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
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.
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.
Caricom Double Taxation Agreement:
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.
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.
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
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
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.