Uncertainty over the future of a double taxation treaty between the United States and Barbados is troubling the island's growing offshore insurance business.
Insurers on the island say there has been a slowdown in inquiries from prospective companies in the United States, a reduction in new registrations and disquiet among existing companies.This follows a move by U.S. legislators to remove tax exemptions for U.S. companies registered in Barbados in a new treaty when the current pact expires at the end of this year.
The government of the English-speaking eastern Caribbean Island of 250,000 people will begin negotiating the new pact with the United States later this month.
Barbados hosts about 150 offshore insurance companies established by U.S. firms. The island earns about $15 million per year from the sector, Erskine Sandiford, the prime minister, said recently.
The earnings are made up of professional and government fees, salaries, communications costs and office expenses.
The current treaty allows U.S. firms to establish captive insurance companies in Barbados and avoid paying federal taxes on premiums.
The tax exemption was subject to a technical corrections bill passed in the U.S. Congress last year. The bill called for the tax exemption to be withdrawn when the current treaty expires. Several congressmen described the exemptions as a "loophole."
John Perham, president of the Barbados Exempt Insurance Management Association, said recently that he doubted the new treaty will contain the incentives for the U.S. companies.
He has suggested that the Barbados government attempts to have written into the new treaty tax exemptions for companies that have been already established.
Other spokesmen for the island's offshore insurance sector say their operations are also threatened by suggestions that meetings of boards and shareholders of the companies should be held in Barbados.
They say this "inconvenience" would further reduce the appeal of the island as a location for offshore insurance companies.
Mr. Sandiford described the move by U.S. legislators as an "assault" on the treaty.
"We recognize . . . the need to reduce the U.S. fiscal deficit," the prime minister said recently. "But little did we realize that we in little Barbados would be the first to be asked to shoulder the burden of reducing the fiscal deficit of the United States.
"We intend to challenge this action. We find this kind of behavior utterly incomprehensible. It injures the interest of U.S. citizens, both corporate and personal, who must face higher insurance costs, and it attacks the very foundations of trust and good faith on which negotiations between nations and allies must take place."
Discussions between the two countries on the new treaty are scheduled to begin in Washington on April 24.
"The Barbados government would like to either re-establish what was in the treaty before or obtain additional benefits in lieu of the United States' unilateral breach of the tax treaty," said a representative of the government.
"We negotiated an agreement. Then people in the private and public sector spent considerable resources to develop the insurance sector. Then almost right away the United States acted to
ify what they had built up."
He described the U.S. action as "protectionism" by the Congressmen. Such action was possible "because countries in the Caribbean do not have the muscle and the United States believes it can act unilaterally without paying a price."