Foreign Governments Support Barbados Offshore
Offshore jurisdictions and the businesses that use them are sometimes wrongly accused of hurting their home country’s economy. This is a common misconception based on a simplified view that if the company is moving business offshore, it must be damaging to the local economy. This view is very one dimensional and has been proven to be incorrect by research on the subject.
In fact, one of the most complete studies on the topic was done by analyzing the longstanding Barbados – Canada tax treaty. The study titled “Offshore Financial Centers and the Canadian Economy” was conducted by Professor Walid Hejazi from the Rotman School of Management, University of Toronto in 2007. It showed that the use of a low tax jurisdiction greatly benefits the local Canadian economy as it results “in higher levels of Canadian exports, employment and capital formation.”
Foreign governments would not continue to support Barbados as an international business hub for their multinational companies if doing so eroded their tax base and offered no significant benefits in return. It is important to remember that an offshore financial centre can only be used by businesses operating internationally and not as a way for companies to avoid paying tax on their business operations at home.
Increase in Exports, Jobs and Capital Formation
Expanding internationally is widely accepted as having positive benefits for the home country’s economy. Governments are always encouraging local businesses to tap into international markets which offer attractive opportunities for growth and expansion.
Many times, foreign direct investment (FDI) abroad becomes an integral part of any effective expansion strategy. Hejazi quotes several studies that showed that FDI has positive effects on both the host and home countries’ economies. He says that increased FDI abroad leads to “increased market access that results from having a presence in a foreign market, leading to increased exports from Canada … leading to increased employment and capital formation in Canada (See Brainard (1997), Lipsey and Weiss (1981, 1984), Hejazi and Pauly (2002,2003), Hejazi and Safarian (1999a,b,2001,2005)).”
In his recent research published in 2010, Hejazi states that “far from exporting jobs, this investment abroad serves primarily as a beachhead for market expansion, stimulating domestically produced exports and high value added head office activities such as engineering and design.”
Lower Cost of Capital for International Expansion
With offshore jurisdictions being used as a conduit for the home country to access global markets, a study by Mintz (2004) investigated the effects of the tax rates on the related cost of capital. The study found that using a low tax jurisdiction as a base for expansion lowered the cost of capital.
From Mintz’s study, Hejazi concluded “This reduction in the cost of capital would therefore reinforce the competitive advantage of Canadian firms that use these conduits to access the global economy. To the extent Canadian firms are moving into high-risk environments, the reduction in the cost of capital offsets these higher risks.”
The home country needs their companies to be as competitive as possible if they are to succeed in the global marketplace and a low tax rate “helps Canadian companies compete more effectively in foreign markets”.
Hejazi points out that many important sectors in the global economy are very mobile and sensitive to tax rates, so their home countries are keen to partner with well regulated, low tax jurisdictions like Barbados to ensure that they do not drive these industries away completely but have them remain tied to the home country. On this basis, he concludes that “low tax jurisdictions are very important to all countries, and this explains why during the 1980s and 1990s, almost every OECD country has adopted some type of preferential tax treaty with a low tax jurisdiction.”
Tax Revenues in the Home Country
There is good reason to believe that the use of low tax jurisdictions may actually increase tax revenues in the home country in the long-term.
Part of the increase in taxes comes from the logical conclusion that if exports, employment and capital formation are expanding in the home country then tax revenues increase as a direct result of this growth.
In addition, a factor often overlooked is that multinational companies will need to pay tax on their international business activities to a foreign government. It is better for their home country if they pay less tax to a foreign low tax jurisdiction than more tax to a foreign high tax government. With less tax being paid to a foreign government, the home country will benefit from increased profits being returned home, benefiting the economy and increasing future tax revenues.
An American study by Hines and Rice (1994) reinforces this point by concluding that “American (and foreign) investment in tax havens has an uncertain effect on US tax revenue, but since low tax rates encourage American companies to shift profits out of high-tax foreign countries, it is possible that low foreign tax rates ultimately enhance US tax collections”.
Barbados Offshore Companies Drive Growth
Foreign governments understand the importance of partnering with an offshore jurisdiction to drive growth and economic expansion at home. They prefer to partner with a well regulated, low tax jurisdiction such as Barbados where transparency and tax information exchange operate in an effective manner. This strong regulation allows individuals and corporations to remit profits back to the home country, which in turn boosts the local economy.
A partnership with a well regulated, low tax jurisdiction is very important and is preferable over the use of an unregulated tax haven. Unregulated tax havens’ questionable status often results in profits not being returned to the home country and hence many benefits of international expansion are lost.
Barbados’ strength as an offshore jurisdiction and as an effective conduit for international expansion is evident. As such, it has become the top offshore jurisdiction for Canadian international business expansion and is very popular with other foreign governments as well. Expanding through a Barbados offshore company will help reduce your international tax burden while benefiting your home country’s economy.