The Time For Change is Now

By Avinash Persaud, Chairman of Intelligence Capital Limited and Emeritus Professor of Gresham College (29/08/2017)

Sometimes a lack of choice is a good thing. Small in size and bereft of natural resources, other than white beaches and turquoise sea, the only option for Barbados when it became independent 50 years ago was to develop its people and institutions. Five decades of free secondary and tertiary education contributed to the country’s high levels of social capital. If you exclude those places that feel a little inauthentic, where expats outnumber the locals and hog the best jobs, then there are few countries with better records of personal safety, political stability, lower poverty rates or lower incidents of terrorism. A few years ago a Barbadian taxi driver found that a passenger had left behind an envelope with the equivalent of a year’s salary. He went straight to the nearest police station to give in the cash. Later, he couldn't understand the level of interest in the story. "That was just what I was brought up to do," he said. 

This article isn’t an advertorial. Stories of incorruptible Barbadians remain but are a little less common today. The Great North Atlantic Recession of 2008 hit the US and the UK hard, the two largest tourism markets for Barbados. Barbados sank into a six-year recession, which put the country’s famed social capital under much stress. The whole point of social capital, however, is that countries that have it are more able to roll with the punches and bounce back from the falls. We may have to wait till 2018, but Barbados will be back.  

Barbados is and has always been a well-regulated jurisdiction with a long tradition of respect for high standards and the rule of law. I mean long. In 1639, Barbados was considered more valuable to the British Empire than its North American possessions and was the home of the first national parliament in the western hemisphere. Three hundred and seventy years later Professor Jason Sharman and a team at Griffith University in Australia conducted a field experiment, where they set themselves up as money launderers trying to establish a company in over a hundred jurisdictions. They were rebuffed more times in Barbados than those former American colonies and almost all other OECD countries. The recent politicization of international tax, regulation and privacy issues means that facts like these often get lost. To underscore its reputation as a responsible financial centre, Barbados is a signatory to and firm adherent of the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters and its counterpart, the Multilateral Competent Authority Agreement. 

If you asked a group of thoughtful international tax lawyers and accountants to design the perfect international financial centre, they would end up with Barbados. The country lies at the heart of one of the densest networks of double taxation agreements (DTAs) in the world. Over 29 treaties currently exist with countries such as the US, China, UK, Canada, Switzerland, the Netherlands, Singapore and Luxembourg. It is, for instance, a hub for over CS$80billion of direct investment from Canada per year. After these funds have come into the Barbados international hub, they flow to China and other economies under the protection of bilateral investment and tax treaties that Canada does not have. Like other reputable international financial centres, the investors pay most of their taxes where they made their investment returns and when they repatriate funds back to Canada but pay little taxes while the funds are in the hub. The network is so thick because it began over 40 years ago. Barbados is no frontier destination, empty of experience.  

The network of treaties feeding into the hub continues to grow. A further eight are awaiting ratification, and new treaties with Vietnam, Malaysia and others are being drafted. Substantial legal and life-style fundamentals should have delivered greater growth in the Barbados international financial centre than we have seen of late. Those working in the sector put this down to a lack of joined-up government. The fiscal regime may be investment friendly, but the corporate affairs and immigration departments operate at a pace that they may be accustomed to but modern financiers are not. When asked why they chose Cayman and BVI, hedge fund managers put speed at the top of their list. When gold prices surge and hedge fund clients want a gold fund to invest in, for instance, they want it now, not six months later. Back in Barbados fast-track solutions have been mooted and tried. Ultimately this will prove solvable. 

Barbados has two other challenges that may be harder to overcome but will be critical to whether its financial centre prospers or withers in the new environment. Barbados is an expensive location for legal services. In part, this is because the competition elsewhere has heated up. However, the difference between the international competitiveness of the fees charged by the Barbados branches of the large accounting firms and the relatively high levels of fees charged by some local law firms suggest that regulatory restraints from competition may be a factor. If lawyers from neighbouring gas giant, Trinidad & Tobago, were more easily able to practice in Barbados, or if more activities could be carried out without a lawyer, as in the UK, Barbados would become a more serious competitor to the larger IFCs. Clients are happy to pay gold plated fees when matched with gold plated advice and so if Barbados was to become the global centre of expertise in certain niche areas then this would be another way of improving competitiveness. So far, however, this is not the case, with a few noteworthy exceptions. 

Barbados was so invested and focused on its strategy of building a network of bilateral tax and investment treaties that it was too slow to recognize when international tax and regulation became political and the rules of the game changed. At first, when OECD countries demanded IFCs had a minimum number of Tax Information Agreements (TIAs), Barbados said that it would not be joining this charade because they had tax treaties which were always more robust than TIAs. They were reinforced in this superior attitude by a previous victory, mainly led by Barbados, against an attempt by the OECD to define those with lower tax rates than in the OECD as being engaged in harmful tax competition and subject to sanction. What Barbados failed to grasp was that the OECD countries were far more fiscally challenged this time around than last and were not going to give up so easily. When the OECD launched its multilateral convention, Barbados asked why it should sign up to a multilateral convention with general provisions when it already has a network of bilateral treaties with specific ones. But they were talking a lost language of level playing fields and personal privacy and so a country with one of the largest network of tax treaties ended up, for a while, on the same lists of non-cooperative jurisdictions that didn’t have any.  

At the end of the day, Barbadians are pragmatic. Once it was clear that sticking to their position was in danger of undermining it, they changed, embraced the multilateral conventions and the new narrower view of privacy. But these tactical adjustments will not prove sufficient in the long run. The politicization of international tax and regulation requires an entirely new approach to IFCs. It requires IFCs to continuously look around the world to identify those areas where inappropriate regulation is repressing legitimate business and to respond with more appropriate regulation. The competitiveness of IFCs is no longer about great privacy, low tax and less regulation, but limited privacy, neutral tax and better regulation. 

IFCs are playing an entirely new game. The old guard in many jurisdictions will find it tough to adapt. Winning this new game relies more heavily on regulatory capacity, regulatory opportunism and industry expertise than on tax rates. It is harder for small states to do this better than larger ones not least because small states have a limited amount of human capacity, experience and confidence to do so. They will have to specialise. Attendees of international conferences on the future of IFCs would tell you, however, that if there were one Caribbean country that has an unusual number of outspoken experts on the subject and could pull this off, it would be Barbados. Merging the Central Bank’s regulatory function with the overly compliance-focused Financial Services Commission, would be a first step towards pooling expertise and shifting the focus of the authorities on to deciding what business they want or do not want. Becoming an innovator in financial regulation would be the next.  

A general election is approaching in Barbados, and the next Minister’s in-tray is piling up with things to do. The advent of Brexit and President Trump may appear to take the pressure off pursuing the necessary changes we have identified here. That would be a mistake. This is not the time to ease off, but to press on.