#BTColumn – Barbados and the 15 per cent global tax

Disclaimer: The views and opinions expressed by the author(s) do not represent the official position of Barbados TODAY.

by Donville O. Inniss

Since the passage of the 1965 International Business Companies Act (IBC), Barbados has truly punched above its weight on global business and tax matters resulting in numerous tax treaties with sovereign states

We became home to thousands of international business structures and above all created a sustainable cadre of professionals whilst generating, in 2017, up to 64 per cent of Corporate Tax revenue plus many other economic benefits to the island.

Of course we have also been black-listed, grey listed, white-listed, downgraded and degraded by others who sought to strengthen their weak domestic tax arrangements by condemning others. But Barbados stood steadfast and ensured that it became an active voice in international fora where relevant issues were debated.

In 2018, whether in an attempt to appease local businesses, bow to international pressure or just sheer lack of public finance ingenuity, Barbados sought to converge its tax rates and settled on a 5 per cent rate, down from a high of 25 per cent and up from a low of about 1 per cent.

Shortly thereafter all hell broke loose as the OECD, buoyed by some strong anti-big business political ideology creeping through the corridors of the EU and USA, re-energised a call for a 15 per cent minimum global tax. After much attempts at bravado, Barbados capitulated and joined some 139 other countries in signing onto to this agreement.

Pillar One of this agreement sought to create rules to govern taxation of profits made by companies that operate in more than one country. With the advent of technology and tech-companies, some developed states felt that they were losing out on tax revenue to lesser states.

The focus in this pillar seems to be based on taxing businesses where their customers are located rather than where they have a physical presence or where their intellectual property is located. Pillar Two specifically addresses the issue of the 15 per cent minimum global tax.

One needs to reflect on how the EU had introduced digital-services taxes which targeted primarily major US firms that did business in the EU but booked their profits elsewhere. The pro-business President Donald Trump threatened to retaliate by imposing tariffs on EU goods entering the USA.

After shouting across the oceans, the powers that be agreed to forge ahead with the new 15 per cent minimum tax. The biggest cheer leader in this battle has been Janet Yellin who now serves as President Biden’s Treasury Secretary. Her arguments in favour of this measure has been loud and consistent in and out of the White House over the years. I suspect that Trump had a way of filtering out the noise for a few years.

Even though there has been much delay in implementing these new measures, shifting from a June 2022 deadline to 2024, this issue must continue to resonate with Barbados as its implementation can have severe adverse consequences for our island nation. Consider what is unravelling in the EU on this matter. In order to implement this new tax policy, the EU must garner support and approval from all 27 member states. However, Hungary has stood up in objection to it as they see such a tax measure as having a profound negative impact upon their economy and society.

Having previously lowered its Corporation tax from 50 per cent to 9 per cent in order to atrract businesses, Hungary would now have to increase its tax rate whereas most other EU countires already are much higher tax jurisdictions and hence stood only to gain from the measure. Even Ireland at 12.5 per cent tax had been a tax outcast for many years but enjoyed tremendous social and economic growth over the years.

Not surprisingly, Hungary had to be penalized for blocking the EU’s effort. But alas, not by the EU, but by the USA who on Friday, July 8, 2022, announced that it was withdrawing from the 1979 bilateral treaty, Hungary/USA, citing that the benefits “were no longer reciprocal.” So whilst Hungary and the EU were still talking the US was taking action against Hungary.

What is perhaps most instructive is that in order for the US to implement this tax policy, the approval of Congress is needed and with all likelihood that Congress will, come November, shift determinedly back to the Republican Party who are vehemently opposed to this policy. The US may very well not be able to legislatively achieve what it is demanding of weaker sovereign states.

So it may be a case of do as I say and not as I do. Republicans dislike any foreign nation having control over its tax policies.

With most countries facing galloping inflation, a lurking recession, higher food prices due to the Russia/Ukraine war, oil prices and growing political unrest, Barbados is justifiably facing an uncertain future which can only be made worse if issues such a the minimum global tax rate and its attendant implementation strategies are not carefully weighed in its future and its favour.

Over the years we have benefited greatly from the IBFS sector and hence we are duly bound to fight to keep it going even if in a different shape.

This sector and these issues may not be of interest as guns, violence, the cost of living and other social and political ills, but it poses a serious threat to Barbados’ ability to continue to build a strong, resilient and diversified economy and a safer society.

Barbados must continue to be actively present in all relevant fora where these issues are being addressed, it must forge alliances with like-minded states and seek to demand preferential treatment wherever possible and applicable.

I look forward to the current administration proving to Barbados that it deserves the faith the electorate has placed in it by going beyond soundbites and grand pronouncements in the international area, and come up with a sound economic strategy able to guide our great country forward. I don’t want to wait in vain.

Donville O. Inniss is a former Minister of International Business.