Amidst much debate, the Barbados Parliament recently voted to repeal the island’s Fiscal Incentives Act (Cap 71A) (FIA) with effect from 2 January, 2019. The ostensible reason was to bring Barbados into conformity with its obligations under the World Trade Organization (WTO), and in particular, the Agreement on Subsidies and Countervailing Measures (SCM Agreement). In short, the SCM Agreement prohibits WTO countries from providing illegal “subsidies” (in the form of grants, incentives, or tax write-offs) to domestic industries.
As the FIA was passed to encourage economic development by stimulating the production of locally-manufactured goods for export, its repeal has raised deep concerns about Barbados’ ability to attract investors and the broader implications for the economy.
Has the time come for Barbados to do away with incentives like those under the FIA?
When the FIA was passed in 1974, it brought into force a CARICOM Agreement on the Harmonisation of Fiscal Incentives to Industry of 1973. Among the objectives of the CARICOM Agreement was harmonization of fiscal incentives to manufacturing industries among CARICOM Member States to avoid a “race-to-the-bottom” in the grant of tax incentives to foreign investors. Under the FIA, Barbados has provided incentives to a number of domestic and foreign companies since the FIA came into effect. These include Caribbean LED Lighting, Preconco, Meridian Caribbean, Deltro, to name a few.
The incentives under the FIA however, contained WTO-inconsistent export subsidies (that is, those tied to export performance) as well as domestic content subsidies (that is, those which required the use of domestic inputs to benefit from the subsidy). Although Barbados, like other developing countries, was for a long time exempted from the requirement under the SCM Agreement to remove these illegal subsidies, as of 31 December 2015, it has been required to repeal these subsidies. For as long as it does not do so, Barbados faces a risk of being brought by another WTO Member before the WTO’s dispute settlement body.
Barbados’ requirement to remove the illegal subsidies may smack of hypocrisy and imperialism by a multilateral organization. After all, Barbados has a negligible impact on global trade flows, so what harm can assistance it provides to its nascent domestic manufacturing do to the world economy? Moreover, it is well-known that many of the subsidies, now deemed “illegal”, were used with impunity by now industrialised countries to grow their own infant industries. Finally, many of the larger countries in the WTO that use agricultural subsidies are given longer time periods for phasing them out.
While the rules do seem skewed, Barbados finds itself today in a financially precarious position. The island recently entered an Extended Fund Facility programme with the International Monetary Fund (IMF) due to its low reserves and high debt to GDP, and funding from the IMF will have to be supplemented given the scale of the macroeconomic challenges.
In this climate, the question has to be how best should Barbados position itself to attract foreign investment in a sustainable and effective way?
The literature shows that when deciding where to invest, investors are increasingly looking at a host country’s overall investment climate and not just the incentives offered on an ad hoc basis. They want to know about the country’s macroeconomic health, its enabling infrastructure, and the overall ease of doing business. Unfortunately, Barbados has been progressively falling in the World Bank’s Ease of Doing Business indicators and is currently ranked at 132 out of 190 economies in that Organization’s Doing Business Report (2018).
Moreover, tax incentives, depending on how they are administered, may not be optimal for attracting sustainable investment. Because they are often granted on a discretionary basis, they often lack transparency and can be costly in terms of revenue foregone to the government’s coffers. According to Barbados’ last policy review at the WTO, revenue foregone under the FIA amounted to BDS$18 million in FY 2010-2011.
So, what are the options open to Barbados?
Through the anticipated repeal of the FIA in 2019, Barbados appears to be following the lead of CARICOM countries like Antigua and Barbuda, Grenada and St. Lucia, that have already repealed the WTO inconsistencies in their respective Fiscal Incentives Acts.
But, Barbados should not stop there. Barbados could create a more investor-friendly environment through tax reform by replacing discretionary and generous tax incentives with a more rules-based system and streamlining tax incentive laws into a single statute to improve transparency and ease of access to this information. It must also undertake targeted measures that make it easier to do business and facilitate greater access to government information and data. One encouraging sign is Barbados’ recent ratification of the WTO’s Trade Facilitation Agreement which aims to improve efficiency in moving goods across borders. In today’s technologically-driven world, a better business environment means access to reliable ICT frameworks and connectivity to the global financial and payment systems. It is these types of deep-seated reforms that attract and keep foreign business invested in a country.