There are important tax issues which affect all aspects of foreign investment in Trinidad & Tobago, including the very decision to invest and the choice of structure to pursue the investment. As part of the undertaking to improve the conditions for investment, there have been a series of tax reforms including reductions in the rates of corporation and income tax.
In this Chapter, Angelique Bart, Partner in Hamel-Smith’s Tax Practice Group provide the foreign investor with an overview of the taxes levied in Trinidad & Tobago including deductions, rates and incentives by way of exemptions and allowances. She also describes the reduction or elimination of double taxation by treaty arrangements.
The principal direct taxes levied in Trinidad & Tobago are:
The business levy is payable quarterly at the rate of 0.6% of the gross sales and receipts of the company. Payments of corporation tax are set off against the business levy liability of the company in the following year when returns are filed. The individual taxpayer is entitled to a tax credit against his business levy liability for a year of income of any payment made in respect of his income tax liability for that year up to a maximum of his business levy liability.
No liability arises during the first three (3) years following registration of a business or in respect of gross sales or receipts note exceeding $360,000 in any year of income. The business levy does not apply to companies subject to the Petroleum Taxes Act or companies exempt from corporation tax under any Act.
A tax at the rate of 25% on the profits and short term gains of companies accruing in or derived from Trinidad and Tobago. However, companies engaged in the following activities are charged tax at the rate of 35%.
GREEN FUND LEVY
A tax on the gross sales and receipts of companies and unincorporated associations at the rate of 0.3%. The tax is paid quarterly into a Fund for distribution to organizations and communities for projects which relate to the remediation of reforestation and conservation of the environment. The tax is not a deductible claim by the payer.
A tax levied on individuals at two (2) rates based on income by persons earning:
A tax on chargeable income of individuals accruing in Trinidad & Tobago, at a flat rate of 25%.
PETROLEUM PROFITS TAX
A tax at the rate of 50% on the profits earned by businesses in the course of petroleum operations falling under the Petroleum Taxes Act.
REFINERY THROUGHPUT TAX
Paid by refining businesses at the rate of US$0.02 cents and US$0.05 cents for the light and full refining respectively. The tax is deductible in computing petroleum profits tax.
SUPPLEMENT PETROLEUM TAX
A tax levied on the gross income of companies liable to petroleum profits tax at specified rates when the price of oil exceeds US$13.00 and US$10.00 per barrel for marine and land. The tax is based on the weighted average annual crude oil price.
A tax at the rate of 5% on the profits of companies which are subject to the Petroleum Taxes Act.
A tax based on various income payments to non-residents. Rates vary from 15% to 5% and may be reduced further by Double Taxation Treaties.
LAND AND BUILDING TAXES
There was a six-year moratorium(2010-2015) on Land and Building Taxes. The Government, however, intends to enforce collection from January 01, 2016. The tax will be computed as a percentage of the Annual Taxable Value (ATV) of the property (land and buildings).
For commercial properties, the ATV is the expected annual rental value of the property and not the present market capital value of the property. For industrial properties, the ATV is 6% of the installed costs of plant, machinery and associated buildings. For agricultural properties the ATV is 2%open market capital value of the property.
The applicable tax rates for commercial, industrial and agricultural properties are 5%, 6% and 1% of the ATV respectively.
The principal indirect taxes are:
CUSTOMS AND EXCISE DUTIES
A tax at varying rates on imports and manufactured goods.
FINANCIAL SERVICES TAX
A tax at the rate of 15% on financial transactions with banks, etc.
A tax on imports.
MOTOR VEHICLES TAX
A tax at varying rates levied on sale of motor vehicles.
A tax at varying rates on instruments such as deeds of lease, conveyances, mortgages and share transfers.
VALUE ADDED TAX
A tax on imports and on the commercial supply of goods and prescribed services levied at 12.5% of the value of the supply. The VAT registration threshold is TT$500,000.
Under the Corporation Tax Act, corporations or companies include unincorporated associations but not partnerships.
Resident corporations are taxed on their world income. Branches of non-resident corporations are taxed only on branch income. They are, however, allowed deductions for head office expenses incurred in relation to the branch. Branches are subject to withholding taxes on after-tax profits (less investments) whether remitted or not.
Residence is determined by central control and management of the affairs of the company and this is usually, but not necessarily, where the Board of Directors meets. Local subsidiaries of non-resident corporations may, themselves, be non-resident if control and management take place abroad.
All expenses wholly and exclusively incurred in the production of a company’s income are allowed except where specifically disallowed. Major expenses not allowed are domestic and private expenses, capital expenses and certain payments to non-residents unless withholding taxes have been accounted for and paid over to the Board of Inland Revenue.
Interest is treated as a distribution in cases where it is payable in respect of certain securities of a company, for example:
Certain tax treaties (such as the U.S. Double Taxation Treaty) provide for the reversal, in certain circumstances, of the effect of these provisions so as not to treat such payments as dividends. The consequences of interest being treated as a distribution are that:
In computing the tax liability, no deduction is allowed for interest paid unless the recipient is liable to Trinidad & Tobago tax thereon or specifically exempt under the Income Tax Act or some other law.
In the case of management charges paid to a non-resident company or person, the deductible amount is normally restricted to the lower of the amount of those charges or 2% of the paying company’s total outgoings and expenses (excluding the management charges and tax depreciation allowances). The withholding tax due on such management charges must also have been paid to obtain any deduction for tax purposes. Management charges include technical fees, head office charges and shared costs charged by head offices, foreign research and development fees.
When business transactions between a non-resident company and a resident company over which it exercises substantial control have been so arranged that the resident company earns no profit from the transactions concerned, or less than it might normally be expected to earn, the Board of Inland Revenue may regard the profit shifted abroad as taxable income of the non-resident company subject to tax in Trinidad & Tobago. The tax is collected from the resident company as if it were an agent of the non-resident company.
The Board also has a general power to disregard any artificial or fictitious transactions that reduce the amount of tax payable by a person and to assess the parties involved accordingly.
The Government has announced its intention to include a transfer pricing regime based on the principles embodied in the OECD (Organisation for Economic Co-operation and Development) Guidelines.
Incentives take many forms e.g. capital allowances, tax exemptions, or loss reliefs. Under the Income Tax (In Aid of Industry) Act Ch. 84:01 there are capital allowances on industrial buildings and machinery and plant. These take the form of initial allowances on new buildings and structures required for the purposes of the trade of manufacturing or on plant and machinery acquired. The latter is significant and is now 90% of the cost price except for businesses engaged in production of sugar, petroleum or petrochemicals which receive an allowance limited to 20%. The 75% allowance is to be increased to 90% in January 2010. There are special provisions for the petroleum businesses.
Wear and Tear allowances are granted under the Income Tax Act in accordance with the Seventh Schedule. Various classes of assets receive allowances varying from 10% – 40% on the aggregate expenditure representing the written down value of the plant and machinery in a year of income.
Tax exemptions or reductions under the Customs Act relate to customs duties on imports for the manufacturing industry.
Operating losses which cannot be set off against profits from other sources for the same year can be carried forward and set off against what would otherwise have been chargeable profits for the succeeding years. Operating losses from trade or business cannot be set off against losses from profession or vocation, management charges or employment income.
Unrelieved losses of one company may not be transferred to, and carried forward by, another company in the case of a corporate reorganisation. There are rules preventing a company from carrying forward its own losses after ownership of the majority of its shares changes hands, unless the Board of Inland Revenue is satisfied that the change was not for the purpose of avoiding tax.
Subject to several conditions, group relief is available for trading losses suffered by a member of a Group which may be claimed by another member as a set off against its chargeable profits provided that the tax payable shall not exceed 25% of tax if no relief had been granted. The only capital losses relieved are those arising from acquisition and disposal of an asset within 12 months (short-term losses). Such losses can only be set off against future income from a short-term capital gain.
The individual who is resident and domiciled in Trinidad & Tobago is subject to tax on his world-wide income.
In the case of income arising outside of Trinidad & Tobago to persons who are not ordinarily resident or not domiciled in Trinidad & Tobago, tax is payable on the amount received in Trinidad & Tobago; but where the employment or office of such person is exercised in Trinidad & Tobago, gains or profits from such employment are taxed in Trinidad & Tobago whether received in Trinidad & Tobago or not.
Salary and emoluments are subject to a withholding called ‘Pay As You Earn’ (P.A.Y.E.) which is deducted by the employer at time of payment of salary or other emoluments. Salary of non-residents arising here also attracts P.A.Y.E. but may be exempt under restricted provisions in Double Taxation Treaties.
Pension plans, individual retirement plans, savings plans and profit sharing plans which are not approved by the Board of Inland Revenue do not secure tax benefits under the law for the employee.
There is a single tax rate of 25% and a personal allowance of $72,000 for every resident.
VAT is a tax of 12.5% on the value of imports and commercial supplies of goods and specified services. The value of goods imported into Trinidad & Tobago is the total of:
There are special provisions for re-imports.
Output tax is the amount claimed from a person in respect of tax on commercial supplies made to that person in the tax period. A taxable person is entitled to a credit for so much of his input tax as is allowable. This may be said to comprise tax incurred by him in respect of specified supplies and imports.
All businesses earning a gross income of $500,000.00 per annum and over are required to be registered as VAT traders. Registration is with the VAT Office, Board of Inland Revenue.
VAT returns are due at the end of every 2-month period (6 times per annum) and must be submitted within 25 days from the end of the period. The difference between output tax and input tax results in VAT payable or refundable.
Certain services are exempt e.g. medical, dental, bus and taxi services, education as specified in the Act, real estate, brokerage, residential rents, financial services, betting and gambling, postal services. No credit is given for input tax paid in respect of an exempt service provided. The Act provides a formula to apportion input tax in order to determine the portion applicable to exempt services.
Certain items are subject to zero rating – a variety of basic foodstuffs, agricultural imports including fertilizers, herbicides and fungicides. Other examples of zero rated items are: natural gas, crude oil, hotel accommodation, yachting services to non-residents, services supplied for a consideration payable in a currency other than that of Trinidad & Tobago to a person who is neither a resident of Trinidad & Tobago nor within the territory at the time the services were performed.
Stamp Duty is levied on instruments of all types, for example, deeds of conveyance, mortgages, debentures, trusts, leases, insurance policies, annuity policies, agreements, and share transfers. The duty is paid at the Board of Inland Revenue and an embossed or machine stamp is affixed to the instrument. The rates vary from $25.00 on a trust deed to $4.00 per $1,000.00 on mortgages and charges. For rates in respect of Residential and Non-residential Transfers, see the section on Real Estate.
Registration duties upon the incorporation of a company:
These are levied at varying rates on customs entries in respect of imported goods according to their classification in Schedules to the relevant legislation. There are exemptions in relation to specific goods. In all cases the basis is the c.i.f. value of the goods at the time of import.
The rates of Customs Duties (as per Common External Tariff) have been reduced gradually since 1995. Rates vary from 0% to 30% on specified items. Duties on non-competing Capital Goods have been reduced to 2.5%. Import surcharge is imposed on selected items.
The returns are made on specified forms at the port of entry to the Comptroller of Customs and Excise and goods are released after the taxes are assessed and paid.
MOTOR VEHICLES TAX
Import duties on motor vehicles are imposed by reference to engine capacity. The rates vary from 25% to 45%. Public transport and goods vehicles attract a 10% rate of duty. Tractors for use in agriculture, mobile drilling derricks; carriages for the use of disabled persons, electric and hybrid vehicles of a certain engine size; and firefighting vehicles are some of the vehicles exempt from duty. A transfer fee is imposed on transfer of used vehicles based on the age of the vehicle. Foreign assembled used vehicles are required to pay motor vehicle tax at the rate of 75% of the rates specified for new vehicles. Tax is imposed by reference to engine size for all vehicles.
While dividends may only be paid out of profits, there are no special capitalisation requirements before a dividend can be paid. A local resident company which receives dividends from a locally controlled company (inter-company dividends) does not suffer any withholding tax and the dividends are not subject to further corporation tax. A final (definitive) withholding tax is levied on dividends paid to non-residents, whether companies or individuals. Generally the rate for individuals and companies is 10%, but dividends paid to a company owning 50% or more of the voting power of the company paying the dividends are subject to withholding tax at 5%.
Under the 1995 Double Taxation Treaty between countries which are members of the Caribbean Community (Caricom), dividends are taxable only in the country in which they arise. The rate of tax is zero percent (0%).
Interest paid to non-residents not carrying on a trade or business in Trinidad & Tobago is subject to a final withholding tax of 15% whether paid to a company or an individual. Tax treaties may reduce these rates. Interest paid in respect of savings accounts in banks and financial institutions and interest on bonds is exempt where paid to resident individuals.
Several other types of payment to be made to non-residents not carrying on a trade or business in Trinidad & Tobago are subject to a final withholding tax of 15% whether paid to a company or an individual. Tax treaties may reduce or eliminate the tax. These payments include:
No withholding tax is levied on such payments when they are made to residents.
Trinidad & Tobago has concluded double taxation treaties with Canada, France, Denmark, Germany, India, Italy, Norway, Spain, Sweden, Switzerland, Luxembourg, the United Kingdom, Venezuela, the United States and Caricom. The object of the treaties is the elimination of double taxation either by taxing the income only in one country or by providing a tax credit in the country of residence where the income has been taxed at source.
As well as containing provisions to alleviate double taxation, the treaties also provide for the exchange of information (excluding trade secrets) when this is necessary to implement the treaty or prevent fraud.
The following rates of withholding tax apply to non-treaty Countries:
Individuals: 10% on dividends; and 15% on royalties, interest and other payments
Companies: 10% on dividends; 5% to a parent company; and 15% on interest, royalties and other payments
The result is that these rates are, in many cases, lower than the rates provided in the treaty.
Use of double taxation treaties should be considered since these generally override the provisions of the tax legislation. Relief is given by way of tax credits, exemptions or deductions. Some treaties have non-discrimination clauses which have the effect, for example, of precluding assessments of branch profits to withholding taxes. The absence of such a clause, for example, could impact on the business structure, whether to incorporate as a company rather than a branch.
The various incentives to certain sectors e.g. under the Petroleum Profits Tax legislation and the Income Tax (In Aid of Industry) Act provide assistance in tax planning. In addition, under the Tourism Development Act, there is scope for obtaining exemptions from taxation and customs duties for periods up to seven years. To enjoy many of these incentives, the company must be incorporated and resident in Trinidad & Tobago. See the section: Incentives to Invest, for further information. In liquidation, distributions to corporate shareholders in excess of their paid-up share capital are exempt from tax.
Other factors which impact on the business structure are the treatment of interest paid to non-resident parent companies as distributions; lower treaty rates of taxes on interest paid to Banks, local provisions with respect to deductibility of items such as management charges. Management charges are restricted to 2% of outgoings and expenses (excluding depreciation and the management charge) when paid to a non-resident not trading in Trinidad & Tobago. Provisions prevent deductibility of interest paid to recipients who are not chargeable to tax unless they are exempt by a specific law.
Resident individuals receive a personal allowance of $72,000 per year. Contributions to approved pension funds and deferred annuity contributions are limited to $50,000 per year. In addition, there are allowable claims of $25,000 for first time home owners and $60,000 for educational expenses outside of Trinidad and Tobago (excluding Regional Institutions).
All income from employment is taxable whether received in Trinidad and Tobago or not. In the case of a resident who is neither ordinarily resident nor domiciled, other income arising outside of Trinidad and Tobago is taxed only if remitted here within the year of income. Since a person becomes resident after he is present for 185 days in a tax year, tax planning opportunities may arise.