Kerwin Hamil | The savvy world of IBCs and their implications
OP-ED CONTRIBUTION: OFFSHORE COMPANIES
Jamaica has been continuously labelled a high tax jurisdiction, resulting in local investors initiating ingenious tax planning strategies to reduce their tax liabilities, including the incorporation of an international business companies, or IBCs, in other Caribbean jurisdictions, such as St Lucia, Cayman Islands and Barbados.
An IBC is an offshore company that conducts limited activities and which is formed in a jurisdiction which is considered tax neutral. However, not all offshore companies are deemed IBCs. The principal objective of most IBCs is to facilitate base erosion and profit shifting – BEPS – across tax havens.
BEPS is a tax avoidance strategy used by companies, which entails moving profits from higher tax jurisdictions to those that impose minimal tax rates.
Tax avoidance, which is in fact using legitimate ways to reduce an entity’s tax liability, is not illegal, but one might argue that it could entail some level of immorality. As such, the international tax environment, which also includes the Organisation for Economic Cooperation and Development, the OECD, is moving towards to elimination of BEPS.
Developing countries, such as Jamaica, due to their high reliance on corporate income taxes, continuously suffer from base erosion and profit shifting. Notwithstanding this, local investors continue to use this avenue as an effective tax planning strategy.
Tax benefits involved
Local investors continue to shift profits and gains earned from local companies to Caribbean territories to benefit from more favourable tax treaties. The rates for withholding taxes are more beneficial with regard to dividends, interest and management fees paid to IBCs formed in Caricom countries.
Jamaica’s Income Tax Act, the ITA, has provisions requiring taxes to be withheld on dividends, interest and in some cases management fees paid to resident and non-resident individuals or companies.
Where dividends are paid to a resident, individual taxes are required to be withheld at source at 15 per cent.
But, where dividends are paid to a resident corporation, the withholding of taxes is dependent on whether the local corporate shareholder has a portfolio holding or a substantial holding in another resident company.
The law refers to substantial holdings as having at least 25 per cent of the voting rights or ordinary share capital of the resident Jamaican company, otherwise, the interest is a portfolio. Portfolio holdings require taxes to be withheld at source at a rate of 15 per cent, whereas, there is no such requirement for a substantial holding.
The withholding tax rate on interest income is at 25 per cent for both resident corporations and individuals, provided that it is received by a prescribed person under the Income Tax Act. However, there are no withholding taxes on management fees paid to resident shareholders, whether or not they are considered individuals or bodies corporate. Non-resident corporations and individuals are, however, subjected to withholding tax rates on management fees of 33-1/3 per cent or 25 per cent, respectively, where their jurisdiction is a not a signatory to the Caricom double taxation treaty.
However, there are significant tax advantages to IBCs incorporated within Caricom countries that have double taxation treaties with Jamaica. Dividends paid to such IBCs are taxed at 0 per cent, whether or not the said entities have substantial holdings.
Interest income received from prescribed entities by local incorporated bodies is taxed at source at 25 per cent in Jamaica, but the said income received by IBCs are only taxed at 15 per cent. Management fees received by IBCs incorporated within Caricom countries where a double taxation treaty exists are taxed at a modest 15 per cent.
In addition, most Caricom IBCs are relieved from paying corporate taxes, capital gains taxes, withholding taxes, sales taxes, as well as employment taxes in the jurisdiction of incorporation. Those that are not relieved from corporate taxes are generally subjected to insignificant income tax rates.
The additional tax benefits make the IBCs very attractive for tax planning. Consequently, most local investors utilise the IBCs as valid tax avoidance strategies to shift profits across borders that are known tax havens.
However, IBCs do have their disadvantages. Most IBCs are not allowed to acquire real properties, other than their office, in most countries of incorporation. And IBCs for the most part are prohibited from conducting trade within their territories of incorporation.
In jurisdictions such St Lucia, IBCs that elect to be totally exempt may not be able to benefit from the Caricom double taxation agreement. Otherwise, these entities are subjected to a de minimis tax rate of one per cent of corporate profits. In most jurisdictions, the period of tax benefits is not indefinite, but limited to 15 to 20 years.