Two pieces of legislation were passed in Parliament this week in an effort to place St Vincent and the Grenadines (SVG) on a footing to avoid being blacklisted by the European Union, as it relates to taxation.
These Acts, the Income Tax (Amendment) Act 2020 and International Tax Cooperation (Economic Substance) Act 2020, were both tabled by finance minister, Camillo Gonsalves on Monday.
Though the two pieces of legislation were debated separately, Gonsalves said that they were closely related, and in fact two sides of the same coin.
While the Income Tax (Amendment) Act 2020 sought to establish a system of territorial taxation on corporate income tax, the International Tax Cooperation (Economic Substance) Act 2020 sought to impose economic substance requirements on companies.
“…In 2017, the European Union, through its code of conduct group investigated and screened the tax policies of 92 jurisdictions…both within and outside the EU, including St Vincent and the Grenadines against the European Union’s code of conduct for business taxation, with the objective of curbing harmful tax cooperation,” the finance minister said.
He noted that this country, at the time, was classified by the EU as a “criterion 2.1 jurisdiction” which assesses whether advantages in the tax system are accorded only to non-residents or in respect of transactions carried out with non-residents and whether the advantages were ring fenced from the domestic market, so that they do not affect the national tax base.
This essentially meant that SVG had a system of laws that treated foreign companies differently to local ones, which was deemed as improper by the European body.
“…That arose from the fact that we have an Income Tax Act that provides for taxes to be applied on a worldwide basis, however we had separate acts called an International Business Companies Act and an International Trust Act which exempted International Business Companies and International Trusts from those requirements…if we didn’t have that system at the time, we would not have had a competitive international financial services sector because that was the norm,” Gonsalves said.
Parliament made amendments to those Acts in December 2018 so as to remove tax exemptions and remove ring fencing in order to comply with the EU’s and Organisation for Economic Cooperation and Development (OECD) regulations regarding the sectors.
The amendment made two years ago subsequently resulted in SVG being placed on an EU “White List” in March 2019.
“Having passed the 2018 test, the governments longer term policy was to introduce a territorial base system of corporate income tax so that tax will only be charged on income that accrues directly or indirectly from sources within St Vincent and the Grenadines,” Gonsalves said, alluding to the passage of the Income Tax (Amendment) Act 2020.
“Essentially, we were saying, we will tax your activities in St Vincent, which will allow the regular companies that already exist, that are local, that pay their taxes to pay their taxes and continue, but we will not tax anybody’s international…income.”
On the flip side of that coin is the Economic Substance legislation.
The finance minister explained that once the country adopts the territorial system “then we have to define and require…some substantive connection to the jurisdiction”.
Gonsalves said the overriding objective of the passage of the Bills is to preserve the international financial services in St Vincent and the Grenadines by restoring taxation of global income to an equal footing while at the same time, seeking to ensure that the international tax requirements of the EU and the OECD are met.
“The effect of this particular piece of legislation (Income Tax (Amendment) 2020) is that all companies incorporated or registered under the companies act or registered under the Business Companies’ Amendment and Consolidation Act and registered under the Trust act, would benefit from tax exemptions or zero rated taxation on global income,” he said.
The finance minister added that “the same companies would also have reporting obligations, however only certain companies, carrying out relevant activities would be obliged to fulfil the economic substance requirement”.
Lawmakers from both sides of the House contributed to the debate of these two Acts before they were successfully passed by the end of Monday’s sitting.