By Robert Looney From WPR

Public interest in offshore banks and their financial services, particularly in the Caribbean, has risen considerably after revelations in two major leaks known as the Panama Papers and the Paradise Papers. The increasingly common practice of the super-rich, celebrities and political figures using Caribbean countries to shelter their income from taxes at home has been a gold mine for investigative reporters. The public outcries have pushed politicians to respond, most recently and prominently with the European Union’s decision to blacklist 17 tax havens “seen as not cooperative on tax matters,” including several in the Caribbean.

But the Caribbean side of this story is often overlooked amid all the disclosures of hidden money. It is unclear just how many tax havens exist because definitions of them vary. In the Caribbean, the list of tax havens generally includes the Cayman Islands, the Bahamas, the British Virgin Islands, Dominica, Nevis, Saint Kitts, Anguilla and Barbados. The offshore financial sector is vital to these islands’ economies and GDP. Around 60 percent of the British Virgin Islands’ annual revenue comes from offshore financial services, and the financial sector accounts for about one-third of its $1 billion economy.

The financial services across the Caribbean are far from monolithic, and tax rates vary considerably from country to country, with each having a niche. Bermuda is home to a third of the world’s top 50 reinsurers. The Cayman Islands have the most hedge funds. The British Virgin Islands is the principal residence for international business companies. The prevalence of tax havens on these islands often account for their ability to recover rapidly following hurricanes.

As might be expected, some Caribbean tax havens have developed bad reputations. Many perceive Saint Kitts, Nevis and Anguilla as money-laundering paradises for drug lords and other assorted criminals. Others see destinations like the Caymans as black holes where billions of potential tax dollars vanish. In sharp contrast to most of the others, Barbados has developed a niche as an ethical low-tax destination—a “clean” haven, one that opens its books and exchanges information with other countries. In Barbados, taxes range from 1 to 2.5 percent. In some circumstances, companies located in Barbados are entirely exempt from taxes.

Officials in Barbados see their system as one that is not structured to encourage tax evasion but instead designed to assist business expansion. Over the years, Barbados has gone to great lengths to develop a series of tax treaties with countries such as Canada to establish firm guidelines for tax liabilities stemming from business and investment activities.

Barbados can back up its claims as an ethical destination with its governance record. Contrasts with Panama, the leading tax haven in the Americas, are especially revealing. Barbados clearly outranks Panama in the World Bank’s six major areas of governance, from accountability to political stability, government effectiveness, regulatory quality, the rule of law and control of corruption.

Such an environment has had great appeal for investors, especially those from Canada. Currently, Barbados ranks third behind the United States and the United Kingdom in attracting Canadian investment. Wealthy Canadians and companies have placed more than $80 billion in Barbados since 1980. There is more Canadian money in Barbados than money from Germany, Italy, France, Japan and Russia combined.

Unfortunately for Barbados, the current backlash against tax havens is gaining strength at a time of economic vulnerability.

Barbados’ model of fully accepting fiscal competition while playing by the rules fits well into the country’s development strategy, which focuses on tourism, international business and competitive exports, mainly rum and chemical products for household use. Activities beyond this mix have limited prospects. Currently, the international business sector contributes around 20 percent of the island’s GDP, through investments, taxes and financial services.

Yet even with all this foreign money, Barbados’ overall economy is teetering on the edge. In late November, the International Monetary Fund warned the cash-strapped government that it had no option other than continued austerity. The island was in the deep throes of a severe fiscal crisis from 2012 to just last year, with budget deficits averaging above 5 percent of GDP. In 2017, the island’s per capita income was $15,956, down from $16,197 in 2008. From 1980 to 1999, the economy grew at an annual average rate of 1.11 percent, falling a tick to 1.06 percent from 2000 to 2016.

Unfortunately for Barbados, the current backlash against tax havens is gaining strength at a time when its economy is most vulnerable to any development that may reduce its foreign exchange earnings. Damaging financial leaks and growing political involvement in the issue of tax havens, encapsulated by the EU’s blacklist that targeted Barbados, suggest that real action to regulate offshore wealth might finally be at hand. Reforms along these lines are easily justified. Oxfam estimates that tax avoidance schemes deprive developing countries of up to $100 billion annually.

So far, international pressure on tax havens has centered on reducing outright tax evasion. This effort is spearheaded by the Global Forum on Transparency and Exchange of Information, which was formed under the OECD. A related effort from the European Commission seeks to limit legal tax avoidance by establishing corporate tax laws globally. Any moves would likely reduce revenues available to Barbados’ government, further complicating its current fiscal crisis.

There is widespread public support for action against tax havens. In one poll, American respondents approved by a three-to-one margin closing loopholes that allow individuals and companies to avoid U.S. tax obligations through the use of tax havens. And that was before the Panama and Paradise Papers leaked.

If these offshore sectors shrink, there currently appear to be few economic alternatives for the Caribbean. Anguilla is considering expanding its fishing industry, while the Cayman Islands are looking into medical tourism, but neither would be adequate replacements. The same applies to Barbados, whose only comparative advantage at this point appears to be ethical tax and banking services.

Barbados’ placement on the EU blacklist was something of a surprise. Before the list was released, Oxfram felt Barbados did not meet the EU’s criteria for inclusion. While the EU action is not punitive but merely symbolic, Barbados will still likely be a victim, despite being a model for other tax havens. There will be guilt by association, given the tendency of many investors to assume that they will get bad publicity from dealings in Barbados, even though the island has gone to great lengths to be an ethical financial destination. For many, the potential savings will not be worth that cost.

No doubt Barbadian officials will soon meet with the EU to determine what changes they must make to be removed from the list. But will that be enough to erase the damage already done?

Robert Looney is a distinguished professor at the Naval Postgraduate School in Monterey, California. He specializes in issues relating to energy security and economic development in the Middle East, Africa, South Asia and Latin America.

IMAGE: German state representative Jeannine Rosler, left, participates in a protest against tax evasion prompted by revelations included in the Paradise Papers leak, Schwerin, Germany, Nov. 15, 2017 (dpa photo via AP)

For more on this story go to: https://www.worldpoliticsreview.com/articles/23853/caribbean-tax-havens-like-barbados-face-new-pressure-with-economic-costs