to come.

2 2 Global Tax Alert Americas Tax Center Detailed discussion Background On 16 October 2017, the OECD s FHTP published its Harmful Tax Practices 2017 Progress Report on Preferential Regimes. 2 The FHTP is the body mandated to monitor and review tax practices of jurisdictions around the world, focusing on the features of preferential tax regimes. The FHTP has reviewed 164 preferential regimes since The purpose of the review process is to identify features of preferential tax regimes that create opportunities for base erosion and profit shifting (BEPS). The 2017 progress report deals specifically with Action 5, one of the 15 initiatives listed in the OECD s Action Plan to curtail BEPS worldwide. Action 5, is formally known as: Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance. It is one of the four minimum standards of the BEPS Plan that have been agreed to by the 102 countries, that have signed onto the OECD s Inclusive Framework on BEPS to monitor and peer review the implementation of these minimum standards. Having joined the Inclusive Framework earlier this year, Barbados now falls within this review process, the results of which have been outlined in the 2017 progress report. Review of Barbados Several categories of regimes have been subject to review including IP regimes, headquarters regimes, financing and leasing regimes, banking and insurance regimes, holding company regimes, and shipping regimes. In each case, the FHTP has concluded that revisions must be made to entities falling within these regimes. Along with other international financial services entities, the Barbados International Business Company has been placed in most of these regimes and the International Society with Restricted Liability falls within the holding company and IP regimes. The Barbados International Financial Services Company, along with the domestic credit for foreign currency earnings on qualifying overseas projects or services, have been listed as having potentially harmful features on account of ringfencing and lack of substantial activities. The Government of Barbados has acknowledged the need for change to these regimes in order to be compliant with Action 5 of the BEPS 2015 Final Report. Therefore, following discussions between the Government and the FHTP, the Barbados regimes listed above are in the process of being amended. Impact on current Barbados structures As the country prepares to introduce changes to its international business regime, there are no immediate actions necessary for current investors. However, the report has outlined the following timing parameters for all countries including Barbados to phase out the current regimes: IP regimes No new entrants after June 2018 Existing entities grandfathered until June 2021 Legislative amendments for new regime to be in place by October 2018 (with exception to December 2018 on account of the legislation process) Non-IP regimes Current regime to be closed as soon as possible but no later than October 2018 (with exception to December 2018 on account of the legislative process) Existing entities grandfathered until June 2021 Based on these timelines, the new regime for such entities in Barbados will be in place by 31 December 2018 and no entities under the current structure will exist after June Implications While it is understood that the pending revisions will create some uncertainty for service providers and investors in the Barbados international business sector, on the positive side, Barbados, unlike some other jurisdictions, has not been

3 Global Tax Alert Americas Tax Center 3 required to eliminate any of its regimes. Additionally, there is no immediate threat to existing structures as these will be grandfathered until June This provides a very reasonable time frame within which investors may engage in the tax planning necessary to ensure continued compliance and benefit from the regimes. To date, there has been no communication from the Barbados Government to provide details on the nature or scope of the revisions to the regimes. However, the Government has emphasized its desire to ensure that the international business sector remains sustainable and competitive. To that end, the comments and suggestions of stakeholders and investors have been encouraged by the Barbados Ministry of International Business as discussions on the regimes revisions, by committees comprised of both private and public sector representatives, are slated to begin in November Future Alerts will report on developments as the process moves forward. Endnotes 1. See EY Global Tax Alert, OECD releases progress report on preferential regimes under BEPS Action 5, dated 18 October Ibid.

4 4 Global Tax Alert Americas Tax Center For additional information with respect to this Alert, please contact the following: Ernst & Young Services Limited, Barbados Maria Robinson Marilyn Husbands Gail Marks Terry-Ann N. Moe Ernst & Young LLP, Caribbean Tax Desk, New York La-Tanya Edwards

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