What does a global minimum corporate tax mean for Caribbean financial centres?
Alicia Nicholls and Tammi Pilgrim  Finance ministers of the worlds 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 initial reflection on what this development might possibly mean for Caribbean international financial centres (IFCs). 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 corporations 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. 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 $US100-240 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 minimise tax liability. Under the Trump administrations 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 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. 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 lions share of Barbados CIT revenues, for instance, 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 OECDs 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 the 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. 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 utilises 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 G7s 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 companys 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 worlds 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, strategise 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 is an international trade consultant and founder of www.caribbeantradelaw.com. Tammi C. Pilgrim is an attorney-at-law, specialising in resolving commercial disputes by arbitration, litigation and mediation. She is the lead partner for arbitration at Lex Caribbean, Barbados, and is admitted to practise 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.