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Caribbean financial sector at risk from the G-20 corporate tax plan

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The Caribbean will take years to recover from the global pandemic that wiped out tourism, its main economic engine. Now a new storm threatens its offshore financial sector.

As some of the world’s largest economies mull over their plans to adopt a global minimum corporate tax, few places can suffer as much as the palm-fringed tax havens of the Caribbean.

With few natural resources or a large industry, much of the region’s economy depends on attracting international business at rock-bottom rates. Anguilla, the Cayman Islands, the Bahamas, Bermuda, the British Virgin Islands, and the Turks and Caicos Islands do not charge corporate income tax. Places like Puerto Rico and Barbados have rates low enough to make them attractive.

Read more: The race for the global tax revolution faces obstacles in the last mile

Companies have some discretion over where they report profits, especially from patents, trademarks, and other intangible assets, and they can cut their tax bills by shifting the income to subsidiaries in tax havens. The Group of 20 nations, or G-20, wants to crack down on this.

Details are still being worked out, but negotiators are considering requiring corporations to pay a 15% tax regardless of where they are incorporated. Therefore, a German company paying 0% in Bermuda would still need an additional 15% in their home country.


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That would undermine the incentive for global companies to set up shop on storm-prone islands in the Caribbean, said Bruce Zagaris, an international tax attorney in Washington and a member of the Caribbean Policy Consortium.

The economic impact for the region “will be very substantial,” he said, “especially when they are emerging from the pandemic and their main sector, tourism, has been hit.”

The International Monetary Fund says the Caribbean economy will not return to pre-Covid levels until 2025, later than most regions, due to the “much slower than anticipated” recovery in travel and tourism.

Microsoft, Shell

Many of the lagoons that made the Caribbean synonymous with tax shelters have been closed in recent years. Still, the oil giant Royal Dutch Shell Plc. posted $ 21.5 billion in revenue through the Bahamas in 2019 and $ 848 million in profit, on which it paid no tax, according to the company’s annual report. And in May, the Irish Times reported that a Dublin-based subsidiary of Microsoft Corp. he used his “tax residence” in Bermuda to record $ 314 billion in tax-free earnings.


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Microsoft said in response to written questions that its organizational and tax structure “reflects our complex global business” and that it “fully complies with all local laws and regulations in the countries where we operate.”

The global fiscal plan still requires approval from the G-20 and members of the Organization for Economic Cooperation and Development, another international forum of countries. And it can leave some jurisdictions relatively unscathed.

Cayman Islands

The Cayman Islands are home to some 100,000 businesses and the financial sector that supports them accounts for roughly half of the economy.

But most of those corporations are considered regulated financial services, including banks, investment vehicles and hedge funds, which may be exempted under the blanket tax deal, although the details of the exemptions are still being negotiated.


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A global minimum tax “will not significantly affect Cayman’s leadership position,” said Jude Scott, CEO of Cayman Finance, the association of financial services providers.

Even if the Cayman Islands are not affected by the G-20 plans, Zagaris says they and other non-tax jurisdictions remain under intense scrutiny from global policy makers “who are trying to put them all out of business.”

Read more: Caribbean nations selling second passports are cutting prices

Puerto Rico

Puerto Rico, a US territory of 3.3 million people, has a notoriously weak electrical grid and has been hit by hurricanes and earthquakes. However, thanks to its low corporate tax rates, it is favored by pharmaceutical and aerospace companies. Manufacturing accounts for roughly 50% of the island’s economy and 35% of local government revenue.


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The Secretary of Economic Development of Puerto Rico, Manuel Cidre, said that a global minimum tax “would obviously be detrimental to Puerto Rico and other jurisdictions,” but it would not end competition for investment.

Cidre said the island would likely raise its rates to match the global minimum and then use the additional revenue to provide corporations with other types of disruptions.

“I would not be surprised if Puerto Rico and other jurisdictions created incentives targeting labor, energy or other areas that were sufficient to make up for what was lost,” he said.

Read more: Puerto Rico’s plan to fix its power grid has gotten off to a rocky start

Some see the fiscal plan as a threat to national sovereignty. The Secretary General of the Caribbean Community, Irwin LaRocque, told local television that rich nations should not impose their fiscal policy on the Caribbean.

Low taxes, he said, are one of the few ways the Caribbean can attract foreign investment, crucial after the region burdened with debt to tackle the pandemic. Thirteen Caribbean countries now have debt-to-GDP ratios of more than 60%, and Barbados, Belize, Dominica and Suriname have debt ratios that exceed 100%, according to the Caribbean Development Bank.

“We cannot get out of the debt trap that we are in,” LaRocque said. “It is necessary for foreign investment to come in. Without foreign investment we will not succeed.”

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