Barbados lures Canadian miners
CARIBBEAN TAX HAVEN BOASTS MANY BENEFITS FOR OVERSEAS OPERATIONS
BRIDGETOWN, BARBADOS -- One trend to keep an eye on in the New Year is the increasing attractiveness of this Caribbean island for Canadian and other international mining companies wanting to establish holding companies and treasury functions to streamline and reduce the costs of their international operations.
To brighten its appeal to Canadian mining companies, Barbados is stepping up efforts to promote its expanding network of bilateral taxation treaties, robust legal system, low costs, and English-speaking environment.
The 2.5% corporate tax rate in Barbados (it is up to 42% in Canada) on income derived from foreign earnings is a key draw for international mining companies who can remit earnings back to their home countries as an exempt surplus.
Barbados government officials such as Darcy Boyce, Minister for Energy, Immigration, Telecommunications and Invest Barbados, argue that the country is neither merely a tax haven nor a nameplate jurisdiction, because international companies must have a real management presence on the island.
"Miners have to be doing business here," Boyce says.
Mining companies are keen to BARBADOS, leverage taxation treaties with countries such as Canada and the U.K. in order to do business in third countries where Barbados has tax agreements in place such as China, and nations in Africa and Latin America -- especially when the miner's home country does not have an agreement with the third country where their mines are located.
"I am aware that numerous Canadian mining companies frequently interpose a Barbados hold- ing company in their corporate structure to invest in overseas mining operations, particularly when these are based in one of our double-tax treaty partnering countries," says Stephen Greaves, president of Bridgetown-based Platinum Offshore Management Services.
Dominique Pepin, director of tax services at Ernst & Young (Barbados), gives an example of how, with Canada not having a taxation treaty with Botswana, Canadian miners use the taxation treaty that Barbados has with Botswana in order to do business there.
The Barbados government wants to add to its network of 19 taxation treaties covering 31 countries with a focus on countries of interest to Western companies.
"Barbados is trying to expand the number of treaties and have a good geographical spread. We are already in negotiations with a further twelve countries, including several in Latin America, Africa and Asia," Boyce says.
Ben Arrindell, a director of Barbados' Cidel Bank & Trust, says the government's strategy is "to identify the countries that are the largest exporters of foreign direct investment, look at where this FDI goes, and then negotiate agreements with the recipients so Barbados can become a conduit for that investment." He notes that tax-treaty ne-g otiations have begun with countries such as Colombia, Chile, Brazil and Australia.
Tax planning is always high in the corporate agenda for international mining companies, and maybe more so in today's high commodity price environment. Here, Barbados provides certain tax planning advantages when the jurisdiction is used to execute mergers and acquisitions, asset sales, product sales and treasury functions due to the country's lower withholding taxes.
"When a Canadian company merges with an international company, this could lead them to establish a subsidiary in Barbados to get a better structure for the assets," says James Gardiner, vice-president of Goldcorp (Barbados) Inc.
Ernst & Young's Pepin notes that some Canadian mining clients use Barbados as a financial hub to prepare for investments.
"Mining companies transfer surplus money from production assets to their Barbados company which invests it. Any investment income earned in Barbados will only be taxed at a maximum of 2.5% so the funds grow more rapidly. When the company has accumulated sufficient funds, it then makes an investment in a new mining project," Pepin says.
Large mining companies operate holding companies for their non- Canadian subsidiaries such as Barrick Gold's South American mining operations and treasury operations that fund their other operations.
"If you are going to do international transactions like developing mines in foreign countries, there are definite opportunities in structuring through Barbados," says Adrian Meyer, deputy chairman of Cidel Bank & Trust.
Offshore, low-tax jurisdictions receive criticism in some quarters on the grounds that they reduce taxes paid to the home-country government and result in job losses at home. But Meyer argues that, in the case of Canada, "studies show use of a low-tax jurisdiction is beneficial to the Canadian economy as it lowers the cost of capital of Canadian corporations and allows them to better compete on the world stage, which means more jobs are created in the home country and more taxes are paid there."
For instance, the 2010 report Offshore financial centers and the Canadian economy by Walid Hejazi, an associate professor of international business at the University of Toronto's Rotman School of Management, found that about a fifth of Canada's foreign direct investment abroad moves through lowtax jurisdictions -- of which Barbados is the largest recipient, and creates many benefits in Canada.
"Increases in Canadian foreign direct investment abroad, through legitimate international financial centres in countries such as Barbados, result in higher levels of Canadian capital formation and employment," Hejazi wrote.
"The reality," Boyce says, "is that well-regulated, transparent tax-treaty based centres, like Barbados, assist in the growth of both Canadian multinationals and their home economy by generating higher tax revenues and job creation in Canada in the long term."
Keen to enhance its reputation and fend off persecution of lowtax jurisdictions, Barbados intends to maintain a rigorous regulatory environment.
Avinash Parsand, chairman and founder of Intelligence Capital Ltd. in Barbados, says the island needs a regulatory regime that suits its small size, citing as an example how the U.K. spends US$2 billion a year on financial regulation, a sum that Barbados cannot afford.
"If we are going to be a successful financial centre we will achieve more through the quality of our financial regulation than through our tax rates," Parsand says. "We have to identify specific niches where we offer excellence that is specific, focused and world-class so that we do not have regulation that is inappropriate for our activities."
Barbados offers more than just tax advantages, including the two elements that miners crave: political and economic stability. This was underlined by the seamless transition of power after the sudden death of Barbadian Prime Minister David Thompson in late October.
"There is political stability and we do not try to undo the work of the previous administration. The Prime Minister dies and the next day a new Prime Minister is constitutionally installed with no problems," Boyce says.
Exploration companies use Barbados to hold assets located in less stable environments such as Cuba and Venezuela, with whom Barbados has "bilateral investment treaties that protect Barbadian companies from expropriation without fair compensation, thus giving political risk mitigation," says Pepin of Ernst & Young.
Adds Platinum Offshore's Greaves: "Barbados offers political and economic stability where the countries miners invest in may not. When a mining operation is sold, it is easier to sell the Barbados entity than the tertiary country asset."
The robust nature of Barbados' financial system means that -- like the Canadian system it was based upon -- it has withstood the recent global financial crisis well.
"We are in much better shape than countries larger, much-better-endowed and richer than ourselves," says DeLisle Worrel, governor of the Central Bank of Barbados.
Beyond this, Barbados has enjoyed a strong commercial relationship with Canada for well over a century. In fact, the Royal Bank of Canada opened a branch in Barbados before it opened one in Toronto.
Canada's influence in Barbados through this long-standing relationship means that the legal and financial system on the island is similar to Canada's, making it relatively familiar to Canadian companies.
"We tend to follow Canadian banking standards so our financial regulation has been very good," says Boyce.
Cidel's Meyer recalls that Barbados "made a deliberate attempt in the early 1990s to 'copy' Canadian corporate law because of the special tax treaty they have."
This lends Barbados a familiar feel that may give Canadian miners that extra bit of confidence.
When Canadian companies raise private finance, "it can help if investors see that Barbados is within the structure of the Canadian company," concludes Greaves. -- Based in Medellin, Colombia, the author is a freelance writer specializing in mining issues.
He can be reached at paul.corresponsal@gmail.com.
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