The vision of all stakeholders in the Barbadian economy is that Barbados should become a premiere business centre for the provision of high-quality international business and financial services and a regional hub for business within Caricom. The international business company (“IBC”) has been the corporate vehicle driving the development of the international business sector in Barbados, having been in existence since 1965. The question that arises is: Has the IBC evolved so as to allow Barbados to achieve its goal?
On its introduction into the Barbadian business landscape, the IBC was viewed as an investment tool largely for the extra-regional investor with intentions to invest offshore. The attractiveness of the IBC was seen in the fact that it enjoyed, and continues to enjoy, certain tax benefits such as the ability to be taxed at a maximum low rate of 2.5% and the ability to take a credit for taxes paid in a foreign territory, even where there is no double taxation treaty in existence between Barbados and the foreign country that is withholding tax from the IBC’s income. Also, IBCs can repatriate any dividends or other income to non-residents without any Barbados withholding taxes.
Although there are many countries that have established similar IBC regimes, Barbados has a special advantage by virtue of the tax policy of its Government. Long ago, the Barbados Government determined that Barbados should be a low-tax, treaty-based jurisdiction, rather than a no-tax jurisdiction. This has allowed Barbados to consistently expand its network of double taxation treaties (“DTTs”). Therefore, apart from the benefits to be derived from simply being licensed as an IBC, there are certain tax treaty benefits that can be enjoyed depending on the terms of the specific DTT. For example, a company incorporated in Barbados as an IBC which undertakes some form of business enterprise in a foreign country with which Barbados has a DTT, may enjoy the benefit of not being considered as having a taxable presence in that country due to the specific relieving provisions of the DTT. The advantage of such treatment is that the IBC would not to be subject to the substantive tax regime in the country in which these operations are established. All profits could therefore be earned in Barbados by the IBC, subjected to low tax rates and be repatriated to the shareholders without any further tax. Alternatively, the IBC could reinvest the after-tax profits in another country outside of the home country of the shareholders.
The evolution in law
Subsequent to its enactment in 1965, the IBC Act was amended a number of times in order to meet the changing needs of investors. The Act was replaced in its entirety in 1991. However, the existing legislation owes its success to some further amendments.
One major step in the IBC evolutionary process was seen in the removal of the ownership restrictions within the IBC Act in 1998. Prior to 1998, IBCs were prohibited from having Barbados resident shareholders. The 1998 amendment allowed Barbadian residents to own the shares of IBCs. Barbadian resident companies and entrepreneurs can now use an IBC to trade in goods and services outside of Barbados and enjoy the benefits outlined above.
The IBC Act also previously prohibited the trade in goods and services, not only within Barbados, but also within Caricom. In 2001, the IBC Act was amended to allow these companies to do business within the Caricom region. This was indeed a significant step especially for multinational companies (“MNCs”) seeking to do business regionally. MNCs could now use IBCs to conduct business in Caricom and at the same time utilize the benefits under the Caricom Double Taxation Treaty.
Many regional companies based in Barbados have operated regionally and/or internationally for some time, relying on the foreign currency earnings credit or the export allowance, both available under the Barbados Income Tax Act (“BITA”), to reduce their tax payable. Where export sales are significant, however, the benefits attributable to IBCs are more significant than the export allowance and tax credits available under the BITA. Consequently, IBCs could be established to engage in regional and extra-regional sales.
In order to further the objective of making Barbados a regional investment hub and encourage the use of IBCs in the distributive sector, the Government of Barbados has proposed certain customs duty benefits. In his 2004 Economic and Financial Policy Statement, the Prime Minister and Minister of Finance noted that IBCs would no longer be required to establish a bonded warehouse to store goods for export and IBCs would be exempt from the payment of annual registration fees in order to maintain such a warehouse.
Although emphasis has been placed thus far on the distribution of goods, it should be noted that the benefits of IBC status are useful also for companies providing services.
The evolution in thinking
More recently, without any legislative change, there has been another development in the evolutionary process of the IBC. This development relates to the views regarding the types of activities that may be undertaken by IBCs. Up until recently, IBCs were largely used as holding companies for regional or extra-regional investment, securities trading, financing, leasing and other related activities. Such activities were largely of a financial nature and were considered by many as not requiring a substantial presence in Barbados. For example, where an IBC is established to hold certain intellectual property which is licensed into various countries, there is little room for a significant amount of activity in Barbados. The main situations requiring substantial activity related to trade in goods and the provision of data processing or other similar back-office type services by the IBC.
A move is, however, currently underway to encourage the use of IBCs in the provision of non-financial services which would attract a substantive presence in Barbados. The Prime Minister and Minister of Economic Affairs recently noted that the benefits of the IBC legislation should be extended to activities such as film and media production, educational, health and the provision of shared services across the region for entities within the Caricom Single Market & Economy. It has also been noted that benefits associated with IBCs could be used for the exploitation of intellectual property specifically in the areas of dance, art and culture. It is our view that Barbados is now poised to expand its product offering and deliver such offerings effectively through the use of IBCs.
For example, Barbados has been revered for its relatively high standard of health care, and has attracted individuals from the region to access health services. There is therefore absolutely no reason why an IBC cannot be used by private physicians to provide health care specifically to non-residents of Barbados. This concept may thereafter be expanded internationally, whereby health specialists could establish operations in Barbados to serve their clientele who may wish to spend some time in Barbados. A similar concept may be applied to the provision of education at a tertiary level.
Notwithstanding the above, it must be borne in mind that there are some issues that will need to be addressed by those seeking to provide such services, especially where the services will also be provided to residents of Barbados. These challenges are, however, surmountable.
In the final analysis, it is evident that IBCs have been at the foundation of the development of the offshore sector in Barbados. It is equally evident that the IBC Act has evolved in order to meet the needs of investors. However, of even greater significance is the fact that thought is being given to promoting the use of IBCs in a far wider range of activities. This is no doubt a move in the right direction, towards the accomplishment of the goal to make Barbados into a leading centre for international business and a hub for business within the region.
Written by Gail Ifill, Manager, Ernst & Young
Reproduced from Business Barbados 2006 with the permission of Caribbean Business Publications.