Progress On The Global Minimum Tax (GMT) In Caribbean IFCs

Background On The Global Minimum Tax

Pillar Two of the OECD/G20’s Base Erosion and Profit Shifting (BEPS) 2.0 project is designed to combat tax avoidance by multinational corporations (MNCs) by implementing a global minimum tax of 15 per cent.[2] This aims to ensure that MNCs pay a minimum effective tax rate of 15 per cent regardless of where they operate and thereby prevent profit shifting to low-tax jurisdictions. It was born out of a concern that large MNCs were using sophisticated tax planning and avoidance strategies to shift profits to low-tax jurisdictions, impacting both developed and developing countries. Not only have average corporate income taxes decreased globally over the past few years, but the OECD estimates that 100-240 billion in lost revenue annually (equivalent to 4-10 per cent of global corporate income tax revenue) is lost each year through base erosion and profit shifting.[3] The ‘race to the bottom’ not only shifts the burden of taxation on to individuals (mostly the middle class), but the foregone tax revenues could have been used by governments for development purposes, like social programmes and infrastructure. The in-scope companies are those MNCs with annual consolidated revenues exceeding €750 million in the previous fiscal year. Countries are not required to implement the tax. However, it applies a ‘top-up’ mechanism so that if an MNC's effective tax rate in a jurisdiction falls below the 15 per cent threshold, other countries can claim the difference.

Caribbean Countries’ Progress On GMT Implementation

Competition on corporate tax rates was not unique to Caribbean IFCs. Many countries around the world sought to attract MNCs to their shores for the purpose of economic activity, employment generation, technology transfer and the like, through providing competitive tax rates and other generous fiscal incentives. This was a particularly useful strategy for small states which have limited options for economic diversification. That being said, many Caribbean jurisdictions have long recognised that low tax rates alone were not enough to attract investment of substance. In addition to its treaty network and competitive tax regime, Barbados, for example, has always touted its highly skilled and educated population, modern telecommunications infrastructure, and political and economic stability, as key pull factors for investors.[4]

Moreover, Caribbean countries’ corporate tax regimes vary widely.[5] Some Caribbean jurisdictions (mostly non-IFCs like Suriname, Jamaica and Trinidad & Tobago) already have statutory corporate tax rates exceeding the global minimum tax threshold of 15 per cent. The new rules may present an opportunity to capture more tax revenue from MNCs operating within their borders. However, for those which are no-tax or low-tax jurisdictions, the global minimum tax could lead to a loss of revenue, as companies that once chose to operate in these countries for tax advantages may consider other locations. As such, Cayman Islands[6] and BVI[7] for example have taken a ‘wait and see’ approach and have not made any commitments to implement the global minimum tax as yet.

However, most Caribbean jurisdictions, including those which are IFCs, have been among the 147 jurisdictions which are participating in the OECD/G20 Inclusive Framework on BEPs, and have begun taking proactive steps to engage with the OECD and adjust their tax frameworks to ensure compliance. Below I provide a couple of examples from Caribbean IFCs.

Bermuda was one of the first out of the gate by passing its Corporate Income Tax Act of 2023[8], as well as the Corporate Income Tax Agency Act of 2024, establishing the agency to administer the new CIT. Prior to this, the Government held three public consultations in which it canvassed the views of the public and its industry officials, and made adjustments based on the feedback received. The legislation came into force on December 27, 2023, and will apply from fiscal years starting on or after January 1, 2025. It introduced a corporate income tax of 15 per cent applicable to Bermuda constituent entities that are part of MNE groups with annual revenue of €750 million or more.[9] This means that businesses which are not in-scope will therefore continue paying no corporate income tax. The Act provides for several elections and exemptions.[10]

After substantial public consultations and consultations with industry officials[11], Barbados passed the Corporation Top-up Tax Act of 2024, which introduced a Qualified Domestic Minimum Top-Up Tax (QDMTT) on qualifying resident companies that are members of a multinational enterprise (MNE) group with annual consolidated revenue of 750 million euros or more. It also made amendments to its Income Tax Act by passing the Income Tax (Amendment and Validation) Act, 2024. These changes are retroactively applied from January 1, 2024. The legislation provides for qualified refundable tax credits, including job credits and a research and development credit. It also provides for Group Relief and a patent box regime. Companies, except those which are small businesses, are now required to prepay corporate income tax monthly instead of twice a year. For in-scope MNEs, this commences from income year 2024, while for all other companies (not small businesses), it starts from income year 2025. Barbados' approach demonstrates how Caribbean jurisdictions can adapt to the new global tax landscape while continuing to attract foreign investment by balancing tax reforms with building other competitive advantages.

Bahamas, which previously did not levy corporate income tax, has also taken the step to comply with the OECD Pillar 2. In 2023, the Bahamas published a Green Paper on Corporate Income Tax Strategies. It has subsequently drafted legislation, the Domestic Minimum Tax Top-Up Bill[12], which proposes to introduce a domestic minimum top up tax. The Government released a paper outlining its proposals.[13] The lower house debated and passed the bill and it is now before the Upper House.[14] The Government estimates that it will boost government revenues by $140 million a year.[15]

Several broad conclusions can be drawn from the above. First, as always, Caribbean IFCs are usually early to support international initiatives in the interest of being compliant with international standards and best practices, even where those initiatives on the face of it do not appear to be in their economic interest. The calculation is that this would be a show of good faith as good international citizens in ensuring MNCs pay their fair share of taxes, and that by implementing a QDMTT, they would be able to benefit from MNCs paying their share in their countries first. Second, all three countries conducted wide-ranging public consultations and have adopted a transparent approach to ensure that businesses and their citizenry had the opportunity to comment, raise any concerns and suggestions, and are kept informed of the proposed changes. Third, they have recognised that the GMT could erode the long-enjoyed tax advantage and the need to continue to build competitiveness on other factors. Fourth, and particularly with regard to Barbados, there is the attempt to use this new regime to continue to attract businesses involved in research and development and other value-added activities.

New US Administration And UN Tax Negotiations

However, there are two main developments on the horizon that may give pause for the global minimum tax. One is the re-election in the US of President Donald Trump for a second (non-consecutive) term starting in January 2025. The US push for a global minimum tax was an initiative under the outgoing Biden administration, although it is yet to be implemented.[16] By contrast, President Trump has generally had a more pro-business orientation, and therefore, it is unclear to what extent the US will continue to support this initiative.

A second development is the UN Tax discussions. As noted, most Caribbean jurisdictions are among the 147 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). However, not being full OECD members, these countries are not participating in the discussions on an equal basis. As such, Caribbean countries have been among the supporters of a proposed international tax convention championed by the UN, specifically aimed at enhancing global tax cooperation in a more inclusive, transparent and development-friendly manner. Though vehemently opposed by most OECD countries, these discussions have been advancing. In August 2024, the UN Ad Hoc Committee voted in favour of Terms of Reference for a United Nations Framework Convention on International Tax Cooperation, which outline the objectives, principles and other elements that will guide the negotiations of a UN Framework Convention on International Tax Cooperation. One hundred and ten countries voted in favour, eight voted against, and there were 44 abstentions.[17]

A New Tax Dispensation

In conclusion, Caribbean IFCs are navigating a critical moment in global tax reform, demonstrating adaptability and commitment to international standards, even in the face of potential revenue losses and a diminishing tax advantage. This adaptability, however, is not without challenges. Caribbean IFCs have traditionally relied on their favourable tax regimes to attract foreign investment, and the GMT introduces a shift that compels these jurisdictions to redouble efforts to build competitiveness through other avenues, such as investment in infrastructure, talent, and innovative tax credits, coupled with a forward-thinking strategy for long-term development. Looking ahead, two significant developments loom large: the possible pivot in US support for the GMT under the incoming second Trump administration, and the ongoing UN discussions on a global tax convention. These evolving dynamics underscore the need for Caribbean IFCs to remain flexible and engaged advocates for their unique interests within the global tax arena, and to push for a fairer, more inclusive global tax system that addresses the specific needs of small and developing states.

[1] PWC’s Pillar 2 Country Tracker: https://www.pwc.com/gx/en/services/tax/pillar-two-readiness/country-tracker.html.

[2] https://www.oecd.org/en/topics/sub-issues/global-minimum-tax/global-anti-base-erosion-model-rules-pillar-two.html

[3] https://www.oecd.org/en/topics/policy-issues/base-erosion-and-profit-shifting-beps.html.

[4] https://www.investbarbados.org/slide/why-barbados/

[5] See data from Tax Foundation for corporate income tax rates around the world from 1980-2023: https://taxfoundation.org/data/all/global/corporate-tax-rates-by-country-2023/.

[6] https://www.royalgazette.com/reinsurance/business/article/20240109/cayman-shuns-minimum-tax-grows-reinsurance/

[7] https://www.bvibeacon.com/no-great-rush-on-global-minimum-tax/

[8] https://www.gov.bm/sites/default/files/2023-12/Corporate per cent20Income per cent20Tax per cent20Act per cent202023 per cent20- per cent20Dec per cent2015 per cent2C per cent202023.pdf

[9] https://www.gov.bm/CIT

[10] https://www.gov.bm/sites/default/files/2024-04/Corporate per cent20Income per cent20Tax per cent20FAQs per cent20v5.0 per cent20 per centE2 per cent80 per cent93 per cent20Apr. per cent209 per cent2C per cent202024.pdf

[11] https://bra.gov.bb/News/Announcements/Barbados-Corporate-Tax-Reform-2024

[12] The Bill may be accessed here: https://opm.gov.bs/wp-content/uploads/2024/08/Domestic-Minimum-Top-Up-Tax-Bill-2024.pdf.

[13] Government of Bahamas’ Consultation Paper. https://opm.gov.bs/wp-content/uploads/2024/08/Introduction-of-a-Domestic-Minimum-Top-Up-Tax-in-the-Bahamas.pdf.

[14] https://ewnews.com/pm-140m-top-up-tax-to-strengthen-bahamas-finances-fund-key-programs/

[15] Ibid.

[16] The US however has not implemented the GloBE rules. The US’ Global Intangible Low Tax Income (GILTI) rules implemented in 2017 is not equivalent to the IIR.

[17] https://www.cesr.org/convention-conclusion-unpacking-the-final-week-of-un-tax-convention-negotiations/

Alicia Nicholls
Alicia D. Nicholls is an international trade consultant with over a decade of experience providing bespoke trade research and advisory services to a variety of clients. She is currently a research fellow and part-time lecturer with the University of the West Indies. Miss Nicholls is the founder of the Caribbean’s leading trade policy and development blog, www.caribbeantradelaw.com, since 2011. She also presents regularly at both regional and international academic and industry-related conferences and webinars. While she maintains an interest in all issues affecting Caribbean trade and trade policy, her specific research focuses primarily on global financial regulation and small States, foreign investment law and policy and international business.