Tax Disputes – Barbados & The Caribbean
By Dominique Pepin
Posted: 6th November 2012 09:07Disagreements, to various degrees, are a part of every relationship. The use and enforcement of taxing statutes has the potential to give rise to conflict, with both the taxing authorities and the taxpayers having opposing views and objectives.
As in many other relationships, a tax dispute takes its roots in the actions of a third party: in this case, the Ministry of Finance, who creates the tax rules with certain objectives in mind, including meeting its budget, creating jobs, attracting foreign investment, managing its foreign currency reserves, etc. The Revenue Authority has the responsibility to administer the tax rules, with the aim of collecting revenues for the State. Finding the right balance is an art and the taxpayers are frequently caught in the middle: they want to accumulate wealth, grow their businesses, increase their personal spending, create jobs, and save as much tax as is legally possible. In accordance with the taxing statutes, and in some cases policy decisions, these conflicts may be settled at various stages – assessment, reassessment, negotiations, objections, appeal, and, as a last resort, by court action.
Conflict and Responses
Following the 2008 economic downturn, a number of factors have led to an increase in disputes between Revenue Authorities and taxpayers in the Caribbean. In a depressed economy, taxpayers have been forced to turn their efforts towards organisational survival, employing myriad strategies, to increase or retain income, reduce costs and manage cash flow. Regional governments have likewise responded to diminishing tax collection. Many regional Revenue Authorities have sought to become more aggressive in interpreting the Acts they are called to administer, resulting in an increase across the Region in the number of tax audits carried out.
Moreover, some Caribbean governments have responded to the economic challenges, but also to legislative issues raised in tax audits, by making amendments to their taxing statutes. There have been a number of amendments to the taxing statutes across the Region designed mainly to create new tax obligations. For example, a number of territories have introduced a value added tax ("VAT") regime, with St. Lucia being the most recent. In some instances the VAT legislation provides for the levy of VAT on extra-territorial transactions via a reverse charge mechanism. In addition, Revenue Authorities have sought to broaden the application of existing legislation. This has been extremely prevalent in the area of the withholding tax provisions. These changes have lead to increased revenue for the state.
Conversely, some governments have made considerable efforts to attract multinationals to utilise the Caribbean region as a hub for business. This is in an effort to increase their tax base by stimulating the economy. In Barbados, we have seen the proposed change in tax rates for International Business Companies, to reduce the minimum tax rate from 1% to 0.25% from 2013. Moreover, Barbados expanded the list of activities qualifying for the Foreign Currency Earnings Credit regime that can effectively reduce the tax rate of Barbados companies from 25% to as little as 1.75% depending on the amount of foreign currency earned by the taxpayer.
Is there value to gain from these Conflicts?
Although the process is usually a costly and painful for the taxpayers, arguably, there is some value in the increase in tax disputes. The Caribbean region, like most other developing countries, has faced some challenges in the development of its own jurisprudence in taxation. Where tax matters are settled utilising the Court system, the Region will benefit from an increase in jurisprudence concerning tax matters. The resolution of such conflicts should provide a repository from which other taxpayers in similar situations can derive some clarity for their own taxation affairs. Moreover, as regional jurisprudence grows, it is expected that the Caribbean would be seen to be aligning itself with increased global standards for transparency.
It must be noted, however, that in the Caribbean, there seems to be a willingness on both sides to settle tax disputes at the negotiation stage. The results of these negotiations are not public record, and an over-reliance on this kind of settlement may be considered to stifle the development of Caribbean tax jurisprudence. In addition it can lead to inconsistent application of the existing tax laws. However, there are other advantages that both sides appear to recognise to be inherent in avoiding court action.
Conflict areas in the Caribbean
In reflecting on the numerous audits that have arisen in the Caribbean recently, it appears that the Revenue Authorities have been concentrating their efforts on taxpayers whose businesses involve large cross border transactions or numerous intercompany transactions. There has therefore been an increased focus on the application of withholding taxes, with the disputed issues ranging from the characterisation of the income to the interpretation of the legislation itself.
There has also been an increasing reliance on what may broadly be called anti-avoidance provisions, or arm’s-length standards embodied in most income tax laws throughout the region. This has resulted in the analysis of intercompany transactions and has highlighted the need for these general rules to be complemented by more detailed and specific provisions. Consequently, there has been a heightened buzz in the region about the possibility of transfer pricing legislation being introduced. Trinidad and Tobago, for example, has already made considerable efforts in drafting the required legislation and is expected to be the first state to officially introduce transfer pricing rules. This will invariably have a domino effect as this will undoubtedly lead to the eventual introduction of transfer pricing rules across the Region. As a result, companies doing business in the Caribbean will be forced to adopt transfer pricing policies.
The role of the Tax Advisor
As noted above, tax is a creature of statute. It is imperative that in navigating the relationship between government and taxpayer, one must understand the inter-play of legal and accounting principles and tax laws. Any representative or advocate for either party must understand the domestic legislation and policies but also any applicable international rules. A competent tax advisor must be able to find practical and effective solutions in the most challenging environments by leveraging that domestic knowledge with an understanding of regional and international taxation. Ernst & Young has considerable experience in successfully concluding practical negotiations on behalf of various clients in the Caribbean.
While in some relationships conflict may be inevitable, having a level playing field for all parties is the optimal solution. The need to appreciate the mutually beneficial relationship that governments have with their taxpayers is important. A just and effective tax regime includes well-drafted and administered legislation, as well as fair and well-versed representatives, including professional advisors who can help both sides navigate the inherent challenges which give rise to tax disputes.
Dominique Pepin has over 15 years of tax experience serving local, regional and multinational corporations in various industries including petroleum, mining, telecommunications and financial services. She has extensive experience in international and regional corporate re-structuring, cross-border transactions, advising on tax audits and appeals in the Caribbean.
Dominique holds a Bachelor of Law, a Master degree in Canadian Tax and is a member of the Quebec Bar Association , the Canadian Tax Foundation and the International Fiscal Association. She is on the editorial board of the Barbados International Finance & Business magazine. She is also fluent in French.
Dominique Pepin can be contacted by phone on +1 246 430 3812 or alternatively via email at firstname.lastname@example.org