While the impact of the world’s seven richest countries (G-7) commitment to a 15 per cent global minimum corporate income tax (CIT) rate is still being assessed, it has been said that Jamaica will be less affected than its Eastern Caribbean neighbours including Barbados, the Cayman Islands, British Virgin Islands and Bermuda.

The global minimum CIT, if implemented would require a corporation from a country which implements this floor of 15 per cent (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.

Jamaica’s tax and auditing expert Dr Dawkins Brown admitted that there are some positive spinoffs from the G-7 global minimum 15 per cent CIT, which Jamaica can exploit.

“Fundamentally, this worldwide minimum CIT seeks to discourage multinational corporations (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,” Dr Brown, who is the executive chairman of auditing and management firm Dawgen Global. said.

He further contends that Jamaica, which is clearly not a low-tax jurisdiction such as some of its Eastern Caribbean neighbours, can benefit from “any taxing rights granted on a portion of a multinational’s profits based on where its customers reside, irrespective of the company’s physical presence as contemplated will be positive for Jamaica.

Pointing out that Jamaica have a CIT rate of 25 per cent, which is above the current average global rate of 22.57 per cent, Dr Brown told Caribbean Business Report (CBR) that, “the precise impact on Jamaica will depend on a few factors. Importantly, among them will be the effect of jurisdictional arbitrage.”

Jurisdictional arbitrage is the practice of taking advantage of the discrepancies between competing legal jurisdictions.

It takes its name from arbitrage, the practice in finance of purchasing a good at a lower price in one market and selling it at a higher price in another. The lower the exit costs for leaving the jurisdiction (unrestricted emigration, cheap travel, liquidity of assets) the more desirable and feasible it is.

Concerns about Jamaica’s BPO sector

Dr Brown highlighted that the concept of Pillar 2 of the G-7 15 per cent CIT proposals can have negative consequences to sectors that have concessionary tax benefit such as Jamaica’s business process outsourcing (BPO) sector. However, Dr Brown noted that BPOs are now required to pay taxes under the new Special Economic Zone rules, which replaces the Free Zone Act.

He explained that the new effective rate can be between 7.5 and 12.5 per cent, which is lower than the proposed 15 per cent. Importantly several of these BPOs in Jamaica are divisions of multinationals or outsourced agents of multinationals.

The Dawgen Global executive chairman made the point that, “the Caribbean islands with zero per cent tax rate will have to made changes in view of the global push. The proposed rules are still vague; however, it is my view that they will transform the techniques of tax avoidance and give rise to a whole new suite of tax avoidance schemes.”

How does this 15% CIT impact Caribbean IFCs?

Many countries, including Caribbean International Financial Offshore Companies (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 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.

Barbados’ international trade consultant Alicia Nicholls and Tammi Pilgrim, attorney-at-law, specialising in resolving commercial disputes by arbitration, litigation and mediation gave a perspective on the impact on the IFC sector.

They are of the view that while empirical data are 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 make-up the largest share of Barbados’ CIT revenues and have proven resilient even in the face of the novel coronavirus pandemic. Any negative impact on the global business sector at this time, Nicholls and Pilgrim argue, 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 to conform to the global norm.

In an opinion piece, the two experts stressed that, “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 per cent to the current low rate in response to the Organization for Economic Co-operation and Development (OECD) 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.