Barbados' economic substance rules brings an end to separate tax rates
Barbados has introduced new economic substance requirements that effectively brings down the so-called ‘ring fence' that kept two separate tax rates for local and international business companies.
As of January, the concept of an International Business Company in Barbados no longer exists: for tax purposes all companies are now Regular Barbados Companies, regardless of where their customers are and if they are foreign owned. "This means that a one-tiered tax rate system is now in effect on the island," Maria Robinson and La-Tanya Edwards at EY wrote in an article for Business Barbados.
The new requirements in Barbados are contained in the Business Companies (Economic Substance) Act, 2018. The Act requires business companies that are resident in Barbados for tax purposes and which conduct certain types of activity to have adequate substance in the jurisdiction.
The consequences of non-compliance with the Act or failure of the economic substance test are varied and include financial penalties, disclosure to the competent authority in the jurisdictions where the holding company, ultimate holding company and ultimate beneficial owner(s) reside, as well as enforcement action.
Companies that fail to meet the test in one year are liable to a penalty of up to $150,000. Failure to meet the test the following year means another $150,000 penalty will be added to the first.
Failure to provide information required by the regulator or provision of inaccurate information to the regulator carries a penalty of $75,000. A right of appeal exists in relation to penalties which have been ordered by the regulator.
The new requirements are in response to European Union and OECD initiatives to prevent harmful tax practices and profit shifting. Similar legislative enactments have been implemented in a number of international financial services jurisdictions such as Anguilla, the Bahamas, Bahrain, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands.
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