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Coping with the OECD reality

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By Sir Ronald Sanders

Demands of the rich man’s club, the Organisation for Economic Cooperation and Development (OECD), have once again created disarray in the Caribbean.

It is a disarray to which Caribbean countries have contributed by their lack of a common and strong political response to the many impositions by the OECD on the global financial sector since 1998 when the Organisation first launched what it called its “harmful tax competition initiative”.

For two decades, the OECD has been systematically and resolutely, forcing Caribbean countries and other developing states, to dismantle their tax structures and international business regimes, some of which, as in the case of Barbados, have been in place for over 40 years.

These international business regimes allowed International Business Corporations (IBCs) to pay low or no tax, which the OECD claimed deprived them of tax revenues.  Instead of lowering their tax rates to compete; they chose to eliminate the competition.

However, IBCs brought crucial revenues in foreign currencies to Caribbean governments.   In the case of Barbados, Prime Minister Mia Mottley revealed that “for every one dollar in corporation taxes paid by domestic companies” the Barbados government “received almost two dollars of corporation taxes from international companies”.

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In other Caribbean jurisdictions, with the possible exception of the Bahamas, Bermuda, British Virgin Islands and Cayman Islands, the Barbados story is not dissimilar except for two factors.  First, Barbados has more IBCs that many Caribbean countries, apart from the four jurisdictions just named; and second, over the last two decades, OECD imposed rules have eroded both the number of IBC’s and the revenues they have generated in countries such as Antigua and Barbuda, Grenada and St Lucia.

The latest OECD salvo is its ‘Base Erosion and Profit Shifting’ (BEPS) scheme which, in a nutshell, on pain of sanctions, stops jurisdictions from providing IBCs with low or no tax regimes and requires that all companies, domestic and international, pay the same rate of tax.  The BEPS initiative was launched in November 2015, and countries that are not in compliance by the end of 2018 will be blacklisted and punished unless, in special circumstances, they have been given a grace period in which to conform.

Hence, Ms Mottley, whose government is in the midst of a massive operation to salvage a wrecked economy that it inherited just six months ago, has announced that by January 1st, 2019, Barbados will converge its local and international tax rates.

Significantly, the Barbados government has decided to converge to the lower tax rate.  Effectively, this means that domestic companies that paid corporation taxes of up to 25 percent will now join IBCs by paying between 1 and 5.5 per cent.

In making this announcement, Ms Mottley made two statements that have significance for the wider Caribbean.

First, she pointed out that it was the previous government’s decision to commit to the OECD demands and to overhaul the tax system by year-end, something done “in the dead of night without debate and discourse and even worse, without any plan as to how they were going to achieve it”.

Second, in stating that her government recognised that, without sufficient time to negotiate any change to the commitment given by the previous government, it was compelled to comply, it was doing so although “the pressure from the OECD may be hypocritical, bullying, and an affront to natural justice”.

Of course, making commitments to the OECD on a bilateral basis and without discourse with relevant parties within their own countries prior to such commitments, is not unique to Barbados.  There has also not been a collective and unified Caribbean engagement with the OECD, at a high political level.  Individual governments have simply signed-up to OECD requirements and their Ministers have presented their acquiescence to Caribbean publics as a “victory”, imaginary and misleading though such assertions were.

So, all the Caribbean countries now have to confront the reality that Ms Mottley and her government faced.  Adherence to the OECD’s BEPS scheme is less than a month away when IBCs and domestic companies will have to pay the same rate of tax.

No one can blame the Barbados government for setting this new tax standard in order to remain competitive because of the circumstances occasioned by the OECD.  But the consequences for other Caribbean countries will be serious.

By choosing the lower tax rate “to remain globally competitive”, the Barbados government has set a bar for other Caribbean jurisdictions that compete with Barbados as well as globally.  Can they now opt to set their corporation tax at the present domestic rate – an average of 30 per cent – or should they adopt the Barbados standard of between 1 and 5.5 per cent?

For some governments, applying the new Barbados standard would cripple their economies.   Over the last 20 years, the number of their IBCs has been decimated by OECD demands.  Today, revenues from IBCs do not match the income generated from domestic companies.  Therefore, these governments will have to converge their local and international tax at the domestic rate.  But, the effect will drive away even more IBCs.   It may also cause some Caribbean companies to shift operations to Barbados.

Other Caribbean countries, that have a greater dependence on IBCs than on domestic companies, have a choice of matching the Barbados standard or converging their tax rates even lower. A race to the bottom could be triggered.

The success of the Barbados standard of a converged, low tax rate for IBC and domestic companies will be tested in the coming years.  There is a risk that revenues to the government might decline. However, the expectation is that: first, the IBC business will increase; and second, the fiscal space that domestic companies will enjoy from much lower taxes will encourage them to invest in expanding their business and employing more people, rather than pocketing bigger profits.

Dealing with these disruptive circumstances, because of external factors, cries out for collective regional action which, had it been taken in a timely manner, would have better placed every country to cope with them.

(The writer is Antigua and Barbuda’s Ambassador to the U.S. and the OAS and Senior Fellow at the Institute of Commonwealth Studies at the University of London and at Massey College in the University of Toronto.   The views expressed are his own)

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In Other News

REQUEST FOR EXPRESSIONS OF INTEREST

(CONSULTING SERVICES – INDIVIDUAL SELECTION)

 

OECS MSME Guarantee Facility Project

Loan No.: IDA-62670, IDA-62660, IDA-62640, IBRD-88830, IDA-62650

Assignment Title: Senior Operating Officer (SOO)

Reference No. KN-ECPCGC-207852-CS-INDV

 

The Governments of Antigua and Barbuda, Commonwealth of Dominica, Grenada, St. Lucia and St. Vincent and the Grenadines have received financing in the amount of US$10 million equivalent from the World Bank towards the cost of establishing a partial credit guarantee scheme, and they intend to apply part of the proceeds to payments for goods, and consulting services to be procured under this project. 

The consultant will serve as the “Senior Operating Officer (SOO)” for the ECPCGC and should possess extensive knowledge of MSME lending with some direct experience lending to Micro, small and medium-sized businesses, knowledge of the internal control processes necessary for a lending operation and the ability to design and implement risk mitigation procedures. The ideal candidate should possess an Undergraduate Degree from a reputable college or university, preferably in Business, Accounting, Banking or related field, with a minimum of 5 years’ experience in lending, inclusive of MSME lending. The initial employment period will be for two years on a contractual basis. Renewal of the contract will be subject to a performance evaluation at the end of the contractual period. The assignment is expected to begin on September 30th, 2021.  The consultant will report directly to the Chief Executive Officer of the ECPCGC.

The detailed Terms of Reference (TOR) for the assignment can be viewed by following the attached link below. 

 

https://bit.ly/3iVannm

 

The Eastern Caribbean Partial Credit Guarantee Corporation (ECPCGC) now invites eligible “Consultants” to indicate their interest in providing the Services. Interested Consultants should provide information demonstrating that they have:

  • An Undergraduate Degree from a reputable college or university, preferably in Business, Finance, Banking or related field; and
  • Minimum of 5 years’ experience in MSME lending. Applicants should also have:
  • The ability to design and implement risk management procedures 
  • Extensive knowledge of MSME lending with some direct experience lending to small and medium-sized businesses
  • Extensive knowledge of MSME banking operations
  • Knowledge of the internal controls necessary for a lending operation and the ability to design and implement risk management procedures
  • Experience developing and presenting information in public, including responding to questions in real-time
  • Experience lending to MSMEs located in the ECCU
  • Knowledge of marketing and communicating with the MSME sector
  • Ability to draft procedures to be used in a lending operation
  • Familiarity with the mechanics of a loan guarantee program
  • Exceptional written, oral, interpersonal, and presentation skills, and
  • Proficiency in the use of Microsoft Office suite.

The attention of interested Individual Consultants is drawn to Section III, Paragraphs 3.14, 3.16, and 3.17 of the World Bank’s Procurement Regulations for IPF Borrowers July 2016, [revised November 2017] (“Procurement Regulations”), setting forth the World Bank’s policy on conflict of interest. A Consultant will be selected in accordance with the Approved Selection Method for Individual Consultants set out in the clause 7.34 of the World Bank Procurement Regulations for IPF Borrowers. 

 

Further information can be obtained at the address below during office hours 0800 to 1700 hours:

Eastern Caribbean Partial Credit Guarantee Corporation

Brid Rock, Basseterre,

St. Kitts.

Expressions of interest must be delivered in a written form by e-mail by August 11th, 2021, to [email protected]. 

 

For further information, please contact:

Carmen Gomez-Trigg                                                            Bernard Thomas

Chief Executive Officer                                                          Chief Financial Officer

Tel: 868-620-8144                                                                  Tel: 869-765-2385

Email: [email protected]                                          [email protected]