Business Page   CARICOM  seeks to encourage intra- regional investment

Sunday, February 6th, 2005



It should have come as no surprise that emotions and distortions played such a prominent part in the debate we witnessed recently on cross-border investments within Caricom. Yet, it was unfortunate that in the emotionally-charged atmosphere, no consideration was given to policies agreed to a long time ago designed to facilitate such investments, and whether or not as a region and countries we should be encouraging or rejecting cross border investments within the region. Indeed if we reject, for whatever reasons, inter-regional investments should we also reject investments from outside the region? If the answer is yes, then does this imply either that we are prepared to develop only at the rate at which our domestic resources permit or is it that we think we have all the resources - financial and otherwise - which we need for development? If the answer is no, does this mean that we want 'foreign' investment but not regional investment?

These questions it might be thought had been answered over two decades ago and indeed inhere in many of the key policy decisions taken by regional leaders during that time. Out of that wider consideration, perhaps the three most important initiatives over the past fifteen years or so were specifically designed to promo growth in the development of cross border trade and investments among Caricom countries. These are the Caricom Single Market and Economy (CSME), the Caricom Double Taxation Agreement referred to as the Caricom Treaty and the Caribbean Court of Justice (CCJ) which is intended to replace the Privy Council of the UK as the final court of appeal in Caricom countries. Guyana of course severed its ties with the Privy Council nearly thirty years ago but has been more enthusiastic than most in its commitment to the CCJ. What makes the CCJ so relevant to regional trade and investments is that the CCJ will have what is called primary jurisdiction in questions arising out of complaints on the operations of the CSME.

Another point that was drowned out in the recent debate is the provision in the Investment Act passed last year which deems Caricom investors as domestic investors. Significantly, this Act was passed without any one in the National Assembly dissenting and with the complete support of the Private Sector Commission which played a key role in the design of the Act. Clearly national sentiments - assuming that they are genuine and not contrived - do not support many of the policy initiatives to which the country has committed, undermining the legitimacy and success for which the Caricom Secretariat is assigned responsibility.

As we are all aware, we are still to implement the CSME which was agreed to as long ago as 1989 and the CCJ is yet to get off the ground. So how has the other major initiative fared, was it beneficial and if so to whom? The significant growth in the development of cross border trade and investment among the various member states of Caricom has been led, to a large extent, by investors from Trinidad and Tobago ("T&T"). This expansion has been attributed by Nichole Lawrence, Tax Partner of Ernst & Young Caribbean to the very initiatives taken by the Caricom governments principally though not solely the Tax Treaty. A Paper contributed by Ms. Lawrence to the newsletter of the Institute of Chartered Accountants of Trinidad and Tobago shows how that Treaty has operated for the benefit of Trinidadian businesses.

The Caricom Double Taxation Agreement:

The Treaty is a multilateral one encompassing all the Caricom countries and replaced the 1973 tax treaty ("the LDC/MDC Treaty") which was previously concluded between the more developed countries ("MDC") within Caricom, i.e. Barbados, Guyana, Jamaica and T&T, and the less developed Caricom countries ("LDC"), being Antigua, Belize, Dominica, Grenada, Montserrat, St. Lucia, St. Vincent and St. Kitts, Nevis and Anguilla.

The LDC/MDC Treaty which was never formally ratified or honoured by the countries that were parties to it was limited in its scope as it was designed only to try to stimulate international trade and investment between the MDCs and LDCs, and not among the MDCs themselves. The later Treaty was clearly more ambitious and sought to rectify its predecessor's limitations. In particular, it removed the barrier of the high effective rate of tax levied on income derived from one Caricom territory by a resident of another.

A good illustration of this was the situation where a company in T&T established or acquired a subsidiary company in Jamaica. Dividends received from the Jamaican subsidiary would have been subject to a 33 1/3% withholding tax in Jamaica. The dividends would also have been subject to tax in T&T at the prevailing corporate tax rate with a credit for half of the Jamaican withholding tax. Assuming a T&T corporate tax rate of 30%, the dividends would be subject to tax in T&T of approximately 16.67%, giving rise to a combined effective rate of tax on the dividend in Jamaica and T&T of approximately 46.67%.

In fact, the effective rate would be even higher once account is taken of the tax on the profits of the Jamaican company out of which the dividend would have been paid.

This example illustrates clearly why, leaving aside other commercial considerations, many T&T companies did not consider it a viable proposition to invest in countries with high rates of taxes such as Jamaica and to a lesser extent Guyana with Geddes Grant and Neal & Massy being significant exceptions.

With Trinidadian businesses and their tax advisers becoming more aware of the opportunities offered by the Treaty, the level of investment in other Caricom territories, particularly Jamaica and Barbados and more recently Guyana has increased substantially.

The Treaty is also unusual in two ways in that, firstly it is a multilateral treaty and, secondly it provides for income arising in one Caricom territory by a resident of another to be taxed only in the source country. The Treaty effectively exempts dividends payable by a company resident in one Caricom territory from taxation both in the country in which the income arises and in the country in which the shareholder is resident. Therefore, dividends received by a T&T company in respect of an investment in Jamaica in the example above would not be subject to any withholding tax in Jamaica and no tax in T&T, giving rise to a significant tax saving.

However, this is a difficult achievement for those companies seeking to expand their operations. Even if the company and its shareholder was to be considered a resident of another Caricom state from which it has its operations, the rate of withholding tax would still be a low 15% and there will be no additional tax payable in that other Caricom state.

The Treaty has undoubtedly helped to level the playing field so that investment decisions by investors within Caricom are now based mainly on commercial grounds rather than on taxation considerations or patriotic sentiments. Taken to a further level, the Treaty also encourages companies to cross list their shares on the stock exchanges in the region, as has already been done by companies in Jamaica, T&T and Barbados, leading hopefully to the establishment and the eventual success of a regional stock exchange.

It is interesting to note that when the draft Treaty was first published some critics claimed that the adoption of a tax treaty based on source taxation would be harmful to the stimulation and facilitation of trade and investment among Caricom members. To date this has not proved to be the case.

Tax Harmonisation:

Following the decision taken at the Caricom Heads of Government meeting in Grenada in 1989 to move towards of the development of a single market and economy within Caricom ("CSME"), slow progress has been made in putting the necessary measures in place to accomplish this. The nine Protocols, which are required to implement the CSME, have been signed and are at various stages of implementation.

The main purpose of the CSME is to allow the free movement of goods, services, capital and Caricom nationals and to regulate the treatment of economic enterprises within the Single Market.

The Caricom Heads of Government have recognised that the harmonisation of taxation is an important step in the achievement of the CSME as failure to do so is likely to result in barriers to the free movement of goods and capital. The existence of the Treaty is clearly a step in the right direction towards tax harmonisation. However, in order to achieve real harmonisation, some measure of uniformity in the way in which taxable income is calculated as well as harmonisation of tax rates within the various member states will be necessary.

Currently, corporate tax rates within Caricom range from as low as 25% in Belize to a high of 45% in Guyana. However, in general, the tax systems in the various member states, with the exception perhaps of Suriname, and the methods of calculating taxable income are quite similar and it should not be difficult to achieve harmonisation in this area.

Ms. Lawrence believes however, that harmonisation of corporate tax rates, will be much more difficult to achieve given the differences in economic development of and sustainability in the various member states.


Our business sector has shown remarkable short-sightedness in availing themselves of the exciting possibilities offered by the Treaty. Not a single one of our public companies whose CEO's crow about being world class is yet prepared to list on the local Stock Exchange let alone on any Caribbean Exchange. They realise perhaps that they cannot defy other regulators with the level of impunity they enjoy in Guyana.

We gripe about the size of our domestic market and yet show temerity in venturing abroad. We go into high tax rates jurisdiction with severe regulatory restrictions while ignoring the fruits in our own backyard. The logical response would be for our investment advisors to encourage even small investors to invest their money on the stock markets in other Caribbean countries. But perhaps because of the conflicting ties which those advisors have to public companies, they shut their eyes to the opportunities. That's another pity.