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EU Warns Six States On 'Harmful' Tax Regimes

by Ulrika Lomas, Lowtax.net, Brussels
12 February, 2019

The EU Code of Conduct Group (Business Taxation) has notified authorities in Barbados, Belize, Curacao, Mauritius, Saint Lucia, and Seychelles that the group considers further changes are needed to their tax regimes to bring them into line with international standards.

The Code Group has released the content of letters sent to authorities in each territory, which explain the reasoning for challenging the entirety or elements of tax regimes in the territories. Many have already made substantial changes to their tax regimes, in response to EU concerns that very low or zero rates of tax are available to entities that lack economic substance in their territories, or that they offer preferential arrangements for offshore entities that are significantly more beneficial than for onshore structures.

Recently Barbados had claimed that changes to its domestic tax regime had brought the territory's tax regimes into line with international standards. Speaking at an international tax conference in New York in late January, Barbados's Minister of International Business and Industry, Ronald Toppin, had said Barbados is "no longer under threat of a negative listing by the OECD."

He said his Ministry has received confirmation from the OECD that it supports legislative changes enacted by the Parliament of Barbados in December 2018 as a response to the Base Erosion and Profit Shifting (BEPS) initiative, in its Income Tax Amendment Act, 2018.

Toppin said: "I am pleased that the hard work involved in making such sweeping changes to so many pieces of legislation paid off. Barbados's decision to converge its international and domestic tax rates remains a viable and necessary catalyst for domestic business development and for maintaining Barbados's competitiveness in its bid to become a global hub for business."

The enacted changes ensure that both onshore and offshore companies pay the same rates of tax. The territory has also newly legislated for economic substance requirements, to ensure that companies can benefit from the territory's tax regime only if they can demonstrate economic substance, in the Business Companies (Economic Substance) Act 2018-41.

International Business Companies (IBCs) and Societies with Restricted Liability (ISRLs) are being phased out, with grandfathering provisions for those granted a license before October 17, 2017, until no later than June 30, 2021.

The applicable tax rate for the grandfathered entities, for taxable income in excess of USD15m, is one percent, in line with the minimum converged rate.

Under the changes, for fiscal years commencing on or after January 1, 2019, all corporate entities, excluding those that are grandfathered and insurance entities, are taxed on the following sliding scale: 5.5 percent on taxable income up to BBD500,000 (USD250,000); three percent on the balance up to BBD10m; 2.5 percent on income above BBD10m and up to BBD15m; and one percent on taxable income exceeding BBD15m.

Losses incurred in previous years will be allowed to be carried forward and reduce up to 50 percent of an entity's taxable income in any one income year.

As of January 1, 2019, there are three classes of licenses for the insurance sector as follows:

  • Class 1 category, which will be restricted to related party business, taxed at zero percent;
  • Class 2 category, which can underwrite risks of third parties, taxed at two percent; and
  • Class 3 category, including brokers, intermediaries, insurance management companies, insurance holding companies, etc., taxed at two percent.

The EU Code of Conduct Group has said that the EU is not satisfied with the changes that have been made to Barbados's tax regime, and has warned the territory that if it fails to make meaningful reforms this year that it could be placed on a list of non-cooperative territories.

The letter, to Toppin, from the Group's chair, Fabrizia Lapecorella, says: "We would like to thank you once again for the cooperation you have shown so far in the context of our dialogue on tax good governance standards."

"As Barbados abolished its preferential tax regimes at the request of the Council of the European Union by introducing regressive corporate income tax rates (as low as 1%) applicable to all entities, which fails to remove the harmful features or effects of the original regimes, the Code of Conduct Group has decided that Barbados should be treated as a jurisdiction that applies 'a nominal corporate tax rate equal to zero or almost zero.'"

"The Code of Conduct Group has for this reason identified these amendments to Barbados' Income Tax Act as a new measure falling under EU listing criterion 2.2. This criterion has been agreed by the EU Finance Ministers in November 2016 and its scope has been further defined by the same Ministers in 2017 and finally in June 2018. This guidance is summarized in a "Scoping paper on criterion 2.2" (including two annexes), which is available [online]."

"According to criterion 2.2, jurisdictions should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction. On this basis, Barbados needs to comply with the requirements under criterion 2.2, including by ensuring that legal mechanisms do not exist that enable the granting of advantages only to nonresidents or in respect of transactions carried out with non-residents and that sufficient substance is required for entities doing business in or through your jurisdiction. The absence of adequate legal substance requirements increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial presence which is a concern from the perspective of criterion 2.2."

"Against this background, we would welcome to receive a commitment at a high political level that Barbados will address concerns outlined in line with the EU Terms of Reference and the abovementioned scoping paper on criterion 2.2 by 31 December 2019, without any grandfathering mechanism."

"In this case, the Code of Conduct Group will not recommend to the Council of the EU to include Barbados in the EU list of non-cooperative jurisdictions for tax purposes, as long as no other criteria have been failed."

"With a view to demonstrate that Barbados has made meaningful commitments at high political level to take the necessary steps to address the issues identified by the EU, we would furthermore seek your consent to publish this commitment letter on the Council's website. This will ensure the transparency of the process."

"Finally, the Code of Conduct Group would like to inform Barbados that no further replacement with measures of similar effect or delays will be accepted when assessing at the beginning of 2020 whether the requested commitments will have been implemented."

"We would be grateful for your response to reach us by 15 February 2019," the letter concludes.

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