Barbados touts its low-tax, offshore advantage

ANITA ELASH - The Globe and Mail

Offshore tax havens, still reeling in the wake of the global economic crisis, are looking to Canada to help revitalize the industry.

Government officials of Barbados, one popular low-tax jurisdiction, are stepping up efforts to attract Canadian investors as the Caribbean country grapples with a slowdown. Like most low-tax countries that rely heavily on international investment, Barbados has suffered amid sluggish growth in western economies. Direct foreign capital investment – a major part of its economy – dropped by nearly 5 per cent in 2009, largely because British and U.S.-based companies cut back on expansion overseas, and business has remained slow since.

Other countries in the region have also been hurt by a decline in foreign investment and are scrambling to drum up new business, especially from Canadian companies, which have benefited from Canada’s relatively strong economy.

Investment by Canadian companies looking to avoid paying Canadian tax on income derived from foreign earnings has grown from $500-million in 1987 to $51.7-billion last year. Nearly 9 per cent of Canadian direct investment abroad is done in Barbados. Canadian subsidiaries, which include a large number of mining, oil-and-gas and financial services companies, account for one-third of the 3,750 corporate structures set up there.

Barbados is also facing more competition for investment after other tax-haven countries in the region, such as the Cayman Islands and Bahamas, signed agreements with Canada last year to ensure greater transparency and give them more legitimacy.

But Barbados is fighting back by promoting its expanding network of bilateral double taxation treaties and appealing to Canadian companies to invest there in order to take advantage of them.

“We have gone through a very rough period, so our strategy is to get in front of investors’ faces,” said Darcy Boyce, Minister for Energy, Immigration, Telecommunications and Invest Barbados, a government economic development agency. “We want them to know that we have the best treaty network in the region.”

Barbados’ 2.5-per-cent corporate tax rate has been a key attraction to Canadian investors since Canada signed its own double taxation treaty with the country in 1987. Under the treaty, Canadian companies can set up a subsidiary in Barbados to conduct international business. If the company has five employees in Barbados and maintains a management presence there, it can repatriate profits without paying Canadian tax.

The practice of investing in low-tax jurisdictions remains controversial. About a fifth of Canada’s foreign direct investment moves through low-tax jurisdictions, of which Barbados is the biggest recipient. The New Democratic Party estimates Canada loses about $4-billion a year in corporate tax revenue on such investments.

But Barbados says offshore investments are an important contributor to its economy, and Canadian tax experts argue that allowing preferential offshore tax structures helps maintain a healthy Canadian business sector.

Walid Hejazi, associate professor of international business at the Rotman School of Management in Toronto, argues that well-regulated low-tax jurisdictions are a crucial conduit to an increasingly competitive global economy.

“Countries operating in the global economy have to be competitive. As the need to expand globally increases, the need to use these competitive tax structures is even more important,” he said.

Invest Barbados chief executive officer Wayne Kirton says Barbados’ stable business environment, well-educated population and sophisticated business infrastructure have been key draws for Canadian companies. He says Barbados has taken pains to ensure that it is neither a tax haven nor a “nameplate” country. It provides full disclosure to Canadian tax authorities and has strict regulations that dictate that international companies must maintain a management presence on the island.

“We are not about secrecy. You cannot hide money in Barbados,” he said.

Barbados’ other major industries are tourism and sugar production. Mr. Kirton said corporate taxes earned from offshore investments in the country make up 5 per cent of Barbados’ GDP. Offshore companies employ about 4 per cent of the work force, most of them professionals such as accountants, lawyers and business school grads.

“As an island nation, we don’t have natural resources unless you count sea, sand and sun. We import most of what we consume here, so it’s very important we bring in foreign exchange,” he added.

In a 2007 study, “Offshore Financial Centers and the Canadian Economy,” done at the request of the Barbadian government, Mr. Hejazi found that Canadian investment through legitimate international financial centres increases exports by 10 to 15 per cent and results in higher levels of capital formation and employment. His study did not assess the impact of such investments on tax revenues in Canada.

Until recently, Barbados enjoyed special status in the Caribbean as the only offshore investment centre that complies with international standards for transparency and tax co-operation. That changed last year when Canada signed Tax Information Exchange Agreements with eight Caribbean countries, including Cayman Islands, Bahamas and Bermuda, all of which had been on an international “grey list” of unco-operative tax havens.

Low or zero tax offshore investments are not for everyone, said Paul Schnier, a tax expert at the law firm Blaney McMurtry Barristers and Solicitors LLP. He said owners who rely on company profits to pay their living expenses would not benefit, since profits from overseas investments in countries like Barbados are only tax-free as long as they stay in the company. The cost of hiring or transferring staff and setting up and maintaining an office can also be high, and companies looking to make such an investment should insure that costs are not greater than any tax savings.

Mr. Schnier said that even if the math works out, political sensitivities may also stop a company from investing in a low-tax jurisdiction.

“There is still some of taint with setting up a subsidiary in a tax haven,” he said. Critics say “why isn’t the government doing anything about company XYZ that is sending its profits offshore? For some people, it just doesn’t feel right.”

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THE BARBADOS FACTOR

3,750 – Number of foreign companies with a corporate presence in Barbados; 31 per cent of which are Canadian.

50 – Number of international banks; 78 per cent are Canadian.

144 – Number of mining companies; 41 per cent are Canadian.

230 – Number of oil-and-gas companies; 30 per cent are Canadian.

Anita Elash