2018 BARBADOS INTERNATIONAL FINANCE & BUSINESS | 114 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSMeeting the Challenges – Canadian Tax Appeal Upholds Barbados by Mary MahabirBarbadian entities are increasingly under scrutiny by the Canadian revenue authorities, who have become more aggressive in their approach of late and are increasingly prepared to challenge Barbados-based structures set up by Canadian parent companies. While professional advisors and regulators in Barbados are confident that the tax treaty network and regulatory and legislative framework – the backbone of the international business and financial services sector in Barbados – can stand up to scrutiny, it was reassuring to see this recently demonstrated. The 2016 decision of CIT Group Securities (Canada) Inc. (Appellant) and Her Majesty the Queen (Respondent) is the case in point.This matter involved an appeal to the Tax Court of Canada, by a Canadian taxpayer, arising from the tax treatment of the income of one of its Barbadian subsidiaries licensed by the Central Bank of Barbados to carry on business as a trust and finance company, initially under the Financial Intermediaries Regulatory Act, and then under the Financial Institutions Act (FIA). In particular, the Court had to determine if the income earned by the Appellant’s “controlled foreign affiliates” in Barbados was taxable in the hands of its Canadian parent, as “foreign accrual property income”. This included determining whether the income earned by the Barbados entity from its business was to be considered as part of its income from property, or, as commonly described, as passive income. A further factor that the Court had to consider was whether the foreign affiliate’s income should be excluded, because of an exception in the Canadian income tax rules for business carried on by the affiliate as a foreign bank or a trust company, the activities of which are regulated under the laws of the country in which the business is carried on. The Barbados entity in question carried on the business of lending to third-party corporations and making long term investments, which was funded by loans from Barbados international business company affiliates. It had six full-time employees as well as a managing director – this is important from a Canadian perspective, to qualify for the exemptions being claimed. What is also noteworthy from the decision is that the Court examined, in some detail, the nature of the business activities. This emphasises the importance of Barbados-based financial service businesses having substance in Barbados and being able to withstand a detailed examination of their operations. Ultimately, the court determined that the business the Barbados entity was engaged in was that of a foreign bank. This was so held, although the entity was licensed as a Part III licensee under the FIA and did not carry on any trust activities, although it was termed a trust company. A further requirement that the taxpayer had to satisfy, in order to meet the exclusion clause in the Canadian tax legislation on which it sought to rely, was that its activities as a foreign bank were regulated under the laws of Barbados. It was found that the activities of the Barbados entity were appropriately regulated by the Central Bank, pursuant to the relevant legislation under Barbadian law. The learned Judge consequently allowed the taxpayer’s appeal and referred the assessments back for reconsideration. This decision is very important in a Barbados context, as it demonstrates that proper tax planning can, and will, be upheld by foreign courts who are satisfied with the regulatory regime that has been established in Barbados. It should also give confidence to foreign investors who might be concerned about setting up entities in Barbados, given the recent attacks on offshore structures, particularly those in the Caribbean.*INTERNATIONAL BUSINESS | 15The Realistic Challenges of PEP Determination – Is It Time for a Change? by Glenna SmithWhile it is clear that there are valid reasons for completing Politically Exposed Person (PEP) determinations, the process could use the application of a common sense approach on a case-by-case basis.At the moment, people in perceived positions of power are regarded as potentially vulnerable to corruption, and must be flagged as PEPs, as well as their spouses, close associates and family members. That makes some sense, because one can have a public figure that abuses their power and co-opts friends and family members to help them channel funds siphoned from the public purse.But the problem is that, since the release of international guidelines on PEP determination, service providers have come to realise that its application and ongoing maintenance is starting to raise challenges in certain cases. The PEP list just keeps getting bigger and longer, with people being added as PEPs, but no one is ever deleted. For example, a PEP may leave public office, but they must remain on the PEP list and be treated as a high risk customer – for life!Many others have followed Mr. Abacha’s example, so one might well ask why service providers think there is a need for some flexibility in the application of the PEP determination process. … there is a need for some flexibility in the application of the PEP determination processNow that we have had several years’ experience in trying to deter and detect corruption, to make our world a more transparent and legitimate economy, service providers are seeing the need for a revision of the guidelines. Many have come across cases where there is clear justification for the removal of an individual from the PEP list. For example, it may be that someone has retired from the PEP position many years ago, or is ageing and in poor health, or is no longer politically connected or active. Let’s revisit why we have to determine who is a PEP. Some say it started with the activities of Sani Abacha, the former military dictator of Nigeria, who, in just five short years (1993 to 1998), is alleged to have diverted a reputed £5 billion from the public purse into personal foreign bank accounts.The answer relates to the associated parties captured in the process, and also to the fact that relationships and people change over time. Take the more obvious case of a divorced spouse, married many years ago to a PEP and, therefore, also tagged as a PEP by association. Is it fair, or realistic, where it can be shown that separation from the PEP is absolute and the individual has not benefitted from the corruption in question, for that person to remain on the PEP list?It is in cases like this, where the original circumstances resulting in PEP determination have changed dramatically, that service providers feel a more flexible, common sense approach is appropriate. It is time for a change.*… service providers feel a more flexible, common sense approach is appropriate 16 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSBarbados Goes Global: Introducing the International Securities Market by Marlon YardeThe Barbados AdvantageThe ISM is based in Barbados, a high-calibre jurisdiction with a trusted international financial centre. The island’s strategic focus on servicing legitimate companies of substance is a differentiating feature that lends appreciable credibility to the ISM, particularly in contrast to the modus operandi of some competing jurisdictions. The ISM will further enhance Barbados’ reputation as a quality place to do business.‘Buy-in’ from key stakeholders – at all levels in Barbados – has been paramount. The continued support of the private sector, in concert with that of the Government and the Central Bank of Barbados, has been instrumental to the market’s development and, ultimately, towards its successful integration into Barbados’ international business & financial services (IB&FS) sector. With a growing network of international alliances, the ISM leverages a multi-tiered support framework that bodes well for the market’s enduring success.Market Roles: the ISM EcosystemThe ISM is a completely separate market from the domestic markets of the BSE. The market offers global ‘hard’ currency trading and is wholly exempt from the exchange control regime in Barbados. This exemption, the primary catalyst for the market’s growth and development, is a key component of the ISM’s appeal to market participants. By smartly pairing the operational prowess of the BSE with the talent, credibility and professional expertise of Barbados’ IB&FS sector, the ISM offers a confluence of opportunities in a trusted The island’s strategic focus on servicing legitimate companies of substance is a differentiating feature that lends appreciable credibility to the ISM …The Barbados Stock Exchange (BSE) now offers a new and emerging trading platform to the regional and international business community. Aptly called the International Securities Market (ISM), this platform has expanded the operational footprint of the Exchange and places Barbados firmly within global capital markets. The island’s unique combination of strong international standards, cost-effective pricing and a comprehensive treaty network, position the ISM as the global Exchange of the future in the Western hemisphere.ecosystem of repute. This is a comprehensive value proposition that profoundly exceeds the frameworks on offer in competing jurisdictions.There are three unique roles that facilitate interactions between buyers, sellers and listed companies on the market. ISM Trading Members conduct trades on the board of the market and may execute orders for both individual and institutional investors. Additionally, provided they are so licenced, they may also execute trades for their own account. ISM Clearing Agents provide support to Trading Members by ensuring the timely settlement of trading between counterparties to a transaction. Those based outside Barbados are further tasked with informing the Exchange of all internationally executed trades. Lastly, ISM Listing Sponsors play a more advisory role. Their primary task is to ensure prospective Issuers are made continuously aware of the ISM listing requirements. Their role thereafter includes conducting due diligence on Issuers, managing Exchange communication and filings for Issuers, and providing ongoing support and advice throughout the life of listings. The ISM INTERNATIONAL BUSINESS | 17has identified and approved a small consortium of Barbados’ premiere service providers for this pivotal role – no security can list on the market without the appointment of a Listing Sponsor.The Road Ahead: A Bright FutureThe ISM provides a cost-effective platform, both for international companies and global investors. With the goal of offering dynamic opportunities and tax-efficient trading, the ISM is well positioned to become a leading platform for international corporate structures.The BSE continues to support the continued development of Barbados’ IBFS sector and, with the advent of its newest market, contribute to the national economy as a whole. The ISM marries a value proposition of structure and substance with a strong positive market outlook – certainly valuable prerequisites for attracting an internationally discerning clientele.*18 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSDoyle Offshore Sails Ltd. manufactures sailboat sails and marine-related products for export all over the world. We started in Barbados in 1988 with eight employees and today have a staff of 45. We use the most current technology in our production techniques and have developed an excellent reputation for high quality and long-life products.Barbados was chosen as the best location to start the business because of a few important factors:• The Barbados Investment & Development Corporation (BIDC) supplied the buildings that were necessary for the type of manufacturing we do, at a globally competitive price. The BIDC readily facilitated us in customising the buildings so that we were able to get production up and running quickly• There was already an educated and competent labour force available. This was also key to the timing of our growth• Proximity to the North American and Caribbean markets was ideal, as time zones were very manageable. Our competitors in China, Europe, Indonesia and Sri Lanka do not have this advantage• Export costs are in line with our competitors• Barbados has a very strong infrastructure. The communications network, transportation, services, healthcare, and even lifestyle, are among the best in the Caribbean.Our goal is to continue to grow our market share throughout the world and to grow the company. We hope the Barbados Government continues to work with us as we seek to remain competitive in a very tough global market. Given that support, I believe we will achieve this goal.Manufacturing Sails for the WorldCASE STUDYDOMICILE FOCUS | 19International Business 50 Years Later:Complexity and Class by Sir Trevor Carmichael, Q.C.For over 50 years of Barbados’ political independence, its international business sector has been transforming from an early start of single-focused corporate and trust structures, to one which, today, is part of the multi-layered and complex world of international financial and tax planning. The evolved changes have mirrored the growing development and marketing of the sector by private sector professionals, as well as government representatives. The negotiation of a set of wide-ranging double taxation treaties, combined with a steadily warmed-up international and domestic regulatory ethos, have created an ongoing need for practitioners to continually revise and provide sets of structures which are novel, creative and complex, while still being clear.The sector has been faced, therefore, with the challenging and potentially satisfying task of finding legal structures, to accommodate the new business deals and dealings which are now presented. For example, the question of when time begins to run, for limitation purposes, in cases where a lender, facility agent or security trustee makes a claim under, or in connection with, a syndicated loan, is a matter which is taking on increased prominence. Hence, the local advisor is now required to display knowledge in regard to the operation of limitation periods, under ordinary non-syndicated loan contracts, both secured and non-secured. Such knowledge allows for the kind of defensive advice which facilitates the drafting of a safe agreement.Similarly, debt restructuring transactions have changed significantly over the last 50 years. Capital structures in the early days were simple, operating loosely under corporate principles, requiring banks to remain supportive and be patient in the appointment of receivers; and also requiring them to make decisions in conjunction with all creditors, grounded on reliable information - and furthermore, to work collaboratively in the hope of reaching a collective view. if familiarity is established with non-dilutive convertible bonds - a relatively new structure in the debt capital markets. Essentially, they allow an issuer to capture the pric-ing benefits of equity-linked securi-ties, but without the share dilution which is regularly associated with convertible bonds. Within the struc-ture, convertible bonds are issued but are cash settled on conversion, while the purchase of call options is made by the issuer – they, in turn, hedge the upside exposure under the bonds. This new method differs from the conventional structure, since the bonds and options must closely align to create a hedged structure. The present-day advisor is likely to encounter such a new modality in the now commonplace financing structures associated with international business compa-nies operating in the Barbados environment. The practitioner in Barbados today, therefore, is being called upon to match constantly emerging and merging corporate structures, financial vehicles, lending configu-rations, shareholder arrangements, custody structures and the accom-panying legal documentation. The swaps and derivatives transactions of the end of the last century are now institutionalised within an association with rules and proce-dures, and Barbados has played a key and continuing role.Fifty years of political independence is now easily matched with an international business milieu which remains au courant, knowledgeable and, when required, creative.*Fifty years of political independence is now easily matched with an international business milieu which remains au courant, knowledgeable and, when required, creativeWhile this ethos prevailed merrily and satisfactorily during the era of the last decade of the 20th century, and even as far as the 2008 financial crisis, the climate thereafter has changed in terms of complexity. For today, restructuring transactions often involve publicly traded, high-yield bonds, and the granting of information on the issuer, during such a restructuring negotiation, has become a more detailed matter. The present-day advisor is therefore expected to display greater mastery in the area of confidentiality agreements.As regards bonds, the present-day practitioner is also well served 20 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSStructured Assignments, Inc. (SAI), formerly TFSS International Inc., is an international business company, incorporated in Barbados in 2010 and is currently under the management of Centurion Assurance Services Ltd.SAI is a special purpose company which enters into periodic payment assignment contracts for structured settlements. The tax management programmes developed initially catered solely to contingency fee attorneys. Through research and development, a similar programme has been recently developed and offered to claimants utilising SAI.Whilst there are many independent experts with whom clients may consult, such as certified public accountants, tax attorneys and financial advisors, prior to making financial decisions, the correct choice of jurisdiction for SAI was instrumental in establishing the core foundation of the programmes being offered. Barbados provides the ideal conduit for structured settlement payment deferrals, due to its double taxation agreement with the USA. Conducting business in Barbados also offers greater credibility to our clients, supported by its track record as a well-regulated and transparent jurisdiction with a long history of economic, political and social stability.The reputation and business climate of the island, therefore, were fundamental in making our choice. What is equally, or even more important, is the high level of service provided on a day-to-day basis by local business partners.We anticipate that SAI will continue to experience excellent growth in this business environment, and based on our marketing efforts, SAI has seen increased confidence by our clients. This jurisdiction has obviously benefited us and, we in turn, will be seeking ways in the future to further contribute to the development of Barbados’ international business sector.Growth Potential in the USACASE STUDYDOMICILE FOCUS | 21Barbados Remains the Preferred Conduit for Inward Investment to Cuba by Dustin DelanyThe Donald Trump administration has certainly taken the world by storm on many fronts, including the purported shift on the Obama presidency’s détente with respect to US-Cuba policy. Though an attention-grabbing headline, this directive involves only a partial rollback of the Obama 2014 breakthrough with the former Cold War foe. In fact, President Trump has left in place many of the Obama changes, including the maintaining of diplomatic relations with Cuba and recently resumed US-Cuba commercial flights and cruise ship travel. It also appears there is no intention of disrupting existing business ventures, such as the one struck under the Obama presidency for one of the major US hotel chains to manage an historic Havana hotel, or of reinstating limits on goods purchased in Cuba. In summary, these changes appear to be less sweeping than was feared, following President Trump’s statement on the issue, in the latter stages of the 2016 US presidential election.Cuba continues to celebrate CARICOM-Cuba Day annually, which marks the 1972 establishment of diplomatic relations with a number of CARICOM jurisdictions, including that of Barbados with Cuba. Since this landmark, Barbados-Cuba relations have flourished, with the establishment of diplomatic missions in each country, giving rise to the:• 1996 Barbados-Cuba DTA• 1999 Barbados-Cuba bilateral investment treaty (BIT).Many other agreements have been put in place between these Caribbean counterparts in the areas of sports, culture, education, health and other economic areas that are mutually beneficial. The Barbados-Cuba DTA includes both personal income tax and tax on profits in Cuba, whereas most of the other Cuba DTAs are limited to tax on personal income only. The Barbados-Cuba DTA affords the opportunity to minimise taxes in Cuba, in relation to certain returns on investment. Barbados and Venezuela are the only Cuba tax treaty partners in the hemisphere, with Cuba having a total of 10 DTAs in place. Barbados offers a wide array of investment vehicles appropriate for inward Cuban investment, including the regular business company, international business company, international society with restricted liability, exempt insurance company, qualified insurance company and international banks.Correspondingly, the Barbados-Cuba BIT also recognises the complete range of these investment vehicles provided under Barbados law and caters to an expansive scope of investments. This BIT contains a provision for ‘most favoured nation’ treatment and standard dispute resolution clauses involving the referral of disputes to international arbitration, including the International Court of Arbitration, a division of the International Chamber of Commerce. This is above and beyond the 2014 investment protection framework in Cuba, Ley No. 118 de Inversion Extranjera, which, upon government approval, authorises investment in many sectors. This new framework has alleviated many concerns for Meanwhile, aside from a 2017 hurricane season, which left a few of Barbados’ fellow Caribbean islands devastated, and the relief efforts of both Barbados and Cuba, it has been business as usual for Barbados-Cuba relations, as these nations celebrated their 45th anniversary of diplomatic ties. The year 2017 saw a strengthening of diplomatic relations, including an update to the CARICOM-Cuba Trade and Economic Co-operation Agreement, which expanded the level of preferential access to each other’s markets and contemplates expansion towards a full trade agreement, a CARICOM-Cuba double taxation agreement (DTA) and the adoption of an agreement on intellectual property rights. The year also saw arrangements in place for the export of approximately one million cases of Barbadian beer to Cuba.Barbados offers a wide array of investment vehicles appropriate for inward Cuban investment …22 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSinvestors in Cuba, giving continuity with international law in its “full protection and security” provision, which precludes expropriation, except if in the interest of the public, although compensation is still mandated. Another user-friendly component of Ley No. 118 de Inversion Extranjera is the comprehensive portfolio of investment opportunities.Although the Trump administration has cast a cloud of doubt over the immediate future of US-Cuba relations, diplomatic relations between the countries remain open and there is no doubt that Barbados-Cuba relations are stronger than ever. Barbados, like most of the rest of the world, remains steadfast in its support for the elimination of the US embargo on Cuba. Not all is lost in this regard, as President Trump has explained that the maintaining of diplomatic relations is “in the hope that our countries can forge a much stronger and better path”. In the meantime, Barbados remains the preferred conduit for inward Cuban investment for US and other investors alike.*… there is no doubt that Barbados-Cuba relations are stronger than everDOMICILE FOCUS | 23Automatic Information Exchange by Maria RobinsonIndividuals and entities holding bank and investment accounts in Barbados will find their financial and business affairs subject to a degree of scrutiny they haven’t experienced before. This is because Barbados, along with several other countries, has signed the Multilateral Competent Authority Agreement (CAA) on Automatic Exchange of Financial Account Information. Barbados signed the CAA on October 29, 2015, and then, in May 2017, passed the necessary regulations to the Barbados Income Tax Act.The CAA is a part of the Common Reporting Standard (CRS), which is an information exchange standard that requires countries to collect information from financial institutions and automatically exchange this information with other countries annually. The CAA is an initiative of the Organisation for Economic Co-operation and Development (OECD) and the G20 countries. Its aim is to achieve total transparency regarding funds held in bank and investment accounts overseas, particularly those located in so-called “offshore” jurisdictions, like Barbados.The OECD wants to ensure that taxpayers, regardless of where they live and work, pay the right amount of tax to the right jurisdiction. Moreover, it wants to deter individuals from using accounts and shell companies to hide assets and income.The CAA, together with the current anti-money laundering requirements in Barbados, ensures that the ultimate beneficial owner - the person sitting at the very top - will no longer be able to remain anonymous.The automatic information exchange process begins with banks and other financial institutions collecting information from the taxpayer and reviewing deposit and investment accounts. (Such institutions in Barbados should already have a base of experience to build on, having had to comply with the Foreign Account Tax Compliance Act of 2010. This US federal law requires all foreign financial institutions to report on financial accounts held by US taxpayers.)But in the long run, the investment in compliance will be worth it for Barbados. A further commitment to transparency can only enhance the country’s longstanding reputation as a compliant jurisdictionIn essence, secrecy is out. Signatories to the CAA are obliged to help keep it that way by collecting and sharing significantly more financial data between tax authorities, including income and account balances.What will all this mean for individuals and entities in Barbados? For a start, it means full disclosure of all sources of income and remittances. Tax authorities are required to collect, analyse and share information on how much you earn and from what sources.Where the account is deemed to be reportable under the CAA, the institution then reports the information to the local tax authority, the Barbados Revenue Authority (BRA). The BRA consolidates this information by country of residence, encrypts it and transmits it in bundles to the tax authority of the relevant country of residence. The initial deadline for the BRA to report the required information is September 2018.On receipt of the information, the tax authority in the country of residence analyses and compares it with domestic records. If there is a mismatch, the authority can take appropriate compliance action against the taxpayer.To fulfil its responsibilities under the CAA, the BRA will no doubt need additional resources in the form of people and information technology. Investment in data encryption software to ensure confidentiality of the information being transmitted is paramount. The multilateral agreement also means the island’s tax treaties might need to be updated, because until now this type of information has been exchanged among treaty partners on request.But in the long run, the investment in compliance will be worth it for Barbados. A further commitment to transparency can only enhance the country’s long-standing reputation as a compliant jurisdiction.*In essence, secrecy is out24 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSThe Financial Services Commission: Regulator of Barbados’ Insurance Industry by Kester GuyOver time, varying financial crises have occurred around the world, primarily driven by instability in one of the financial sub-sectors. Such occurrences have always brought a regulatory response, based on an understanding of the issues and adoption of appropriate measures aimed at mitigating the probability of recurrence. Two instances where such developments held true were the Wall Street crash of the 1920s and the recent global economic crisis, fuelled by the spread of harmful business practices.The Barbados Financial Services Commission (FSC) was established in recognition of the need for an integrated approach to the supervision and regulation of non-bank financial institutions. As an expanding financial centre, it became necessary to ensure that a robust regulator for the non-bank financial sector was in place. Consequently, in 2011, the regulatory functions of three bodies were combined, with one of the main objectives being to maintain stability in Barbados’ financial services sector, while strengthening the business environment to ensure continued growth. From a regulatory perspective, the FSC Act, 2010-21 was proclaimed and this Act now governs the insurance industry. Additionally, the Insurance Act, Cap. 310 and the Exempt Insurance Act, Cap. 308A, remain in use as a guide, with all legislation contained therein enforceable by the FSC for domestic insurance companies and companies registered with exempt status, respectively. The FSC has built a risk-based regulatory system utilising its resources in the most efficient manner, to manage and mitigate excessive risk taking. Integrated into its operations are the recommended practices of the Organisation for Economic Co-operation and Development on Exchange of Information, and the Financial Action Task Force’s recommendations on Anti-Money Laundering practices. The FSC framework, while Interactive Mobile Solutions (IMS) operates from the English-speaking island of Barbados, providing business-to-business and business-to-consumer call centre services to small and medium sized businesses in Canada, the Caribbean and the USA. Barbados is the ideal location for our business due to its close proximity to Canada and the USA. In addition, Barbados possesses a skilled labour force. As part of the Caribbean market, we pride ourselves on being a cost-effective solution, with proven flexibility across multiple time zones. Our services include inbound call centre and customer care, as well as order taking. Other services provided are outbound surveys and data entry. Our clients typically reap the following benefits:• Savings in operational cost• Immediate customer support• Reduced employee stress, allowing their staff to focus on the day-to-day operations• Specialised after-sales service.IMS has been in existence for over 10 years, originally offering outsourced marketing consultancy services to Barbados and the region. Within the last seven years, our services have diversified to include digital marketing and, more recently, our focus has been on the provision of outsourced call centre services and data entry. The management team and staff are predominantly Barbadian. Our senior management team has over 25 years’ experience, specialising in marketing, sales and customer service, while our leadership team has more than 35 years’ experience within the pharmaceutical industry.Providers of Cost-Effective Call Centre ServicesCASE STUDYINTERNATIONAL INSURANCE | 25extremely sound, is not onerous and considers the international core principles for insurance regulation. All regulation is actively reviewed on a periodic basis, to ensure that the framework being used is in line with global best practices for the insurance industry. As regulator, the FSC also sees its role as providing protection to consumers of financial products in the market. In addition, the FSC plays a critical role in business facilitation, by creating an environment where best practices are the norm for insurance company operations. The intent of the FSC is to create confidence in the industry, for both the consumer and the companies operating in the market, with the hope that such confidence translates into efficiency and growth.The specific role of the FSC in the insurance industry in Barbados is to:• Be the supervisory and regulatory authority for the industry• Ensure the protection of policyholders’ interests• Ensure the solvency of insurers licenced under the relevant legislation as a going concern • Facilitate the orderly functioning of insurers and intermediaries.Good regulation is grounded in the protection of policyholders’ interests, supervision of market players, and insistence on compliance with the requirements. The FSC is cognisant of the need to be facilitative and to ensure that the marketplace is one where there is orderly functioning of insurers and intermediaries. Operating in line with these best practices will aid in creating trust in the insurance industry for both buyers and sellers of insurance. Good regulation does not deter innovation, but ensures that it is managed for the benefit of the customer in such a manner that is not detrimental to the industry. As such, the FSC is committed to regulating the insurance sector in line with international best practices which suit the Barbados environment and will hold steadfast in this approach - trusting that, in so doing, the insurance market will continue to operate in an efficient manner for the benefit of all.The FSC’s goal is not to be adversarial, rather, we have embraced transparency, dialogue with industry stakeholders, collaboration with other regulators and the improvement of processes - all aimed at creating an environment conducive to well-managed growth. The primary objectives are to improve the robustness of regulation in the financial services sector, instill confidence, enhance regulatory oversight and promote financial stability, thus ensuring a sustainable financial services industry that is more resistant to economic shock, with the capacity to smoothly fulfill its basic functions, even when unexpected shocks occur.*Security and Trust you can depend on DISCRETIONdgmfinancialgroup.comWayne Fields, President DGM Financial GroupTel: 1 (246) 434 4850TRUST TRANSPARENCYINTEGRITY• Trust and Corporate Services• Management services for Captive Insurance, Exempt Insurance and International Business companies• Family Oce Management• License applications for International Banks and Insurance Companies• Immigration ApplicationsThe Central Bank of Barbados26 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSThe Segregated Cell Company – Rewards and Rating by Kyle RudderA legislative model has been developed in keeping with the well-established principles of Barbados corporate law, combined with insurance sector specific safeguards, in accordance with prescribed and accepted international prudential standards of regulation. Hence, there are regulations for the protection of investors, the protection of policyholders, protection for persons to whom a fiduciary duty is owed by the insurance supplier, as well as assurances in relation to the integrity and stability of the insurance system. One specific purpose and intention, in respect of the development of SCCs, was the “rent-a-captive”. Barbados legislative amendments were intended, therefore, to allow and encourage the establishment of offshore “rent-a-captive” insurance vehicles, without the need for the creation of detailed creditor/insulated series shares.Another positive development in relation to the introduction of measures to protect investors and policyholders, is the ability to obtain a rating for a newly established insurance entity. In this regard, today’s Barbados-based insurance manager may also be uniquely placed to interface with ratings agencies, in respect of the application made by one of its newly managed entities. Generally, the manager will be required to obtain certain basic information before the relevant ratings agency is able to proceed with an initial rating assignment. Such information will often include a five-year business plan with which all parties agree, and which includes, but may not be limited to the following: • Policy statements on underwriting criteria, investment guidelines and risk management• A description of the products offered, pricing standards and the company’s distribution and market strategy• Financial projections, along with the underlying quantitative and qualitative assumptions and the anticipated utilisation of capital• Stress-tested capitalisation which conservatively supports the assigned rating throughout the business plan• Demonstration of a successful track record of operating performance relevant to the new venture’s core business. Experience with organising new insurance ventures may also be factored into the process• Experienced management and the appropriate staff and operational infrastructure to support initial activities and meet regulatory and ratings agency scrutiny• Management, board members, strategic investors, investment bankers, actuaries and other advisers available for discussions with the ratings agency, to provide comprehensive disclosure of requested information• An established follow-up process to measure the effectiveness of the initial business plan and to monitor the company’s strategic and financial development. The rating process for insurance entities generally involves many quantitative and qualitative factors, which are placed into essentially three categories: balance sheet strength, operating performance and business profile. The methodology for rating new company formations will often use the same assessment of balance, strength and business profile, as is the case with established companies, which receive the usual rating assignments. In the case of start-up ventures, there is, however, a natural lack of certainty and an established track record. Hence, in assessing the long-term sustainability of earnings and cash flow, greater rigour in the rating process is required. The Barbados insurance environment benefits significantly from local entities which are internationally rated, for the rating adds value and credibility both to the entity and the jurisdiction.*Through the introduction of the Segregated Cell Company (SCC), Barbados enhanced its legislative framework, in respect of insurance services, to provide a corporate body with the ability to both establish and maintain separate accounts, as well as to establish protected cells.INTERNATIONAL INSURANCE | 27Segregated Cells and Incorporated Cells: A Barbados Perspective by Liza Harridyal-SodhaBarbados amended its Companies Act to introduce Segregated Cell (SC) legislation in 2001 and, more recently, Incorporated Cell (IC) legislation in 2016. Interestingly, both SC and IC legislation were enacted in response to the demands of our thriving insurance industry. However, SC and IC structures can also be used for companies carrying on financial services activities, including banking and mutual funds activity. A Segregated Cell Company (SCC) is a single legal entity, which is owned or ‘sponsored’ by a person or other legal entity. The SCC is comprised of a general, or core, business, which is owned by the sponsor, and a specified number of cells. The purpose of a SCC is to allow individuals or entities (participants), not necessarily related or affiliated, to conduct certain defined business activities using a cell. Each SC must have its own distinct designation, and there is no limitation on the number of participants in a single cell. The rights and obligations of a participant in a SCC are similar to those of a shareholder in any other Barbados company. Each cell can issue shares, declare dividends, redeem or reduce its capital, or wind-up its affairs. The cellular and the non-cellular assets of the SCC must be kept separate. The records, income, expenses, assets and liabilities attributable to each cell are accounted for separately by the SCC in respect of each cell. The most appealing feature of the SCC is that liability is attached to the cellular assets attributable to a particular cell. However, where the cellular assets are insufficient to satisfy a claim, the claimant may have recourse to the non-cellular assets of the SCC. The claimant does not have recourse to the assets of the other cells, and therefore, each cell is protected from the others, so that only the core cell capital is at risk. The main advantages of a SCC are that it provides:• A more efficient and flexible method of managing risk and diverse business interests• Protection from creditors• Cost effectiveness. Since the SCC is a single legal entity, the administrative costs incurred would be for one company (although a statutory audit may be required for each cell)• The sponsor can share in the profits of the SCC (based on the terms of a participation agreement)• The ability for participants to share in various cells without having control over the core business of the SCC.Despite the numerous advantages, there could be concerns relating to the SCC being treated as a single legal entity; the exposure of the core cell to liability; its inability to transact business with another cell, and the fact that central control lies only within the core cell. In recent times, those who may not be able to utilise a SCC can now explore the establishment of an Incorporated Cell Company (ICC).The structural framework of an ICC is the same as a SCC, in that there is a single core together with any number of cells. The critical distinction is that each IC, unlike a SC, is a separate legal person, with all the legal attributes of a company incorporated under the laws of Barbados. Each IC bears its own risk and no other IC is liable. An ICC has the benefit of affording a stronger corporate protection for each IC - taxation, governance and regulatory matters are more clearly defined, there is no limitation regarding the ICs’ ability to contract with one another, and each IC can have its own Board of Directors and Officers. However, since each IC is treated as a separate company, administrative costs are notably higher than for a SCC. However, SC and IC structures can also be used for companies carrying on financial services activities, including banking and mutual funds activity.Both SCC and ICC structures have their specific uses and it should not be intimated that an ICC replaces a SCC. Indeed, a vast number of SCCs have operated very successfully in Barbados for over 15 years. However, in considering the aforementioned factors and, when comparing the familiarity of the corporate form of the ICC with the less known SCC form, all indications lead to an exponential future use of the ICC in Barbados.*28 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSThe Continuing Evolution of Captive Insurance by Ricardo Knight & Kirk CyrusThe total number of captives worldwide was 6,618 at December 31, 2016, of which 3,192 (48%) are registered in the United States, 2,417 (37%) in Bermuda and the Caribbean, 841 (13%) in Europe and 148 (2%) in Asia Pacific, according to the May 2017 edition of ‘Captive Review’ magazine in their annual publication on domiciles and captive statistics.A captive, like every insurer, benefits from diversification of its portfolio, but operates more efficiently than the insurance market for primary risk layers. These are the low severity, medium-to-high frequency losses, with typical savings as much as 25%, depending on the type of risk. It is now commonplace for captives to participate in varied global programmes and lines, including property, damage and non-damage business interruption; recall, products and general liability; environmental impairment; marine cargo and inland transit; automobile and personal damage; trade credit; and employee benefits - including life, disability and medical.intellectual property (IP) and reputational loss/damage arising from IP or sensitive data, than notification based coverage. A captive can facilitate a tailored design of risk transfer coverage for a company, which can then be formalised through a policy form and placed in a captive to develop loss experience, so as to support a commercial underwriter’s participation in the coverage in future years. Brand Damage and ReputationResponsibility for protection of brand reputation rests with the corporate board, including mitigation through insurance. The role of insurance in the process will depend on how management views reputational risk. The task is designing a programme that closely fits the identified risks, but it may be possible to transfer separate aspects of the risk across different insurance products - including cyber, property damage, business interruption, errors and omissions, etc. The key to development in this area is the extent to which this risk is integrated into existing risk management arrangements or business lines.Captive DomicileThe recommendation from the industry will always be to establish the captive in an international financial centre (IFC), such as Barbados, that allows maximum flexibility for business development, while minimising ongoing costs.In recent years, there has been consideration of US “onshore” domiciles and those in the EU such as Ireland, Luxembourg and Malta. Outside of the USA, captive growth has been evidenced in Bermuda and the Caribbean, while business activity in Guernsey for non-EU domiciles has continued at a steady pace. The main advantage of EU jurisdictions has been the ability to directly underwrite risk into other EU/EEA member countries.Other factors to be considered when choosing a domicile, using Barbados as an example, include:• International Accreditation – Renowned as one of the premier holiday destinations in the Caribbean, Barbados is recognised by the United Nations as one of the top developing nations in the world, with a reputation for its integrity as an IFC.Emerging RisksCyber Whilst cyber coverage is growing in complexity and capacity, most companies’ principal needs for cyber coverage are more likely to be based upon loss of INTERNATIONAL INSURANCE | 29• Longevity and Track Record – The domicile has its genesis since 1983 with 266 captives on record (at December 2017), and a stated objective of providing a high quality and right-sized jurisdiction through its extensive treaty network. This comprises 39 double taxation agreements (10 with CARICOM) and nine bilateral investment treaties in force, as well as, five tax information exchange agreements.• Flexibility of Insurance Regulation – In Barbados, direct writing is allowed when a group may want to use a captive to incubate emerging or difficult-to-insure risks. This may not be the case with every domicile - in Luxembourg, for example, requests to form direct captive insurance companies without a reinsurance affiliate are typically declined by the authorities.• Solvency II – Though Barbados is not presently seeking Solvency II equivalency, other domiciles are. Captive owners need to understand that Solvency II equivalent domiciles bring with them more stringent capital, governance and regulatory reporting requirements. • Base Erosion and Profit Shifting (BEPS) – Barbados has officially joined the “Inclusive Framework on BEPS”, pledging to implement measures aimed at preventing tax avoidance by multinationals and improving tax dispute resolution. The likelihood exists that captives which are regulated under a Solvency II regime could have an advantage in tackling the action items set out by the OECD/G20 BEPS Project.SummaryBarbados remains one of the largest global captive insurance domiciles, with a well-regulated business environment, excellent infrastructure, modern legislation and an expanding treaty network. As the captive insurance industry continues to expand, it is anticipated that IFCs such as Barbados must develop a niche strategy within the limitations of a new world order requiring more onerous governance and regulation. Barbados, as always, remains open for business, recognising its commitment as a world class domicile for the niche captive insurance market.*Not sure which way to go with captives? Follow us. We’ve been guiding the way since 1981. CAPTIVE IntegrityIndependenceInnovation Barbados Office 6th Floor CGI Tower, Warrens, St. Michael, Barbados BB22026Contact Jeanne Crawford at 246.432.6467 orJCrawford@USARISK.bbUSARISK.COMMANAGEMENT 30 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSBEPS and Barbados Captives by Chris EvansThe former Prime Minister of Barbados, Mr. Owen Arthur, led the defence on behalf of the targeted jurisdictions and was successful, primarily on the grounds of the considerable hypocrisy and double standards inherent in the composition of the blacklist – i.e., many of the leading OECD countries were ‘tax havens’ by their own definition.At the time, it was correctly anticipated that similar exercises would be undertaken … enter the Base Erosion and Profit Shifting (BEPS) initiative, in which certain OECD members expressed concern over the tax practices of some jurisdictions considered to be unfairly harmful to the tax bases of the same member countries, e.g., allegedly inappropriate transfer pricing tax practices under which, say, artificial transactions create tax deductions in a member country and simultaneously constitute low or zero-tax income in the receiving jurisdiction. Add to this the concern of real or perceived absence of transparency in some jurisdictions. Thus, the BEPS initiative appears to be focused on the aspect of harmful effects on EU countries.A number of international financial centres (IFCs) were selected for scrutiny, with an apparent focus on the smaller ones, including Barbados. As with previous initiatives, it is interesting that significantly larger IFCs are not subject to the same scrutiny.Consider the captive insurance industry. Insurance premiums paid by an insured in an EU country to a Barbados captive insurer or reinsurer, are presumably a tax-deductible expense in the paying country. The premium income to the Barbados captive generates, essentially, tax-free profits in Barbados. Following the “harmful effects” argument, might this transaction be considered artificial, lacking substance, and therefore harmful? Is the Barbados captive sector under threat from BEPS?• Note that “captive” covers the true, self-insurance (pure captives) entities, as well as international reinsurers assuming third-party risks. In Barbados, the vast majority of pure captives are owned by Americans or Canadians. The US taxes its citizens on worldwide income, meaning that the profits of US-owned Barbadian captives are subject to full US tax, even if zero taxed in Barbados • The assumption of Canadian risk for Canadian-owned captives incurs a similar Canadian cost• The EU isn’t a market for Barbadian pure captives, one reason being that it is well served by jurisdictions such as Ireland, Isle of Man, Jersey and Luxembourg, to name but a few, which have been established for decades.Generally, the pure captive concept is extremely well understood by tax authorities and is almost always focused on risk management issues, not tax advantages.Of course there are the international reinsurers who access the EU on the more efficient business-to-business basis provided by the captive structure. These may, or may not, have tax efficiencies, but at a minimum cannot be described as artificial or without substance. Several have their own staff, leased office, etc. A few outsource their work to Barbadian management companies, who undertake their clients’ substantive reinsurance activities in the same manner as if they were client staff.Barbados’ approach as an IFC has always been to attract business of substance in a transparent manner through the use of tax treaties. The well-regulated captive insurance business is a natural fit and directly employs around 300 persons, added to which are the considerable investment management, banking, audit, lease and other support services provided in Barbados.One conclusion of the 2001 initiative was that Barbados was the only jurisdiction taken off the blacklist without having to do anything. The captive insurance sector in Barbados is well positioned to pass the very significant BEPS substance and transparency tests, with possibly only changes required to remove the ring-fencing position in the legislation.*In 2001, the Organisation for Economic Co-operation and Development (OECD) launched an offensive against ‘tax havens’ with the publication of a “blacklist” of jurisdictions. INTERNATIONAL INSURANCE | 31Investment Strategies for Captives by Gordon Anderson & Ryle WeekesWhen managing investments for captives, there are a number of critical decisions to consider:• What is the most appropriate asset mix?• Do we employ passive or active asset management?• How do we select an appropriate benchmark?This article attempts to provide some insight into each of these key concerns.Captives, by their very nature, are conservative. As a result, downside protection tends to be much more important than the next hot sector or stock. Safety and liquidity, especially early in their lifecycle, are paramount. Just as important, however, is the need to understand your client and their appetite for risk, as this will be integral in defining lower and upper limits of asset allocation ranges. A vital part of the role the investment manager will play is to determine, in consultation with the client, that delicate balance between risk and return.Historically, fixed income instruments have been the most favoured asset class for captives. This has largely been as a result of the more predictable income stream and relative safety they provide, with the smaller equity allocation enhancing returns. Determining the most appropriate asset mix between cash, fixed income and equities is, arguably, one of the most important investment decisions for the captive. The investment manager has significant flexibility to tactically shift between equity and fixed income, based on the market outlook.In considering the selection of fixed income instruments, credit quality, geographic location, interest rate and maturity have been the key points to consider. If there is some predictability in the timing of potential future claims, matching the timing of liquidity events could “immunise” the portfolio against negative movements in interest rates. For example, for longer tail risks, the captive can undertake a longer maturity fixed income portfolio. In the case of shorter potential claims, it would make sense to have shorter maturity bonds.The decision to employ “active” or “passive” funds is also a key consideration in portfolio construction. Exchange Traded Funds (ETFs), as a passive solution, are increasingly utilised as a vehicle for engaging top investment managers at a very low cost. Another very powerful advantage is the ability to select whatever market cap or geographical location, sector or sub-sector you wish. The ETF spectrum is, increasingly, so esoteric and diverse, that finding a fund investing only in beef and pork, for example, is no longer unusual. The decision to employ active managers tends to centre on whether their performance justifies the high fees, the failure of which can result in underperformance relative to the benchmark. A number of “smart” beta index strategies have also emerged. These attempt to outperform benchmarks, over the medium and long term, by using fundamentals such as dividend yield or quality, rather than market cap or asset price weighting to select constituents. Benchmarks are useful, primarily, as a gauge for comparing portfolio returns. The goal of most portfolios is to outperform the benchmark after fees. As a result, it is important to select the most appropriate benchmarks, considering criteria such as investment “styles”, value vs. growth or market capitalisation, while criteria such as maturity or credit quality are more specific to fixed income. Fixed income benchmarks weighted by company, or even countries, paradoxically, are skewed towards weaker companies and/or countries, as they have more debt outstanding.Given the myriad of variables and strategies which need to be established, monitored and dynamically adjusted to effectively manage the investment portfolios, it is important that service providers maintain strong relationships with their captive clients, to fully understand their needs and deliver the most appropriate solutions.*The goal of most portfolios is to outperform the benchmark after fees32 | 2018 BARBADOS INTERNATIONAL FINANCE & BUSINESSGOLFINGNATURALWONDERSCULTURAL SHOWCASESNATURETRAILSPOLOCHATTEL HOUSESFRIENDLY PEOPLE... and so much moreINTERNATIONAL INSURANCE | 33
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