Caribbean Trade Law and Development

Tag: Tax

  • Latin America and Caribbean Tax Summit in Cartagena: A Caribbean Perspective

    Latin America and Caribbean Tax Summit in Cartagena: A Caribbean Perspective

    Alicia Nicholls

    On July 27-28, 2023, sixteen countries from Latin America and the Caribbean (LAC) participated in a historic LAC Ministerial Summit for a more “Inclusive, Sustainable and Equitable Global Tax Order” held in Cartagena, Colombia. It was jointly hosted by the Governments of Colombia, Brazil and Chile and was the first occasion on which finance ministers and other officials of these countries have met to discuss tax issues as a regional grouping at this high-level.  As an academic, I had the fortune of participating in the civil society meetings held in Panama City (Panama) and Cartagena de Indias (Colombia) in the lead up to the Summit, respectively.  In this article, I share my initial reflections on this initiative for greater LAC cooperation on national and international tax matters.

    Background

    Countries of the global South, including LAC countries, are predominantly rule-takers in the global financial system. In recognition of the need for LAC countries to come together to fight for a more equitable and inclusive global tax order, Jose Antonio Ocampo, Colombia’s then Minister of Finance and Public Credit, announced in January 2023 the Colombia government’s intention to host this high-level summit. Colombia’s efforts were later supported by the Governments of Brazil and Chile, and the UN Economic Commission for Latin America and the Caribbean (UN ECLAC). An invitation to participate in the summit was extended to all LAC countries, while African and other G24 leaders were invited as observers.

    Hosting this meeting in the port city of Cartagena de Indias, Colombia’s fifth largest city, was symbolic for at least three main reasons. First, the city bears the nickname ‘La Heroica’ as on November 11, 1811, it was the first Colombian territory and the second in the whole of Latin American to declare independence from the Spanish Empire.  Second, in 1815, the city also valiantly resisted Spanish forces for 105 days in what is known as the Siege of Cartagena. Third, it is also one of the most ‘Caribbean-esque’ of Colombia’s major cities and with a large noticeable Afro-Colombian population.  As both a Barbadian and Caribbean national, there were many aspects of Cartagena that felt familiar in terms of the warmth and friendliness of the people, the colorful buildings and the food, in particular. Now in 2023, this beautiful city was the setting for what is hoped to be the dawn of an era of south-south cooperation among LAC countries on tax matters.

    Summit Outcomes

    First, the summit outcome included a joint declaration signed by the delegates from the 16 participating countries establishing the Regional Platform for Tax Cooperation for Latin America and the Caribbean. This proposed platform would promote dialogue and knowledge exchange to develop national and global tax policies that help the region to more adequately confront the mounting crises faced.  

    Second, it was also agreed that Colombia would hold the Pro Tempore Presidency of this Regional Platform for the next twelve months and that ECLAC will be the technical secretariat of the platform. Third, the Pro Tempore Presidency is tasked with creating an Annual Work Plan, with ECLAC support, and prioritizing the most pressing themes regarding an inclusive, equitable and sustainable taxation agenda within a period of 6 months.

    A positive aspect of this LAC initiative is that development is a central component of this effort, acknowledging that countries’ tax policy must support, advance and not undermine their development imperatives and that international tax initiatives must do likewise. Many LAC countries do not feel that the current OECD-led tax discussions, including the BEPs two-pillar solution, will redound to their benefit and have argued that a unified LAC voice is needed to ensure global tax rule-making takes into account the region’s interests and not simply those of the world’s richest countries.

    Civil society had a critical role to play in the discussions, and the effort has received tremendous support from civil society groups and think tanks globally as well as from the United Nations. As such, there was explicit mention of the link between tax and gender and women’s empowerment, the environment, education and public health, for example. To this end, there was a strong argument made that the growing shift in LAC countries towards largely regressive taxes was anti-developmental as they shifted the tax burden away from the wealthy towards the most vulnerable segments of society.

    Limited Caribbean Participation

    The initiative appears to be a good faith attempt to build a LAC coalition not only for regional coordination on tax issues but one that would also help to strengthen the region’s impact on global tax policy making, recognizing that the global South remains on the periphery of global financial rule-making. However, attendance at the summit was quite muted as only 16 countries of the 33 countries which are CELAC members attended. Moreover, despite being hailed as a ‘LAC’ summit, only two Caribbean countries (Haiti and Dominican Republic) participated in the Summit. None of the English-speaking Caribbean governments participated in the Summit although representatives of civil society groups from some Caribbean countries were present at the civil society meetings in Panama City and Cartagena. It is not publicly known why this is the case as the Summit has barely received any media coverage in the English-speaking Caribbean nor is it clear whether it was discussed at the CARICOM Heads of Governments meeting in early July. However, I can speculate on a few possible reasons for the lack of any widespread Caribbean appetite so far for the initiative.

    One reason could be that tax is an area of policy-making which countries guard closely. The right to tax has always been linked to the exercise of a State’s sovereignty. As small open economies with limited natural resources in most cases, many Caribbean countries have developed international business and financial sectors as a diversification strategy to grow their economies and provide for their people. Among other things, they use their favourable tax rates and offer sophisticated corporate tools and tax incentives as central planks of their investment attraction strategies to promote sustainable economic growth and to create jobs for their workers. Their ability to do this is being increasingly circumscribed by the need to meet global regulatory demands and they might see this still nebulous LAC platform as yet another fetter on their sovereign right to set their own tax policies for their development purposes.

    Second, there might be some discomfort among Caribbean governments with creating a new platform for tax issues outside of an existing and familiar architecture like the Community of Latin American and Caribbean States (CELAC). On that front, it is curious why CELAC was not the chosen venue for this discussion.

    Third, it is unclear to what extent this new platform takes into account existing sub-regional cooperation mechanisms. CARICOM countries usually approach foreign policy matters as a bloc as the Revised Treaty of Chaguaramas calls for coordination of foreign policy. Moreover, CARICOM countries discuss tax and other finance matters in their Council for Finance and Planning (COFAP). Another fear among Caribbean countries could be that their voice in this regional space might still be drowned out by more powerful LAC countries. This fear is not unfounded. While there is much to be gained from greater LAC cooperation and there are, of course, similarities, there are also important differences which any proposed LAC-wide regional cooperation must take into account. These differences include size, economic structure, social structure and tax structure. Among Latin American countries, only Panama could really be considered an international financial centre (IFC), while IFCs are more predominant in Caribbean countries.

    Additionally, many Caribbean countries face accusations of being tax havens, including by some Latin American countries despite the fact that Caribbean countries are often among the first adopters of global tax initiatives despite their capacity constraints. Therefore, while blacklisting for tax and AML/CFT/PF issues is not a major issue for Latin American countries, for Caribbean countries it is. It is for this very reason that Caribbean representatives present at both the Panama and Cartagena civil society meetings were insistent that the final civil society outcome document handed over to the Ministers at the Summit needed to include some reference to this issue. Indeed, recommendation nine of the final civil society document calls for decolonialization of the global tax order and specifically condemns biased blacklisting which unfairly targets Caribbean countries while ignoring large countries of the Global North where most of the tax evasion occurs.

    I am sure many persons reading this article are probably hearing about this summit for the first time. Indeed, the Summit received very little media coverage in the anglophone Caribbean, compared to the press coverage in well-known newspapers like Colombia’s El Espectador. This is just a symptom of a longstanding problem facing us in the LAC region, that is, that in many ways, we in LAC often know more about what is happening in the countries of the Global North than what is happening in our own sub-region or neighbouring regions. 

    A major reason for this is, of course, the language barrier. Even though technologies such as simultaneous interpretation during meetings, Google translate and the like may mitigate these barriers somewhat, they do not replace the utility of learning another language, learning about the culture in order to foster understanding and meaningful exchange.  In many ways, and despite existing (mainly partial scope) trade agreements between CARICOM and some Latin American countries, and increased airlift, there is still much we need to learn about each other. As someone who speaks several languages including Spanish, I know that it is only when we truly get to know each other that we can build that trust needed to turn the LAC as a cohesive negotiating bloc on these issues on a global scale.

    Concluding Thoughts

    I am thankful to the organisers, Latindadd and Public Services International (PSI) and to the rest of the Caribbean contingent who attended, for the opportunity to have participated in these meetings not just for the opportunity to have presented a Caribbean perspective on the discussions as an academic, but to build links with some truly amazing people in LAC who are working on these and other global economic issues.

    In theory, south-south cooperation among LAC countries on tax justice matters could be mutually beneficial. After all, in much the same way that G7 and G20 countries use their collective might to set the rules of global finance, LAC countries could leverage their collective voices to press for a fairer global financial system which takes into account their development imperatives. It could provide opportunities for sharing best practices and providing technical assistance on these matters.

    It is commendable that this initiative is seeking to incorporate a Caribbean voice as many Caribbean countries often feel that LAC discussions usually are limited to the experiences of Latin American countries without acknowledging Caribbean realities which in some cases could be quite different. LAC cooperation must bear in mind the region’s heterogeneity and as such, Caribbean issues should be given the same weight as issues affecting other LAC countries.

    Additionally, this cooperation should seek to use already existing regional cooperation structures such as CELAC and also respect and bear in mind that CARICOM already has its own processes for functional cooperation on this issue. In other words, any LAC cooperation should complement not seek to replace CARICOM’s own structures. It is also time for LAC countries to leverage their collective voices to support the African Group proposal for a UN Tax Convention and for the UN to be the official forum for the development of global tax rules as opposed to the status quo where the OECD, a club for the world’s wealthiest countries, has sought to arrogate on to itself this power. If done on the basis of mutual respect and communication, south-south cooperation among LAC countries, including possibly on tax justice issues, could be beneficial to Caribbean countries but this is something which Caribbean countries would need to carefully consider.    

    Alicia D. Nicholls, B.Sc., M.Sc., LL.B is an international trade specialist and founder of the Caribbeantradelaw.com Blog. She attended and participated in the civil society meetings in Panama and Cartagena as an academic and thanks the organizers for the opportunity.

  • What might a global minimum corporate tax mean for Caribbean International Financial Centres (IFCs)?

    What might a global minimum corporate tax mean for Caribbean International Financial Centres (IFCs)?

    Image by Gerd Altmann from Pixabay 

    Alicia Nicholls and Tammi Pilgrim

    Finance ministers of the world’s seven richest democracies (the Group of 7 or G7) have committed to an “at least 15%” global minimum corporate income tax (CIT) rate. This decision in principle has been lauded as a ‘landmark’ deal to ensure big multinational corporations (MNCs) pay their ‘fair share’ of tax. While the details of the proposed tax are still unknown, the decision, if implemented, could potentially have non-negligible implications for no-tax or low-tax jurisdictions globally. This article provides our initial reflections on what this development might possibly mean for Caribbean international financial centres (IFCs), including Barbados.

    What does a global minimum CIT entail?

    The global minimum CIT would require a corporation from a country which implements this floor (the “home country”) to pay taxes on its profits at this particular rate, even if those profits are declared overseas, such as in a lower-tax jurisdiction. It works as a “top up” tax, where the corporation’s home country (Country A) could charge the difference between the tax rate the corporation paid in the lower-tax jurisdiction (Country B). That undermines any advantage of shifting to a lower-tax jurisdiction.

    The idea of a global minimum CIT is not new. The introduction of common global minimum tax rules is presently part of Pillar 2 of the Organisation for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Initiative which aims to stop corporations from exploiting gaps and mismatches in countries’ tax systems to avoid taxes.

    Why is this being proposed?

    Fundamentally, this worldwide minimum CIT seeks to discourage MNCs from moving profits to countries with low CIT rates in order to avoid paying the higher CIT imposed by their home countries. This inevitably results in reduced tax revenue for the home country.

    The OECD argues that “BEPS practices cost countries $US 100-240 billion in lost revenue annually, which is the equivalent to 4-10% of the global corporate income tax revenue”. Large countries, especially certain high tax European countries like France and Germany, blame this tax competition for the erosion of their tax bases and point to the higher rates paid by small businesses and the ordinary taxpayer. However, very little is said about the tax codes of these large countries which generally allow this ‘inequity’ to occur, by permitting corporations to take advantage of various tax loopholes. It also discounts the legal principle espoused by many common law jurisdictions, allowing taxpayers to legitimately arrange their affairs to minimize tax liability.

    Under the Trump Administration’s massive tax reform done pursuant to the Tax Cuts and Jobs Act of 2017, the US statutory CIT rate was lowered from one of the highest in the world at 35% to in the mid-range (21%). However, the Biden Administration initially sought to raise the statutory CIT rate to 28% to help finance its ambitious $2 trillion dollar infrastructure plan to stimulate the US economy. Therefore, the implementation of a global minimum CIT gained renewed traction in April 2021, when US Secretary of the Treasury Janet Yellen called for such a tax at a rate of 21%.

    This “call to action” was enthusiastically greeted by many European countries, the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF). Perhaps not surprisingly, it has not received a similarly enthusiastic response in the Republic of Ireland, which has a CIT rate of 12.5% and is home to the European headquarters of US tech behemoths Apple, Facebook and Google.

    How does this impact Caribbean IFCs?

    Many countries, including Caribbean IFCs, have traditionally attracted foreign direct investment thanks in part to lower CIT rates. Among Caribbean IFCs, there are ‘no-tax’ jurisdictions like the Bahamas and the British Overseas Territories of the Cayman Islands, the British Virgin Islands (BVI) and Bermuda which charge no personal or corporate income tax. Then there are ‘low-tax’ jurisdictions, like Barbados, whose CIT rate (1% – 5.5%) is now the lowest in the world.

    These countries are now at risk of losing that business and the benefits that come along with it, as the global minimum CIT might act as a disincentive for companies to stay in no/low tax jurisdictions. While empirical data is limited, the global or international business sector is an important source of foreign exchange and direct employment in the Caribbean, while also providing spill-over benefits through skills transfer, corporate rental income and being a vital income source for corporate services providers. Corporate tax receipts from the global business sector comprise the lion’s share of Barbados’ CIT revenues and have proven resilient even in the face of the COVID-19 pandemic. Any negative impact on the global business sector at this time could inflict even greater economic devastation on these countries’ vulnerable economies.

    Aside from the potential loss of business and tax revenues, Caribbean IFCs may also be exposed to significant international pressure (including reputational damage) to conform to the global norm. Although the ability to levy taxes is a sovereign right flowing from statehood, Caribbean IFCs would not be unreasonable to fear they might be strong-armed into adopting the global minimum CIT rate through tactics such as blacklisting or denying corporations from receiving deductions on income earned in a jurisdiction which has not adopted the minimum CIT.

    Barbados, for example, lowered its CIT rate from 30% to the current low rate in response to the OECD’s allegations of ring-fencing, since international business companies (now abolished) then enjoyed a lower CIT rate than that imposed on domestic companies. Barbados also passed significant economic substance legislation requiring companies to demonstrate that they are carrying on their core income generating activities in the countries in which they declare profits. This has made it even harder for jurisdictions to compete for investment simply on tax rate.

    Finally, Caribbean IFCs following these developments might find it increasingly necessary to pivot to alternative methods of boosting their investment appeal. Indeed, a look at Invest Barbados’ “why Barbados” page reveals that Barbados has increasingly based its value proposition on non-tax factors, including facilitating businesses of substance, its human resources, lifestyle and tax treaty network

    Barbados’ response to this latest initiative seeks to attract more businesses to headquarter here where they would be taxed as Barbados companies. As stated by Advisor to the Barbados Government, Professor Avinash Persaud, at a recent business forum “America and the UK may decide to have a global minimum tax rate… they can decide how they tax a Barbadian subsidiary of a British company, but they cannot determine how they tax a Barbados-headquartered company. So we need to bring these companies to Barbados to do real business in Barbados and be headquartered here”.

    What happens next?

    The commitment in principle by G7 countries on a global minimum CIT is a major decision, but not yet a ‘fait accompli’. Talks will continue in the Group of 20 (G20) and OECD with the aim to reach a consensus by July. However, the fact that the G7 communique utilizes the wording “at least 15%” speaks to possible disagreement, even among proponents, on whether the rate should indeed be 15% or even higher. There are, of course, other issues that are yet to be resolved, such as to which companies would this tax be applicable.  

    Since the G7’s announcement, further dissension has come to light. The City of London (UK), as well as Hungary and Poland, have signalled their intention to seek carve outs (from the global minimum CIT rate) for financial services companies and income derived from a company’s substantive activities within a jurisdiction, respectively. It is possible that such exemptions might be necessary in order to achieve international consensus.

    The issues raised by the introduction of a global minimum CIT rate are complex. They bring sharply into focus the friction between the competing needs of a home country (to retain tax revenue) versus those of another country (to attract foreign direct investment), usually with the shared aim of promoting their own development and achieving their respective economic and social goals. Without doubt, therefore, the issue of MNCs paying their “fair share” in taxes is one which needs to be addressed multilaterally. However, arguably, this discussion should be occurring in a forum like the United Nations where all the world’s countries – big and small, developed and developing – are at the table, to avoid the perception that rich countries are setting the rules, changing them at will and moving goal posts, based on their own narrow political interests and economic exigencies.  

    Moreover, as too often happens, in seeking to go after the ‘big fish’, it is the little ones – small IFCs – which will likely feel the brunt of any economic fall-out. Caribbean IFCs should, therefore, strategize on how best to tackle this latest onslaught. One possibility might be to join forces with other similarly situated IFCs internationally, to voice objection to this proposal and demand a seat at the table. As Barbados is currently doing, they must also implement alternative strategies to attract investment if this latest proposal achieves ‘global’ agreement.

    Alicia Nicholls, B.Sc., M.Sc., LL.B. is an international trade consultant and founder of www.caribbeantradelaw.com. Tammi C. Pilgrim is an Attorney-at-Law, specializing in resolving commercial disputes by arbitration, litigation and mediation. She is the lead partner for arbitration at Lex Caribbean, Barbados, and is admitted to practice in Barbados, St. Lucia, New York and St. Kitts and Nevis. The views expressed in this article are solely those of the authors and do not necessarily represent the views of any entities with which they might be affiliated.

    This article also appeared in the Barbados Business Authority (Barbados’ leading business magazine) and Barbados Today.

  • G7 finance ministers commit to 15% global minimum corporate income tax rate

    G7 finance ministers commit to 15% global minimum corporate income tax rate

    Alicia Nicholls

    Finance ministers and Central Bank governors of the Group of 7 (G7) have committed to a global minimum tax of at least 15% on a country-by country basis. They also agreed on “the importance of progressing agreement in parallel on both Pillars and look forward to reaching an agreement at the July meeting of G20 Finance Ministers and Central Bank Governors”.

    This was one of the decisions outlined in their communique released on June 5. This development, hailed by some as ‘historic’, will form the basis of what rich countries are hoping to be a multilateral deal. The aim of a global minimum tax rate is to stop corporate tax competition among countries and discourage multinationals from shifting profits to more tax competitive jurisdictions. It should be noted that the proposed global minimum corporate tax rate of 15% falls below the average statutory income tax rate among OECD countries of 21%.

    The Finance Ministers and Central Bank Governors of the G7, met virtually on 28 May 2021. This was followed by a further meeting of Finance Ministers and Heads of major global financial institutions, the International Monetary Fund (IMF), World Bank Group, Organisation for Economic Cooperation and Development (OECD), Eurogroup, Financial Stability Board (FSB) on 4-5 June 2021.

    Read the full communique here.

  • Blacklisting discussed at CARICOM Inter-Sessional Meeting

    Blacklisting discussed at CARICOM Inter-Sessional Meeting

    Image by angelo luca iannaccone from Pixabay

    Alicia Nicholls

    The arbitrary inclusion by the European Union (EU) of some Caribbean Community (CARICOM) Member States on its EU-wide blacklists for tax and anti-money laundering/countering the financing of terrorism (AML/CFT) purposes ranks high among several pressing issues occuping the minds of regional leaders when they meet over the next two days. The Thirty-Second (32nd) Inter-Sessional Meeting of CARICOM Heads of Government kicked off today, Wednesday February 24, 2021. The virtual meeting is being chaired by incoming Chairman of Conference, Dr. the Hon. Keith Rowley, Prime Minister of Trinidad & Tobago.

    At the Opening Session held today, outgoing Chairman of Conference, Dr. the Hon. Ralph Gonsalves, Prime Minister of St. Vincent & the Grenadines, strongly condemned the EU’s inclusion of Dominica on its revised list of non-cooperative jurisdictions for tax purposes and its lack of a consultative approach in this exercise. Barbados was removed from this revised tax blacklist and placed on the grey list temporarily, pending its supplemental review by the Global Forum of the Organization for Economic Cooperation and Development (OECD). However, it should be noted that Barbados remains on the EU’s updated list of high risk third jurisdictions with strategic AML/CFT deficiencies released in May 2020 and entering into force October of that year.

    Indeed, the blacklisting situation is a longstanding bugbear in the otherwise strong EU-CARICOM relationship, and compounded this time by the poor timing of the release of these revised lists in the middle of a pandemic. A jurisdiction’s inclusion on such a list not only has implications for how transactions originating from or involving individuals or entities from such jurisdictions are scrutinised by financial institutions, but can have implications for that jurisdiction’s ability to both attract and retain foreign investment. It should be borne in mind that Caribbean countries can neither recover nor build resilience on public revenue alone, but will also need private foreign capital injections, such as through foreign direct investment (FDI) inflows.

    Indeed, Caribbean countries are among the most severely affected by the COVID-19 pandemic. Most are tourism-dependent economies, which have already suffered significant declines in revenue and job losses due to the reduction, and at one point, sudden stop in tourism arrivals resulting from both national and international COVID-19 containment and mitigation strategies. The EU’s inclusion of Dominica on its list of non-cooperative tax jurisdictions is particularly worrying given that country’s utter devastation by category five Hurricane Maria in 2017 and from which it is still rebuilding and recovering.

    COVID-19 will also be a major theme in the two-day discussions. Lamenting the “loss of lives and livelihoods” caused by the pandemic, CARICOM Secretary-General Ambassador Irwin Larocque, however, revealed that CARICOM was taking steps to devise strategies for a resilient recovery. Over the coming days, the Heads of Government would be considering, inter alia, proposals on revivng the tourism industry, agriculture, advancing implementation of the CARICOM Single Market & Economy (CSME) and addressing fiscal challenges. Ambassador Larocque further noted that social partners will share their perspectives on the way forward.

    Both Secretary-General Larocque and Chairman Rowley reiterated CARICOM’s call for a global summit to address the equitable access to vaccines, and also highlighted how instances of south-south cooperation in vaccine procurement have assisted the region. The Secretary-General noted that CARICOM has signed on to the African Medical Supplies Platform and the African Union has graciously provided 1.5 million doses of vaccines to CARICOM which they received through their procurement arrangement. These, he noted, will supplement those to be received under the COVAX Facility. The Secretary General also thanked the Governments of Barbados and Dominica for sharing with other Member States vaccines they had received as a gift from the Government of India.

    On the basis of income per capita, many CARICOM countries are unable to qualify for most types of concessional financing from multilateral lending institutions, an especially grave situation for fiscally-constrained countries and which already generally have high debt to GDP ratios. In his address as incoming chairman, Dr. Rowley again appealed on behalf of CARICOM for a broadening of existing vulnerability indices to facilitate greater access by SIDS to finance their recovery and to build resilience.

    Alicia Nicholls, B.Sc., M.Sc., LL.B. is a trade and development consultant with a keen interest in sustainable development, international law and trade. All views herein expressed are her personal views and should not be attributed to any institution with which she may from time to time be affiliated. You can read more of her commentaries and follow her on Twitter @LicyLaw.