The OECD Harmful Tax Initiative: Impact of the Proposals on
Small and Developing CARICOM States
Introduction
The CARICOM Member States typically have small land areas, small populations - the majority less than 0.5 million, limited natural resources and a- heavy reliance on a few export commodities. The economies are therefore basically structurally undiversified and highly vulnerable.
As recently as March 2000, the Commonwealth Secretariat/World Bank Joint Task Force on Small States issued a report in which they confirmed that, in addition to the above features, small states have limited institutional, financial and human capacity in the private and public sectors and restricted access to global capital markets arising from high transaction costs, high income volatility and a general susceptibility to risk. Recognition of this high-income volatility resulted in attempts to diversify the economies.
With increasing global competition and the need to diversify the economies, many of these small Caribbean States were encouraged by the multilateral institutions to develop their services sector. A major challenge to small states over the last 40 years or so has been to diversify their economic structures. This arose because of the need to find economic opportunities for increasing populations and in the face of the reduction in the viability of their major agricultural commodities due to competition in traditional markets.
The first efforts at diversification were towards light, labour intensive manufactures and later towards services. Import substituting was found to have
limitations because of the small size of the domestic markets and exporting to the wider global market proved to be difficult because of the lack of competitiveness. The services targeted include tourism (land based and cruise), financial services, ship registry, international business corporation, Internet gaming and economic citizenship. Some of these industries have been significant for a number of years in some countries while others are relatively new, and some countries adopting them, have emerged as essentially service economies. However, tourism alone could not adequately serve their needs so the countries were urged by multilateral financial institutions and the major developed countries to further diversify their services sector. As recently as 1996, in a Report on “Prospects for Service Exports from the English-speaking Caribbean”, the World Bank advised that “the countries would have to forego virtually all potential tax revenue from the off-shore sector to enable firms to compete”. Most Member States have established low or no tax regimes for this sector. Given the assessment of the World Bank of the requisites for firms in Caribbean jurisdictions to compete, the creation of a sector with preferential taxes could hardly be described as providing “harmful” competition to developed jurisdictions such as London and New York, with their panoply of incentives and other facilities designed to attract investment.
This presentation, seeks to sketch the importance of the services sector to the economies of the CARICOM Member States and draws some conclusions on the likely impact of the OECD initiatives on those economies.
(i) THE CARICOM OFFSHORE SERVICES SECTOR
A. Overview
The most well established offshore centres in the Region are the Bahamas and Barbados. Other Member States, including Antigua and Barbuda, Belize, Dominica, Grenada, Montserrat, St. Kitts & Nevis, Saint Lucia and St. Vincent and the Grenadines are aggressively competing in the sector.
The offshore sector makes a meaningful contribution to the economy of each of the above mentioned countries in terms of its contribution to:
• Gross domestic Product,
• Central Government Revenue,
• Foreign exchange earnings; and
• Employment creation.
The development of the offshore sector in the Region occurred at different times as set out in table I below, and at different pace, with some being more advanced than others.
Table 1: The Years in which CARICOM Offshore
Centres were Established
Early Entrants / Later EntrantsEarly Entrant
/ 1980s / 1990sThe Bahamas (1936) / Antigua and Barbuda (1982) / Belize (1990)
Barbados (1984) / Dominica (1996)
Montserrat (1980) / Grenada (1997)
St. Vincent & the Grenadines (1982) / St. Kitts & Nevis (1993)
St. Lucia (2000)
Source: Nand C Bárdouille: The OECS Offshore Services Sector: A primer on Sectoral Development Imperatives. November 2000 and other CARICOM~Secretariat documents
There are three identifiable phases in the establishment of offshore centres in the Region. In the early stages, activities were concentrated in the Bahamas and later in Barbados.
Prior to the 1980s there were only two offshore centres in the Region. From 1982 there was no new offshore centres established until 1993, a lull of over 10 years, thereafter, four (4) other centres were established. The total number of CARICOM countries with offshore centres is therefore ten (10).
Table 2: Types of Activity Undertaken in CARICOM Offshore Centres
COUNTRY / TYPE OF SERVICES OFFEREDAntigua & Barbuda / IBCs
Offshore Banks
International Trusts
International Insurance
Ship Registration
The Bahamas / IBCs
Offshore Banks
International Trusts
International Insurance
Ship Registration
Barbados / IBCs
Offshore Banks
International Trusts
International Insurance
Ship Registration
Belize / IBCs
Offshore Banks
International Trusts
International Insurance
Ship Registration
Dominica / IBCs
Offshore Banks
International Exempt Trusts
Exempt Insurance
Internet Gaming
Economic Citizenship
Grenada / IBCs
Offshore Banks
International Trusts
International Insurance
Economic Citizenship
International Betting
Companies Management
Montserrat / Offshore Banking
International Banking companies
Saint Lucia / IBCs
International Trusts
International Mutual Funds
International Insurance Companies
International Banks
St. Kitts / Exempt Trusts
Exempt Limited partnership
Exempt Companies
Nevis / IBCs
Offshore Banks
International Exempt Trusts
Limited Liability Companies
St. Vincent & the Grenadines / IBCs
Offshore Banks
International Trusts
Mutual Funds
International Insurance
Ship Registration
The kinds of activities carried out vary from country to country. In the Region, though, most jurisdictions actively encourage ship registry, IBCs and offshore banking. In 1999, nine CARICOM Member States had IBCS registered in their jurisdiction, nine had offshore banks, seven had international trusts, five had ship registry and two had economic citizenship programmes.
Table 3: Economic Contribution of the CARICOM Offshore Financial Services
Sector
Country / To Export of Goods and Services 1990-1993 / Export of Services 1990-1993 / Government Revenue 1992-1997 / Gross Domestic Product 1996-1997Antigua & Barbuda / 4.5% / 5.1% / 2.0% / 0.3%
The Bahamas / 5.7% / 6.6% / 20.0% / 15.0%
Barbados / 5.8% / 7.6% / 22.0% / 5.0%
Belize / 11.8% / 23.7% / NA / 1.5%
Dominica / 5.1% / 12.3% / 5.3% / 1.3%
Grenada / 9.2% / 12.5% / 5.1%
St. Kitts & Nevis / 7.0% / 10.1% / 1.8%
St. Vincent & the Grenadines / 4.9% / 10.8% / 0.7% / 3.5% (1999)
Source: Angella Smith; UWI, Mona, Jamaica, 1999, Overview of the Offshore Financial
Services Sector in the Caribbean and Threats to its Existence. Department of Economics
The table above gives the sectoral contribution to export of goods and services, Government Revenue 1992-1997 and Gross Domestic Product 1996-1997. It showed that the sector is relatively more important in some countries than in others. During the period 1996-1997, the sectors contribution to GDP was 0.3% in Antigua and Barbuda while for the Bahamas it was estimated to be as much as 15%,
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B. Early Entrants
The Bahamas has the most well established offshore centre in the Region,
and at the end of February 1999 there were 84,540 IBCs in that country. The
sector’s contribution to employment in that country averaged 4% during the
period 1991-1997. In the offshore sector, total employment rose by 4.4% in
1999, to reach 942 persons, a development linked to the increase in physical
offices located in the jurisdiction. About 15% of the workforce is expatriate. The
offshore sector continues to be important in the economic development of the
country as depicted in the table below.
Table 4: Gross Economic Contribution of the Offshore Sector in the Bahamas
1994 / 1995 / 1996 / 1997 / 1998 / 1999PTotal Employment / 759 / 777 / 806 / 892 / 902 / 942
Total Operational Costs B$ MN
Salaries
Government fees
a) licence
b) Company Registration
c) Work Permits
d) Other Government Fees / 73.4
31.9
8.4
6.2
0.4
0.5
1.3 / 77.4
33.9
8.8
6.3
0.3
0.7
1.5 / 80.5
34.7
8.5
6.2
0.3
0.7
1.3 / 90.4
39.4
8.0
5.9
0.3
0.7
1.1 / 95.3
41.7
9.6
5.8
0.3
0.7
2.8 / 107.7
46.2
7.7
5.1
0.4
0.7
1.5
Staff Training / 0.2 / 0.4 / 0.4 / 0.7 / 0.9 / 1.2
Other Administrative Costs / 32.9 / 34.3 / 36.9 / 42.3 / 43.1 / 52.6
Capital Expenditure / 7.7 / 7.6 / 11.15 / 8.2 / 8.2 / 15.2
Total Expenditure / 81.1 / 85.0 / 92.0 / 98.6 / 103.5 / 122.9
Average Salary (B$’000) / 42,029 / 43,629 / 43,052 / 44,180 / 46,255 / 49,045
Source: Compiled by the International Monetary Fund, Western Hemisphere Department for
CARICOM Secretariat January 2001
The table also showed that there was a near doubling in capital spending to B$1 5.2 million between 1994 and 1999.
In Barbados, the number of IBCs grew from 1,474 in 1994 to 3,399 by
1999, offshore banks grew from 26 to 45 during that same period. In 1996, the
contribution to GDP was approximately-5%, and between 1990 - 1996 the sector
accounted for 7% of total services exports and 5% of total goods and services exported. During the period December 1998 to September 2000, total assets of the offshore sector grew by BDS$7.24mn, an increase of 19.33% in a period of less than 24 months.
Table 5: Number of Active Entities in the Barbados Offshore Sector 1994-1999
compiled by the
1994 / 1995 / 1996 / 1997 / 1998 / 1999IBCs / 1,474 / 1,822 / 2,126 / 2,632 / 3,073 / 3,399
Foreign Sales Corporations / 1,172 / 1,514 / 1,726 / 2,291 / 2,608 / 2,857
Exempt Insurance Companies / 194 / 205 / 193 / 200 / 200 / 207
Exempt insurance Management Companies / 38 / 38 / 38 / 36 / 32 / 32
Societies with Restricted Liabilities / - / - / 14 / 32 / 65 / 97
Offshore Banks / 26 / 33 / 40 / 44 / 43 / 45
Total / 2,904 / 3,615 / 4,137 / 5,235 / 6,021 / 6,637
Source: Compiled by the international Monetary Fund Western Hemisphere Department for CRICOM Secretariat January 2001
C. Later Entrants
For Antigua and Barbuda, between 1990-1996 the sector contributed on average, 5% of export of services and 4% of export of total goods and services and 8% to government’s current revenue during the period 1988-1996. Unlike in some other countries, it has been reported that” the offshore sector appears to have relatively little direct impact on onshore economic activity. Direct emp!oyment in the offshore industry is estimated by Antiguan authorities to be about 450, most attributable to gaming companies”1
‘compiled by the International Monetary Fund Western Hemisphere Department for CARICOM
Secretariat January 2001
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Table 6: Antigua and Barbuda Indicators of Offshore Sector Activity
1997 &1998
1997 / 1998Number of Institutions
a) IBCs
b) Offshore Banks
c) Insurance companies
d) Others / 10,900
57
7
52 / 11,000
52
7
51
Government Revenue from offshore sector EC$ Mn / 6.7 / 5.2
Government revenue from offshore sector as a percentage of current revenue / 2.0 / 1.5
Government revenue from offshore sector as a percentage of non tax revenue / 14.4 / 10.5
Foreign exchange earnings in EC$Mn / 15.6 / 23.4
Foreign exchange earnings from the offshore sector as a percentage of goods and services / 1.3 / 2.1
Source: compiled by the international Monetary Fund Western Hemisphere Department for CARICOM Secretariat January 2001
The table above on Antigua and Barbuda showed that at the end of 1998 there were a number of significant declines in the contribution of the offshore sector. Among the reductions taking place were the following:
• The number of offshore banks fell from 57 in 1997 to 52 at the end of 19998
• “Other institutions” fell from 52 to 51
• Government revenue declined from EC$6.7 Mn to EC$ 5.2 Mn
• Government revenue from the sector declined as a percentage of current
revenue from 2% to 1.5%
Dominica, one of the more recent entrants in the sector activities, had 5,831 lBCs and 6 offshore banks in 1999. Revenue from the sector was
US$ 3.8mn in 1998. The sector continues to be an important contributor to government revenue and to export of services.
Table 7: Economic Impact in Dominica, 1999
Type of Service / Revenue generated EC$Economic citizenship programme
/ 7,787,188Offshore banks / 132, 624
IBCs / 331, 223
Internet Gaming / 1, 430,001
International Exempt Trusts / 21,058
Exempt insurance and related company management / 32,669
Currency trading / 13,500
Total / 9,748,169
Source: Nand C BardouiIe The OECS offshore services sector: a primer on sectoral development
imperatives. Paper prepared for the thirty third meeting of the authority November2000
The table above showed the revenue contributed by the offshore sector to Dominica. This sort of contribution is typical for other countries as well, and serves to show the contribution to total revenue that could be made by the offshore sector. At the same time, very little government infrastructure expenditure is required to maintain that level of contribution. Thus the existence of a well managed and regulated sector brings with it a considerable amount of value added.
The number of IBC5 registered in Grenada in 1999 was 1,652. At the same time there were 31 offshore banks, 11 offshore trusts and some other companies operating in the sector. In Grenada, for example offshore banks continue to make significant financial contributions in this regard and expenditure increased from $70,000 in 1998 to $250,000 in 1999 with a further $3,000,000 targeted for spending by December 2000.
Table 8: Economic Impact in Grenada, 1998-2000.
1998 / 1999 / 2000Offshore companies (EC$M) / 3.05 / 15.12 / 32.78
Economic citizenship / 4.91 / 8.53 / 12.00
Total EC$ / 7.96 / 23.65 / 44.78
Gross Domestic Product / 1.0% / 2.8% / 5.1%
Private Investment / 3.1 / 8.7% / 14.9%
Government Recurrent Revenue / 3.4% / 8.6% / 14.2%
Source: Nand C Bardouille The OECS Offshore Services Sector: A primer on Sectoral