Coping with the OECD reality
November 23, 2018
Demands of the rich man’s club, the Organisation for Economic Cooperation and Development (OECD), have once again created disarray in the Caribbean.
It is a disarray to which Caribbean countries have contributed by their lack of a common and strong political response to the many impositions by the OECD on the global financial sector since 1998 when the Organisation first launched what it called its “harmful tax competition initiative”.
For two decades, the OECD has been systematically and resolutely forcing Caribbean countries and other developing states to dismantle their tax structures and international business regimes, some of which, as in the case of Barbados, have been in place for over 40 years.
These international business regimes allowed International Business Corporations (IBCs) to pay low or no tax, which the OECD claimed deprived them of tax revenues. Instead of lowering their tax rates to compete; they chose to eliminate the competition.
However, IBCs brought crucial revenues in foreign currencies to Caribbean governments. In the case of Barbados, Prime Minister Mia Mottley revealed that “for every one dollar in corporation taxes paid by domestic companies” the Barbados government “received almost two dollars of corporation taxes from international companies”.
In other Caribbean jurisdictions, with the possible exception of The Bahamas, Bermuda, British Virgin Islands and Cayman Islands, the Barbados story is not dissimilar except for two factors. First, Barbados has more IBCs that many Caribbean countries, apart from the four jurisdictions just named; and second, over the last two decades, OECD-imposed rules have eroded both the number of IBC’s and the revenues they have generated in countries such as Antigua and Barbuda, Grenada and St Lucia.
The latest OECD salvo is its ‘Base Erosion and Profit Shifting’ (BEPS) scheme that, in a nutshell, on pain of sanctions, stops jurisdictions from providing IBCs with low or no tax regimes and requires that all companies, domestic and international, pay the same rate of tax. The BEPS initiative was launched in November 2015, and countries that are not in compliance by the end of 2018 will be blacklisted and punished unless, in special circumstances, they have been given a grace period in which to conform.
Hence, Ms Mottley, whose government is in the midst of a massive operation to salvage a wrecked economy that it inherited just six months ago, has announced that by January 1, 2019, Barbados will converge its local and international tax rates.
Significantly, the Barbados government has decided to converge to the lower tax rate. Effectively, this means that domestic companies that paid corporation taxes of up to 25 percent will now join IBCs by paying between 1 and 5.5 percent.
In making this announcement, Ms Mottley made two statements that have significance for the wider Caribbean.
First, she pointed out that it was the previous government’s decision to commit to the OECD demands and to overhaul the tax system by year-end, something done “in the dead of night without debate and discourse and even worse, without any plan as to how they were going to achieve it”.
Second, in stating that her government recognised that, without sufficient time to negotiate any change to the commitment given by the previous government, it was compelled to comply, it was doing so although “the pressure from the OECD may be hypocritical, bullying, and an affront to natural justice”.
Of course, making commitments to the OECD on a bilateral basis, and without discourse with relevant parties within their own countries prior to such commitments, is not unique to Barbados. There has also not been a collective and unified Caribbean engagement with the OECD, at a high political level. Individual governments have simply signed-up to OECD requirements and their ministers have presented their acquiescence to Caribbean publics as a “victory”, imaginary and misleading though such assertions were.
So, all the Caribbean countries now have to confront the reality that Ms Mottley and her government faced. Adherence to the OECD’s BEPS scheme is less than a month away when IBCs and domestic companies will have to pay the same rate of tax.
No one can blame the Barbados government for setting this new tax standard in order to remain competitive because of the circumstances occasioned by the OECD. But the consequences for other Caribbean countries will be serious.
By choosing the lower tax rate “to remain globally competitive”, the Barbados government has set a bar for other Caribbean jurisdictions that compete with Barbados as well as globally. Can they now opt to set their corporation tax at the present domestic rate – an average of 30 percent – or should they adopt the Barbados standard of between 1 and 5.5 percent?
For some governments, applying the new Barbados standard would cripple their economies. Over the last 20 years, the number of their IBCs has been decimated by OECD demands. Today, revenues from IBCs do not match the income generated from domestic companies. Therefore, these governments will have to converge their local and international tax at the domestic rate. But, the effect will drive away even more IBCs. It may also cause some Caribbean companies to shift operations to Barbados.
Other Caribbean countries, that have a greater dependence on IBCs than on domestic companies, have a choice of matching the Barbados standard or converging their tax rates even lower. A race to the bottom could be triggered.
The success of the Barbados standard of a converged, low tax rate for IBC and domestic companies will be tested in the coming years. There is a risk that revenues to the government might decline. However, the expectation is that: first, the IBC business will increase; and second, the fiscal space that domestic companies will enjoy from much lower taxes will encourage them to invest in expanding their business and employing more people, rather than pocketing bigger profits.
Dealing with these disruptive circumstances, because of external factors, cries out for collective regional action which, had it been taken in a timely manner, would have better placed every country to cope with them.