TAX REFORM
Framework for Reform
It is important that it be understood
that our approach to tax reform should be driven by considerations that are greater
than fiscal issues.
First, Barbados will hereafter function as part of
a Caribbean Single Market and Economy. There is also the need to secure the future
of the international business and financial sector by addressing the wide disparity
that now exists between tax rates for domestic and offshore entities. For strategic
competitive purposes, a major sustained revision must be made to our Corporate
Tax structure.
Secondly, tax reform must now be used as stimulus for
economic activity to ensure that our economic recovery can be made as robust as
possible.
Above all, the long term sustainable development of Barbados
is best ensured within a tax regime featuring low rates, a clearly defined base,
one that inspires personal and corporate initiative, and exhibits characteristics
of fairness, simplicity and equity.
Finally, to be meaningful, the relief
provided has to be substantial. Hence, the adjustments we propose to make must
be designed as a programme to be implemented over a period of years.
CORPORATION TAX
It is necessary that we continue the reform
of our Corporation Tax to make Barbados as competitive as possible, and to encourage
higher levels of investment in the local economy.
In this regard, the
adjustments announced today to Land Tax, tax on leases for Agriculture, the tax
rate on bank's assets and tax rates for the insurance industry are all part of
that process.
Sir, there is the perception that there is a high rate
of corporate taxation in Barbados. However, the corporate tax system of Barbados
is made up of an array of incentives such as tax holidays, tax credits in respect
of foreign exchange earnings and export sales, investment allowances, a special
regime for small businesses, special development areas tax breaks and special
regimes for hotels, shipping and agriculture among others.
This proliferation
of special allowances and regimes serves to make the effective corporate tax for
domestic companies, which make use of these incentives, much less that the nominal
of 37.5%.
Indeed it has been calculated that the effective rate of tax,
may be in the vicinity of 25%.
It is possible therefore to simplify the
system by rationalizing this array of allowances and by bringing the corporate
nominal tax rate of 37.5% down and closer to the effective rate of 25%.
I propose to continue the process announced last year when I indicated that it
was my intention to reduce the corporate tax rate to allow local businesses to
be on a level footing with their Caricom competitors. The legislation to reduce
the Corporation Tax from 40% to 37.5% from income year 2002 has been passed in
Parliament. I therefore propose this year to further reduce the corporate tax
rate by a further 1.5% for income year 2003.
I wish now to go further.
Last year I indicated my intention of reducing the corporation tax rate to
33% by 2006.
I now wish to accelerate that process and to announce that
the rate will be reduced to 25% in that income year, setting it on par with the
best rate in Caricom.
To bring down the rate by that additional extent,
there will have to be a consolidation and rationalisation of allowances, taking
into account regional standards and international accounting best practices, That
issue will be addressed in income year 2003.
These adjustments will allow
us to establish the platform on which to mount the major transformation that must
take place to secure the long term viability of the economy.
That is
to bring about the convergence between the tax rate on onshore and offshore business.
International businesses have been attracted to Barbados under a regime which
charges no more than 2 1/2% on profits. Local business until recently paid tax
at the rate of 40%. That differential has inspired much of attention paid to us
by the OECD and now the US Treasury, has caused concern by some countries with
which we have double taxation treaties, and has stood in the way of some countries
entering tax treaties with us at all.
By comparison, our immediate competitors
in the international business field such as Ireland set a common but relatively
low tax rate (121/2%) applicable to all types of business.
We too have
to move to a common, converged rate for all businesses, and to set it at a rate
that matches those of our competitors, allow us to keep and expand the number
of enterprises doing international business here, and meet the concerns of our
Treaty partners.
It is very difficult to do all of that when the differential
between the onshore and offshore rate is as great as 40% - 2 ½%. We are
therefore bringing down the rate for domestic enterprises faster than we had initially
planned, to enable us, as soon as practicable to have a common rate for both offshore
and onshore enterprises.
This has to be very carefully planned and implemented
to avoid simultaneously losing all of our international enterprises on the one
hand, and much of our revenue from taxes on domestic enterprises on the other.
But it is the next major step that we have to take in corporate tax reform.
PERSONAL INCOME TAX
There was a reform of the personal tax
system in Barbados in 1992, which was aimed at simplifying the system by reducing
the number of rates and consolidating a number of allowances. Since that time
additional allowances have been reintroduced aimed at encouraging savings and
home ownership. In addition the income threshold below which tax is not paid was
increased from $13,000 to $15,000. These have contributed significantly to the
situation where the average individual paid no more tax in 1999 than he or she
did in 1993, and for some individuals the tax paid in 1999 was lower than in 1993.
However, if no adjustments are made now, tax payers will be disadvantaged
because of inflation, and by being put into higher income brackets through wage
increases.
This matter has been the subject of intensive consultation
and proposals were developed and reviewed by a committee made up of representation
from the Social Partners.
They have recommended acceptance of an option
that involves, the reduction of the basic rate (now 25% on the first $24,200 of
taxable income) and to the marginal rate which is now set at 40% in all taxable
income above that level.
I however propose that the following approach
be followed in relation to reform of the personal income tax:
The basic
and marginal rates will be both lowered in line with the recommendations of the
committee, beginning in income year 2003 and spread over 4 years to income year
2006.
The structure of personal allowances will be reviewed. I feel strongly
that householders should be able to offset more of the expenses in maintaining
and managing their homes by way of tax credits. This home allowance should not
only be retained but should be increased and the range of expenses allowed should
be expanded.
Secondly, there should be one consolidated and increased
allowance for savings, and the individual should be permitted to determine how
he or she will apply it as between the various instruments available, including
shares in credit unions, registered retirement plans and the like.
Thirdly,
some of the restructuring of allowances should take place immediately, and the
rest phased in over a period.
Fourthly, the threshold below which income
tax is payable now at $15,000 should be reviewed and increased at the earliest
opportunity.
In keeping with this approach, I now wish to announce the
following:
1. For income year, beginning 1st January, 2003, the
basic rate of income tax levied on taxable income of $24,200 or less will be reduced
from 25% to 22.5%.
2. For income year 2004, that basic rate will be further
reduced to 20%.
3. In income year 2005, the marginal tax rate applicable to
taxable income in excess of $24,200 will be reduced from 40% to 37.5% and in income
year 2006 further reduced from 37.5% to 35%.
4. In addition to reducing
the basic rate in 2003, I propose to increase the activity that qualify for the
home allowance by allowing home owners to deduct the cost of insurance on their
properties. This allowance will now be set at $6,000 rather than the $3,500 which
now applies, except in those instances where homeowners can claim for the retrofitting
of their homes.
5. The home allowance is to be increased from $6000
to $10,000 in 2004.
6. In that year the consolidated savings allowance
will be introduced and set at an appropriate level.
7. As regards
the raising of the threshold of $15,000, that will be reviewed in time for a decision
and implementation in income year 2004.
For those who despair about the
keeping of commitments made in manifestoes, I simply say, there is still time.
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