TAX NEWSFLASH KPMG in Barbados Highlights of the 2013 Barbados Budget Contents Brief Overview Economic Review International Business and Financial Services Sector Special Entry and Reside Permits ( SERP ) Personal Tax Changes Other Tax Measures Other Changes Reduction Measures Non Tax Brief Overview The Honourable Christopher Sinckler, Minister of Finance and Economic Affairs, delivered the eagerly awaited Financial Statements and Budgetary Proposals of the Government of Barbados on Tuesday, August 13, 2013. The Minister outlined the approach towards the restructuring and revitalization of the Barbados economy and specified policy interventions and measures aimed at the restoration of growth and sustainability while growing foreign reserves. He highlighted the four main drivers of growth in the short and medium term as increased public, private, foreign and domestic investment; improved business facilitation; increased productivity; and increased competitiveness. Using the six months Economic Review 2013 to outline the negative outturn in revenue, driven in large measure by a weakened performance in real activity and the expectations that the global economy is unlikely to rebound, the main features of the budget focused on growth initiatives, fiscal adjustment policies and public sector reform. The key sectors for growth were seen as international business and financial services, tourism and related services, agriculture, manufacturing, and alternative energy. The Minister saw the need to front load the fiscal adjustment policies aimed at cutting the deficit to a target below 3.0 percent of GDP by 2014/2015, based on initiatives to be carried out from both the expenditure and revenue side. For public sector reform, the Minister considered structural re-organisation as the starting point for a more flexible, accountable and transparent public sector. TAX NEWSFLASH/Barbados August 13, 2013
Economic Review The Minister provided an economic review for the period ending March 31, 2013 which showed a fiscal deficit of $668.5 million representing 7.9% of GDP at market prices, in contrast to $384.2 million representing 4.4% of GDP at market prices for the corresponding period ending March 31, 2012. The Minister also provided preliminary information from the Accountant General for the period April 1 to June 30, 2013 which showed current revenue of $483.9 million, a decrease of $91.8 million or 15% from the amount recorded for the corresponding period during 2012, and some $162.7 million less than originally budgeted. Current expenditure, exclusive of amortisation of $102.2 million, decreased by $17.7 million or 2.6% from the 2012 figure to $672.3 million. The measures to be implemented are estimated to earn revenue of $150.9 million over a nineteen month period, while reducing current expenditure by $285 million. The Government is projecting a deficit of $251.8 million representing 2.8% of GDP at market prices. 1
Highlights of tax changes announced in the budget are summarized below: Amendments to International Business and Financial Services Sector effective January 1, 2014 Multi Year IBC Licences Effective January 1, 2014, the International Business Unit will issue international business companies with multi-year licences for a maximum of three years. These changes are assumed to be applicable to International Business Companies (IBCs) and Societies with Restricted Liability (SRLs). The International Corporate and Trust Providers Act will become fully operational with the coming into force of the Regulations. This measure is to assist with the administrative burden of renewing licences annually. It has been indicated that BIBA is to assist with the measure regarding technical expertise. Business Facilitation Unit A unit will be staffed from among existing officers of the Ministry of International, Trade and Small Business Development and will be headed by an Investment Commissioner who will be responsible for assisting with the smooth and efficient implementation of prospective investments, both local and foreign, in Barbados. Business Facilitation is a critical success factor in the International Business Sector. Therefore the Unit adds accountability to this process. This is likely to increase efficiency and enhance the way business is conducted in Barbados. Resolution of Tax Law Issues The Inland Revenue Department will engage on a consultancy basis a local company and tax law expert to handle tax law resolution issues and provide advice to the Department of Inland Revenue so that timely decisions could be handed to businesses in the sector that require them. This is a much needed initiative which aims to address the various tax issues encountered by taxpayers who require timely responses from the Department of Inland Revenue. More clarity is required regarding the role/responsibilities of the expert, The Commissioner of Inland Revenue (CIR) and the new Barbados Revenue Authority. 2
Marketing and Investment Promotion It was proposed to increase the marketing and investment promotion budget of Invest Barbados by an additional 7 million dollars to attract foreign direct investment. This is aimed at encouraging new entrants to the business sector in emerging markets. Special Entry and Reside Permit ( SERP ) Effective September 1, 2013, a SERP will be introduced to replace the Special Entry Permit ( SEP ) and will be valid for five years at a time to be available to foreigners who own substantial property in Barbados and their dependents. The value of the property or investment to be used to qualify an applicant for SERP status should be US$2 million or more and the investment must have been purchased with funds sourced outside Barbados and not be subject to any mortgage on it. In addition, foreigners who have special skills needed in the country and who wish to live in Barbados will also be eligible for SERP. Persons holding a SERP, will be issued with a Barbados Identification card similar to work permit holders and will be able to obtain Barbados drivers licences and otherwise conduct business in Barbados. The Government of Barbados has expanded the criteria for eligibility to include property and investment. Investment includes real property but also rental real estate, property development projects, manufacturing, tourism, bank deposits, mutual funds or bonds or any financial instrument. In addition, the requirement to qualify for the special entry permit has been lowered from US$5 million to US$2 million. The SERP should eliminate some of the problems such persons met while travelling to and from Barbados. Further clarification is required on the life-span of the SERP for such persons with special skills and whether there are any plans for the transfer of knowledge to locals in these specialised areas. 3
Personal Tax Changes The Minister announced that there would be a temporary consolidation tax on gross income of persons earning $50,000 and over, effective September 2013 as follows: Gross Income ($) Rate 50,000 to 75,000 0.5% 75,001 to 100,000 1.0% 100,001 to 200,000 2.5% > 200,000 3.5% This is expected to be eliminated March 31, 2015. No examples were provided and no explanation was provided or definition given of gross income. The tax is to be applied on persons earning $50,000 and over. It appears that where a person s gross income exceeds $50,000, the first $50,000 will be exempt from tax and the remainder will be taxed at a sliding scale as outlined in the table above. It is worthy to note that the term gross income is not defined in the Income Tax Act of Barbados. Thus, for employees some clarity is required regarding what constitutes gross income, eg: salary/remuneration/emoluments. Since this is a gross based tax, it should enhance tax revenues from self employed persons with reported income who would have otherwise had no taxable income. It is conceivable that gross income could include pensions. However, it fails to capture persons with unreported income. (See overleaf for worked example of the tax on differing salary levels). 4
Individual Rates 2011 2012/2013 2013/2014 Salary 75,000 75,000 75,000 Personal Allowance (25,000) (25,000) (25,000) Travel Allowance (7,200) Entertainment Allowance (7,800) Taxable Income 35,000 50,000 50,000 Consolidation tax 50,000-75,000 0.50% 125 75,001-100,000 1.00% 100,001-200,000 2.50% over 200,000 3.50% - - 125 Income Layer up to $24,200 20.00% 4,840 - - in excess of $24,200 35.00% 3,780 - - up to $35,000 17.50% - 6,125 6,125 in excess of $35,000 35.00% - 5,250 5,250 8,620 11,375 11,375 Total Taxes Payable 8,620 11,375 11,500 Effective Tax rate 11% 15% 15% Individual Rates 2011 2012/2013 2013/2014 Salary 150,000 150,000 150,000 Personal Allowance (25,000) (25,000) (25,000) Travel Allowance (7,200) Entertainment Allowance (7,800) Taxable Income 110,000 125,000 125,000 Consolidation tax 50,000-75,000 0.50% 125 75,001-100,000 1.00% 250 100,001-200,000 2.50% 1,250 over 200,000 3.50% - - 1,625 Income Layer up to $24,200 20.00% 4,840 - - in excess of $24,200 35.00% 30,030 - - up to $35,000 17.50% - 6,125 6,125 in excess of $35,000 35.00% - 31,500 31,500 34,870 37,625 37,625 Total Taxes Payable 34,870 37,625 39,250 Effective Tax rate 23% 25% 26% 5
Other Tax Measures Municipal Solid Waste Tax With effect from September 2013, a 0.7% municipal solid waste tax on the non-improved value of the land replaces the proposed Greening Levy. Solid waste management is critical to the establishment of a green economy but is this tax an equitable basis of charging the generators of solid waste? The greening levy targeted employees, the solid waste tax targets land owners. Tax on Lottery Winnings Effective September 2013, a tax of 15% on lottery winnings of $1,000 and over is proposed. This measure is in an effort to increase government revenue by widening the tax net and treating such winnings as income. Measures and legislation will need to be put in place if Government is to achieve its objective. Tax on Banking Assets Effective September 2013, a tax of 0.20% will be applied on the assets of commercial banks. It is not expected to exceed 19 months. It is anticipated that the amounts raised will be earmarked to contribute to the marketing efforts of the BTA, thus targeting the commercial banks for direct input in the tourism sector. This tax was removed in 2007 and it will not be surprising if a response is made by the banking sector. Changes to Value Added Tax ( VAT ) in the Tourism Sector Effective October 1, 2013, the VAT rate on accommodation in the hotel sector and on direct tourism services will be reduced to 7.5%. The reduction in the VAT rate in the tourism sector is in line with Government s efforts to reduce costs to persons using these services, thus allowing the industry to remain competitive and to encourage tourists to spend. A more significant measure may have been the reduction of VAT on utility charges. 6
Excise Tax Discretionary Waivers Effective September 2013 until March 2015, there will be a reduction in discretionary waivers on import duties and excise tax but not on VAT. The waivers will range from 0% to 100% and will be at the discretion of the Minister of Finance. Tobacco Products Effective September 2013 until March 2015 there will be a 25% increase in excise tax on tobacco products. Motor Vehicles Duties Effective September 2013 excise tax rebate on new cars will be rolled back to 15%. The reduction of the waivers would serve to increase government revenues as would the increase in excise tax and the rebate in excise tax on new cars. While these proposed measures are at the discretion of the Ministry of Finance, specific guidelines and conditions are necessary to support this measure. 7
Other Changes Agriculture Barbados Cane Industry Project Major restructuring of the local sugar cane industry by re-engineering of an existing sugar factory so as to allow it to engage multiple applications, including the production of bio-mass for the cogeneration of electricity. This major project is expected to commence in 18 months and is anticipated to achieve increased efficiency and to transform the sugar agriculture industry with positive spin-offs on the non-sugar crop production. It is anticipated that this will reduce the current losses in the sugar cane sector. With funding from Japan, it is expected that all parties involved see the big picture and the gains to be added from the sector. Agricultural Grant Creation of $2 million grant specifically for small farmers to engage in crop production. The Government is hoping to stimulate increased activity in the local agriculture sector and reduce food imports. Incentives to Local Hotels A special program will be introduced and encouraged to incentivise local hotels to use more local produce in the sector. The policy is intended to link the concessions and waivers granted to hotels and restaurants to demonstrable use of domestically grown produce. The agricultural and hotel sectors will be tied in some regard to each other. The increased use by local hotels and restaurants of local produce is hoped to increase activity in the agriculture sector and reduce the food import bill, thus reducing foreign exchange outflows. An attempt at addressing praedial larceny more vigour will provide further enhancement of this sector. 8
Education and Culture Effective academic year 2014/2015, Barbadian citizens pursuing studies at campuses of the University of West Indies ( UWI ) will be required to pay tuition fees, government will continue to fund economic costs. Recent scale of fees are as follows:- Faculty Tuition Cost Full Time Student $ Humanities and Education, Social 5,625 Faculty of Law 8,808 Faculty of Medical Sciences - Clinical 16,618 Medical Sciences - Pre-Clinical 65,000 * half for part time students The BTA will in collaboration with the National Cultural Foundation and the Ministry of Culture, Youth and Sports, launch the Barbados International Culture Sports Tourism Initiative starting next year. This initiative will focus specially on establishing Barbados as a leading international events logistics and promotions hub. The Minister also mentioned measures to deal with UWI debt, a proposal to establish a National Education Savings Plan with appropriate tax allowance provisions for savers, and adjustments to the Student Revolving Loan Scheme to ensure adequate access to loans. 9
Non-Tax Reduction Measures Measures: A $30.0 million reduction in the $121.78 million provided in the 2013/2014 Estimates for temporary post/employees (the $30.0m to be taken only from the 2013). A 12% cut in transfers (this will be on a base of $475.8m). A 5% cut in Goods and Services. A reduction of $20.0 million in the amount ($29.082 million) allocated in the 2013/2014 Estimates for acting allowances/substitutes. From income year 2013 and effective September 2013, there will be a reduction of the reverse tax credit of 50% from $1,300 to $650. These measures could potentially decrease government expenditure if successfully implemented. Short Term Investments Programme Effective November of 2013, Government, working on a Public-Private Partnership (PPP) basis with three of the largest road builders in Barbados, will launch a $125 million Special Roads and Bridges Package to be executed by these private firms over the planning period. This is a welcome initiative to improve the road and bridge infrastructure. This spending on a PPP basis is likely to aid in the maintenance or creation of jobs. This is in line with the Government s aim to reduce its expenditure and encourage the use of renewable energy. 10
Manufacturing Rum Industry Subsidies Plans to implement an initiative to give a similar level of subsidisation to local rum producers as is enjoyed by rum producers in the United States. It is hoped that this will place locally produced rum on a more competitive footing in the international market and increase revenues there-from, resulting in additional foreign exchange and helping to sustain the local industry. We await the initiative. No time frame has been suggested. Ethanol Production BNOCL has been instructed to work closely with the local rum distilleries on the introduction of locally produced ethanol into the gasoline sold locally. It is hoped that, although the ethanol that is to be produced by the new sugar cane processing complex will not be available for another three years, the local rum distilleries could use their excess unsold inventory to produce fuel grade ethanol that can be used by BNOCL. This is expected to assist in sustaining the local rum industry by alternate use of rum by-products and reduce the amount of gasoline blended with methyl tertiary butyl ether (MTBE) imported by BNOCL while saving foreign exchange on such imports. The added benefit is that the use of local ethanol would provide cleaner gasoline products in keeping with Government's Greening strategy. We expect a more definitive instruction will follow. 11
Alternative Energy Sector Government will invite the private sector to supply, erect, operate and maintain solar electricity systems on the roofs of twelve (12) government-owned buildings, hurricane shelters and nineteen (19) schools. The installation of these systems, in conjunction with the Electric Light and Power Bill and Income Tax Amendment Bill will seek to result in cost savings for government and also allow for the generation of solar energy for sale to the Barbados Light and Power Company. This is one of the measures hoped to reduce government spending and consequently reduce the deficit.. 12
We can help Your KPMG adviser can help you assess the effect of the tax changes in this year s budget on your personal finances or business affairs, and point out ways to take advantage of their benefits or lessen their impact. We can also keep you abreast of the progress of these proposals as they make their way into law and help you bring any concerns you may have to the attention of the Ministry of Finance. Information contained herein is current to August 13, 2013. Contact us Wayne Lovell Partner T: (246) 434-3928 E: wlovell@kpmg.bb Marianne Greenidge Senior Manager T: (246) 434-3918 E: mariannegreenidge@kpmg.bb Juan Wright Senior Manager T: (246) 434-3913 E: juanwright@kpmg.bb www.kpmg.bb The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. 2013 KPMG, a Barbados partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity, All rights reserved. Printed in Barbados. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss Cooperative. 13