Pillar 2 and Its Potential Impact on Caribbean Offshore Jurisdictions

 

MEMO

1.      This is a memo in respect of research conducted in advance of the live webinar event “Pillar 2 and its potential impact on Caribbean offshore jurisdictions”, this event is scheduled for 30 September at 5 – 6 PM EST.

What are the Pillars?

2.      Pillar One proposes changes to traditional “nexus” rules for allocating taxing rights, enabling a portion of the revenue generated by large groups from automated digital services (and, possibly, some consumer facing businesses) to be taxed in the jurisdiction in which they are used. This pillar details the different technical issues that need to be resolved to undertake a coherent and concurrent revision of profit allocation.

3.      Pillar Two (also referred to as the “Global Anti-Base Erosion” or “GloBE” proposal) relates to the possible introduction of a “global minimum tax rate”, by creating new taxing rights for jurisdictions whose taxpayers do business with low-tax jurisdictions. This pillar describes the work to be undertaken in the development of a GloBE proposal that would, through changes to domestic law and tax treaties, provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.

4.      The development of the GloBE proposal under pillar two in particular contemplates radical new principles of international taxation which would extend beyond the sphere of purely digitally focused businesses by way of:

An income inclusion rule that would tax the income of a foreign branch or a controlled entity if that income was subject to tax at an effective rate that is below a minimum rate.

An undertaxed payments rule that would operate by way of a denial of a deduction for a payment to a related party if that payment was not subject to tax at or above a minimum rate.

A switch-over rule to be introduced into tax treaties, which would permit a residence jurisdiction to switch from an exemption to a credit method where the profits attributable to a permanent establishment or derived from immovable property are subject to an effective rate below the minimum rate.

A subject-to-tax rule that would complement the undertaxed payment rule by subjecting a payment to withholding or other taxes at source.
5.      Pillars one and two would clearly represent a significant change to the international taxation landscape and so developments will need to be closely monitored with respect to structuring considerations for financing multinational groups.

Caribbean / Offshore Structures and their use

6.      The current state of play in respect of tax rates in the Eastern Caribbean / Caribbean
Proper are:

Country Tax Data 2021
Anguilla This is a completely zero-tax jurisdiction, no with-holding taxes are applicable, or any form of direct taxation applicable in Anguilla nor are there any anti-avoidance rules or compliance obligations applicable to individuals in Anguilla.

Anguilla is a British Overseas Territory and an Associate Member of the Caribbean Community (“CARICOM”), it does not have any tax treaties however it has entered into  although it does have a network of tax information exchange agreements with countries including Australia, Belgium, Canada, Denmark, Faroe Islands, Finland, France, Germany, Greenland, Iceland, Ireland, Netherlands, New Zealand, Norway, Portugal, Sweden, and the United Kingdom.

Antigua and Barbuda In Antigua and Barbuda, the general corporate tax rate for any type of corporate entity is 25%. A note of caution however, once an entity turns over more than XCD$300 000 / USD$115,000 and is providing goods and / or services in Antigua, they may be liable to a further tax in the form of Antigua Sales Tax ( a value added form of tax) at a rate of 15% (exceptions apply and some goods and services are zero rated).
Barbados All corporate entities are now subject to corporate tax rates of between 1 – 5.5%, this is a sliding scale dependent on the level of an entity’s income. 5.5% on the first 1 million Barbados Dollars (BBD), 3% on the BBD 1,000,001 – 20 million BBD, 2.5% on BBD 20,000,001 – 30 million BBD and then 1% on amounts in excess of BBD 30,000,001.

Typically, resident companies are taxed on their worldwide income with allowances or releief claimable against allowable deductions, taxes paid in other jurisdictions (provided that the tax paid doesn’t fall below that which would have been payable in Barbados to less than 1%) etc.

Barbados has been popular in international circles as a ‘branch’ company. This is now impacted as branch profit tax of 5% is applied to payments from branches of foreign companies to their non-resident parents out of income derived in Barbados unless reduced under a tax treaty.

VAT (current rate of 17.5%) applies to the sale of goods and services (some may be zero – rated), inclusive of online transactions where those are carried out with non-resident suppliers for the purchase of goods and services for consumption in Barbados.

Other fees may apply – e.g. the foreign exchange fee of 2% on all transactions that require the sending or settlement in a foreign currency where that transaction is not from a foreign currency account.

A further bank asset tax of 0.35%

There are currently 31 active tax treaties and currently in force is the OECD Multilateral Instrument.

British Virgin Islands As one of the most popular “offshore” jurisdictions, the BVI retains its tax exemption for BVI Companies, so practically there are no filing requirements for corporate income tax purposes.

There are however economic substance requirements apply to BVI entities that perform relevant activities – banking, insurance, fund management, finance and leasing, headquarters, shipping, holding, intellectual property and distribution and service centers.

Extensive documentation, physical presence and activity will be required in order for the BVI entity to comply.

For multinational companies, country-by-country reporting requirements may apply where those BVI companies of an in scope multinational group must submit a CbC notification or report.

The BVI is a British Overseas Territory, there are no tax treaties in force however there are in force some 28 tax information exchange agreements, the BVI is also a signatory to : - Convention on Mutual Administrative Assistance in Tax Matters, Multilateral Competent Authoroty Agreement on the Exchange of CbC Reports, and the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information.

Commonwealth of Dominica This island nation is often mistaken for its larger neighbour to the North, the Dominican Republic.

Entities incorporated in Dominica are deemed to be resident and is taxed on its worldwide income at a rate of 25%, branch remittance tax is at 15%, dividends and interest paid to a non-resident is subject to a 15% withholding tax.

Dominica has concluded and enacted around 13 tax treaties worldwide.

Grenada Grenadian corporate entities are generally subject to a corporate tax rate of 28% on their worldwide income.

Dividends are currently tax exempt, whereas interest, royalties and other fees are all subject to a 15% withholding tax.

VAT stands at a rate of 15% and is applicable on the sale of goods and services within Grenada – certain goods and services may be weighted differently (zero rated, lesser rate or exempt).

Stamp duty of 1% is applicable in certain circumstances, a further stamp tax is also payable on the gross income of a business, it is a weighted scale of 0% - 0.70% on the income.

It does not appear that there is any foreign tax relief available.

The country is currently subject to 13 tax information agreements.

Most known for ‘offshore’ betting licenses, Grenada was the tiniest of the Eastern Caribbean countries to have offshore offerings. As of December 2021, Grenada will no longer have an “offshore” industry.

Montserrat Montserrat is re-emerging following the devastating effects of the 1995 explosive volcanic eruption and the subsequent evacuation of over 50% of the native population.

Corporate tax rates are at 20% and is chargeable to income derived from on island activity (so, territorial tax).

There are no other taxes chargeable on dividends, interest, royalties, and other fees.

The corporate regime is fairly uncomplicated relative to the other British Overseas Territories and states in the Eastern Caribbean.

There are currently 10 tax information exchange treaties in place and a handful of double taxation treaties as well.

Saint Kitts and Nevis The Federation of Saint Kitts and Nevis has various corporate entities – resident entities are generally taxed on worldwide income at a rate of 33% (lowered briefly for COV19 to 25%) however resident companies that do business exclusively outside of the Federation are generally exempt from taxation.

Dividends are not subject to withholding tax (unless paid to a non-resident) but can be subject to corporate tax, capital gains tax is generally levied at a rate of 20% , branch remittance tax is also applied additionally at a rate of 15%.

VAT is at a standard rate of 17%  which is reduced to 10% in the tourism industry, certain goods and services may also be exempt or zero-rated.

No economic substance requirements are applicable in the Federation.

Saint Lucia Saint Lucia or Helen of the West Indies has various forms of corporate entity inclusive of the ubiquitous IBC.

Generally, corporate tax is levied at 30%, both resident and non-resident companies are taxed only on income derived in or sourced from Saint Lucia.

Dividends and capital gains tax are not subject to tax, foreign tax relief is also available.

VAT of 12.5% (reduced rate of 10% for hotels) on good and services consumed in Saint Lucia., some goods and services are exempt or zero-rated.

In respect of withholding tax, a sliding scale of 10 – 25% (dependent on residence) is levied on interest, royalties and other fees, there is no branch remittance tax.

Curiously, there is a withholding tax of 10% on withdrawals from a pension fund or insurance policy less than 10 years old.

Stamp duty of roughly 1% is chargeable on any document evidencing a legal or contractual relationship between 2 or more parties.

Saint Lucia has a sole Double Taxation Agreement applicable to member states of CARICOM.

So far Saint Lucia has concluded 31 other tax treaties / tax exchange information agreements and is party to a series of treaties under negotiation.

Saint Vincent and the Grenadines Saint Vincent and the Grenadines (“SVG”) levies 30% taxes on resident companies, for non-resident companies only on income derived or courced in SVG.

Limited Liability Companies (LLCs), a form of company without share capital are not taxed.

Dividends are not subject to tax.

In respect of withholding tax a sliding rate (dependent on residence of the recipient) of 15 – 20% is applicable on interest, royalties and other fees payable to non-resident companies.

Economic substance is now applicable to SVG companies.

VAT is at a rate of 16% (11% for hotels), certain goods and services may be exempt.

Stamp duty of up to 1% is payable on any document evidencing a legal or contractual relationship between 2 or more parties.

So far Saint Vincent and the Grenadines has concluded 24 tax exchange treaties / agreements and is party to a series of treaties under negotiation.

7. There are certain countries that the EU considers as having sub-par tax governance standards. Such countries are included in the list of “non-cooperative jurisdictions”.

8. As at the date of the webinar, the EU’s Economic and Financial Affairs Council list of non-cooperative jurisdictions[1] are 12-fold: American Samoa, Anguilla, Dominica (new), Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands, Vanuatu and the Seychelles.

9. The inclusion of a jurisdiction on the EU blacklist may be a relevant factor for multinationals to consider when selecting an international offshore financial centre, particularly because EU member states are expected to implement, from 1January 2021 at the latest, defensive measures with respect to non-cooperative jurisdictions, such as withholding taxes, non-deductibility of payments and denial of certain tax exemptions and payment to an entity resident there may be reportable, under hallmark C in the DAC 6 reporting rules.

10. The planning of effective financing of offshore operations will also involve close examination of the structure through which such arrangements are to be made (as well as the location of the entities that participate in that structure).

11. A local holding company may be used to finance the local operating company, rather than have a parent directly lend to a local operating company. If the acquisition of a target company is to be made, a holding company structure may well be very effective. The effectiveness of the structure will depend on the tax regime in the holding company's jurisdiction and, in particular, the availability of deductions for interest payments. An intermediate holding company may be useful in converting onetype of income, for example, interest income, into another type of income, for example, dividends, which may reduce the effective tax rate of the multinational group. In many locations, it will be possible to group the holding company and the target for tax purposes, allowing the cost of finance to be set off against the trading profits of the target company.

12. If the effective rate of tax in the UK is higher than that of the jurisdiction in which an offshore company is incorporated, it is, generally, fundamental that the tax residence of the offshore company is kept outside of the UK. Not only must the company not be incorporated in the UK, but the central management and control of the company must not be exercised in the UK. Even with the company resident outside the UK, the impact of tax legislation such as the controlled foreign companies (CFCs) provisions will need to be considered.

13. It should be pointed out that there has, in the past, been consideration of dual-resident company structures, which, if effective, allow the parties to obtain an interest deduction in both jurisdictions in which such companies are resident. This is based on a company satisfying an incorporation test in onejurisdiction and a central management and control test in the second jurisdiction.

14. However, in several countries (including the UK), specific anti-dual resident legislation has been introduced and, in the UK, the use of dual-resident companies has been effectively eliminated. Under UK legislation introduced in the Finance Act 1994, if a company is dual-resident in both the UK and another country but, under the tie-breaker clause in the double tax treaty between the twocountries, the company is treated as resident in the other country for treaty purposes, the company is treated as non-UK resident for all UK tax purposes (section 18, Corporation Tax Act 2009). Dual-residence is also unlikely to be possible in many other jurisdictions going forward as a result of the BEPS project.

15. The writer has only considered structures involving a parent company in onejurisdiction and subsidiaries in another (or others). However, an alternative to establishing a subsidiary in another jurisdiction is establishing a permanent establishment (PE) there.

16. It is already becoming evident that the outputs of the OECD's BEPS project and related initiatives are reducing greatly the ability for multinational groups to achieve reduced taxation through international structures which were traditionally prevalent.

17. Measures to prevent, for example, treaty shopping, hybrid mismatches and avoidance of permanent establishment status are aimed at ensuring that, broadly, taxation reflects economic reality by countering tax advantages that might otherwise arise through "artificial" structuring.

Conclusions

 

18. The use of traditional offshore structures is likely to undergo significant evolution.

19. The current tax regimes applicable in the Eastern Caribbean are appended to this memo.

 

[1] https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/ (accessed 19 July 2021)

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