Barbados: Combatting the Global Recession

By Dr. Trevor A. Carmichael, Q.C., Chancery Chambers (04/02/2010)

Performing in a Recession

It is now a virtual truism, to the point of almost a trite expression, that adversity brings strength, or at an equally banal level, that crisis provides opportunity. Albeit an apparently commonplace way of thinking, it nevertheless highlights a commitment to optimism and a recognition of the importance of careful choice. Barbados during the present global recession has mirrored this recognition of the need for heightened action, as its policy makers seek to buttress an economy not insulated from the current global damage.

For the first three months of 2009, Barbados’ real GDP fell by an estimated 3 per cent, compared to growth of 1.9 per cent for the corresponding period in 2008. It represents the first January to March decline since 2002 and essentially reflects a decline in tourism and construction value-added, with the corresponding impact on related industries both in the traded and non-traded sectors. Furthermore, for the first time since 1995 the capital and financial account recorded a first quarter deficit and consequently the net international reserves of the monetary authorities declined by approximately USD23 million.

During this period, both domestic deposits and credits to the non-financial private sector slowed markedly when contrasted with the comparable period of the previous year. Noteworthy however, were the magnitudes, such that liquidity levels in the banking system were just slightly above those recorded at the end of the year 2008. Concurrently, a small contraction in the treasury bill rate occurred.

The timely start to the sugar harvest may be one of those benefits that came in the era of overall global financial adversity. For as a result, sugar production grew by 11.9 per cent during the first quarter of the year 2009 in stark contrast to two previous consecutive first quarter declines. However, real value-added in non-sugar agriculture remained relatively constant at 0.5 per cent compared to an average growth rate of 2.9 per cent in the first quarters of the four preceding years. Maybe in recessionary times consumers eat more, for chicken production for the period improved by 2.8 per cent compared to the 2008 decline of 8.8 per cent. This view is not, however, supported by a 9.0 per cent decline in the production of other meats and unchanged output of food crops.

The Central Bank of Barbados has continued judiciously to respond to the global economic dislocation. As far back as 2007 it had sought to lower the operating costs of businesses and individuals through interest rate reductions. It has continued this policy trend and in February 2009 lowered the minimum deposit rate from 4 per cent to 3 per cent with the intention of recording consequential reductions in the lending rate. This rate is now 225 basis points below its 2007 level and while the weighted average lending rate was 9.80 per cent at December 2007, it stood at 9.33 per cent at February 2009. Furthermore, a repurchase facility was introduced in February 2009 to attend to any liquidity issues which could arise in the present financial climate. By the end of the first quarter of 2009 the facility had not been used.

The International Dimension

Not unexpectedly, the global financial uncertainty had its impact on Barbados’ international business sector, for the sector recorded a slightly decreased profitability and fewer new entities were formed when contrasted against other years for comparable periods. For example, in the first three months of 2009, 94 new international business companies were formed compared to 150 in the corresponding 2008 period. However, difficult times do sometimes bring good results and the recent experience of Barbados’ less publicised international trust business proves the adage. International business overall remains a very vibrant element within the economy and the suite of legislation continues to ensure that the jurisdiction remains placed as an ideal centre for the pursuit of legitimate business expectations.

International business companies (IBCs) continue to be incorporated within a regulatory framework which applies a rigorous but fair licence application procedure. The relevant legislation was introduced in 1965 and since that time the scope and purpose of the user has changed according to tax and regulatory enactments, particularly in Canada, the United States (US) and the United Kingdom (UK), from where many of the users emanate. The legislation’s use has also been influenced by the nature and type of double taxation agreements which Barbados continues to negotiate and the core treaties which it inherited at its Independence from Britain in 1966. Currently, there are treaties in existence with Canada, the US, the UK, Switzerland, Norway, Sweden, Denmark, Malta, China, Cuba, Botswana, Venezuela, Austria, the Netherlands and Mexico.

The Society with Restricted Liability (SRL) has experienced significant growth in recent years. The flexibility of this vehicle, together with Barbados’ excellent treaty relationships with China, the US and Canada, account for multiple uses in the case of joint venture investments within China, as well as for Chinese entrepreneurs who are pursuing global business deals. It provides a mechanism for structuring investments in civil law jurisdictions in Europe and Latin America. Also, under Barbados law, the SRL is a body corporate and therefore taxable. Yet, for US tax purposes it has similar elements to its cousin, the United States Limited Liability Company. Accordingly, the members or quota holders of the SRL may elect, pursuant to US tax rules, to treat the SRL as a partnership or branch for all US tax purposes. By filing a prescribed form with the US Internal Revenue Service within the stipulated time period, the entity may qualify as a partnership or branch rather than being deemed a corporation, as would otherwise be the case.

As a very flexible entity, the SRL may be formed as an Exempt or Non-Exempt Society and may be owned beneficially by residents of Barbados. The former is designed primarily for use in international transactions and therefore is prevented from doing business with residents of the Caribbean Community (CARICOM). However, the latter, with its more local focus, is able to do business with residents of Barbados and CARICOM as well as to participate in Barbadian real estate opportunities which are not available to the Exempt or International SRL.

The international insurance sector, which was introduced in 1983, is of earlier origin than the 1995 SRL regime. The insurance industry has undergone significant changes in the past two decades as the traditional captive is no longer the sole type of structure in use. Indeed, the insurance industry and securities industry have today become so closely intertwined that the traditional definition of a captive insurance product is no longer always accurate. Many of the new special purpose vehicles which are being used to insure and reinsure catastrophic risks are embedded within structures that are sometimes more akin to the securities industry than its insurance counterpart. Barbados, like Bermuda and the Cayman Islands, has been host to many of these new structures and it has been the regulated flexibility of these jurisdictions which has facilitated the speedy setting up of new reinsurance entities immediately after the catastrophe of September 11.

On a more general level, Barbados’ tax treaties continue to offer benefits which provide tax-planning opportunities to investors who are seeking to minimise their global tax exposure. Most of Barbados’ treaties allow for reduced withholding tax rates on dividends, interest and royalties. A case in point is Canadian domestic tax legislation, which provides that dividends paid by a Canadian resident company to a non-resident company are subject to Canadian withholding tax at a rate of 25 per cent. However, under the Barbados-Canada tax treaty, this rate is reduced to 15 per cent.

As a general rule, the treaties also contain tax-sparing provisions. These allow for foreign companies with subsidiaries that conduct business in Barbados under the Fiscal Incentives Act or the Tourism Development Act and consequently pay no corporation tax to be given credit for the Barbados taxes that would have been paid had the Barbados subsidiary not operated under the above mentioned incentive legislation. The Barbados-UK double tax agreement contains such tax-sparing provisions. In addition, the interaction of the Permanent Establishment (PE) and Business Profits Articles of Barbados’ treaties offers protection to Barbadian resident companies from exposure to taxes on business profits earned in another treaty country.

The treatment of capital gains is often important to international investors since, in some of Barbados’ treaties, the right to tax certain gains lies with the state where the seller is resident. Hence, in cases where the seller is resident in Barbados, and since Barbados does not impose tax on capital gains, no tax is payable either in Barbados or in the other treaty country.

A limitation on benefits provision is also present in a number of Barbados’ tax treaties. Such a provision prohibits treaty benefits from being applied to offshore companies which benefit from a special tax regime or prevent non-residents of a treaty country from enjoying the benefits of a treaty. Barbados’ treaties with Canada, Norway, Sweden, Finland and the UK contain restrictive clauses denying the benefits of the treaty to special incentive companies, such as the IBCs. Although the provisions of the Barbados-Canada treaty do not apply to companies that are entitled to special tax benefits in Barbados, the Canadian domestic foreign affiliate rules permit these companies, once resident for tax purposes in Barbados, to utilise special tax benefits under Canada’s domestic tax legislation. As a result, such income, when repatriated to Canada, is not subject to tax in Canada. The revised Limitation on Benefits Article of the recently renegotiated Barbados-US tax treaty excludes special incentive companies from benefiting from the treaty provisions applicable to dividends, interest and royalties. However, this treaty still has advantages for these companies, principally under the Business Profits Article. There are also benefits for individuals.

The most recently concluded treaties, including those with China and Cuba, do not prohibit the use of special incentive entities from obtaining treaty benefits. These treaties provide significant tax-planning opportunities to investors wishing to minimise their costs when repatriating income from their investment. Indeed, the treaties with China and Cuba contain provisions which make Barbados an attractive jurisdiction through which investments into China and Cuba may be channelled.

Barbados’ international business sector remains vibrant and diversified, and this year introduced its first international business week which locally showcased the industry in all its splendour and glory.


While the global recession has made its mark, it has been a soft one capable of ongoing erosion and erasure, a feature facilitated by the quality and integrity of the jurisdiction.