New budget introduces thin-cap rules and proposes transfer pricing rules, among other things.
Barbados has proposed several corporate tax changes in its 2019 budget that could affect international entities. The budget was delivered on March 20, 2019, and it introduces new thin-capitalization rules and eliminates the deduction for management fees paid to non-residents. The budget also announces that Barbados will introduce new transfer pricing rules, although further details are not provided. The budget also eliminates a number of withholding taxes to further converge the tax regime applicable to domestic and international businesses operating in Barbados, among other changes.
Thin-cap rules - Introduced
The budget introduces a thin capitalization rule of 1.5 to 1. Corporations will only be able to deduct interest-payable on outstanding debt due to non-resident related parties that own more than 10% of the entity if the total amount of the debt does not exceed one and a half times the equity of the company. Any portion of interest on such debt that exceeds this ratio will no longer be deductible. These rules will take effect September 1, 2019.
Management fee deductions - Eliminated
The budget eliminates deductions for management fees paid to non-residents, effective March 20, 2019.
Transfer pricing rules - To be introduced
The budget announces it will introduce transfer pricing rules for taxing transactions involving the sale of goods and services between legal entities within the same controlled group. It does not indicate further details of these rules or when they will be effective. Draft legislation is not yet available.
Convergence of withholding tax rates
The budget proposes a number of changes to withholding tax, effective March 20, 2019. Specifically, the budget eliminates the 15% domestic withholding tax on interest, management fee and royalty payments made to non-residents. The budget also eliminates the branch profits tax of 10% for branch profits paid out of income earned outside of Barbados.
Generally, these changes effectively extend the withholding tax exemptions previously provided only to licensed international business entities, to domestic companies as well and represent a further convergence of Barbados' tax legislation for domestic and international businesses. Barbados already converged its corporate income tax rate, effective January 1, 2019 (subject to certain grandfathering provisions).
Personal tax rate
The budget introduces new personal tax brackets and rates, and the top marginal tax rate will be 33.50%, as of July 1, 2019, before decreasing to 28.50% on January 1, 2020.
Working towards removal from EU blacklist
The budget reiterates Barbados commitment to reviewing its international business frameworks and tax regime, and emphasizes that it is working with the EU to make the necessary changes it needs to be removed from the current EU blacklist. Barbados was included in the revised EU blacklist, released on March 12, 2019.
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