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Reshaping our Future Saint Lucia Budget Memorandum

April 2019

PwC 1

Territory Leader

A message from PwC Barbados’ territory leader

We are pleased to present to you our Budget Memorandum entitled “Reshaping our

Future” in response to the presentation of the 2019/2020 National Budget delivered

by the Honourable Allen Michael Chastanet, Prime Minister and Minister for Finance,

Economic Growth, Job Creation, External Affairs and Public Service, on 15 April

2019.

This commentary is presented against the backdrop of a challenging economic

environment in the Caribbean region, as well as significant tax changes globally and

Saint Lucia’s adoption of certain key international tax standards.

We hope that our analysis and commentary will assist in creating a better

understanding of the potential impact of the proposed measures on investors doing

business both with and within the country, as well as the impact on the citizens of

Saint Lucia. This is especially so in light of a budget that focuses primarily on social

and economic platforms designed to provide opportunities for an enhanced standard

of living for all Saint Lucians.

PwC, which has active tax practices in over 150 countries, has extensive experience

in providing advice within the Caribbean where we seek to promote development

through the provision of assurance, tax and advisory services to businesses and

individuals interested in investing, or maximising their existing investments. We are

proud to offer our Budget Memorandum, which is a collaborative effort of the tax and

advisory teams in Barbados, the East Caribbean and Trinidad and Tobago, and to

garner insights in the Saint Lucian economy.

We invite you to reach out to our professionals across the region and in particular, to

Ms Tonya Graham, Director based in Saint Lucia to discuss solutions and

opportunities to achieve growth in your business.

Best regards

Michael Bynoe

Michael Bynoe

PwC 2

Content

1 Budget overview

Analysis of the fiscal measures

Article: Tourism as a natural resource

Article: Blockchain & tax

Article: Territorial tax system

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4

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18

20

Tax facts / tax computations 23

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6

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Territory Leader

Presented under the Theme “Growth by Empowerment for a Better Future,” the

Honourable Allen Michael Chastanet, Prime Minister and Minister for Finance,

Economic Growth, Job Creation, External Affairs and Public Service, delivered his

address in an environment characterized by improvement of certain key economic

indicators and favorable tourism and agriculture statistics.

In doing so, he sought to paint a balanced picture with Government’s Medium -Term

Plan for the years 2019-2022. In articulating the plan, the Prime Minister alluded to the

recognition of the needs of the citizens and addressing these needs by focusing on a

number of strategic areas including healthcare reform, bridging the education gap,

addressing the rising crime, building on the tourism and agriculture sectors and

infrastructure development.

One of the primary pillars in the Government’s plan is the achievement of universal

healthcare. Achieving Universal Healthcare is a challenge to all countries, rich or poor.

It raises no shortage of concerns related to the determination of:

• the appropriate level of care to ensure financial sustainability;

• selecting a model that mitigates abuse and over consumption; and

• mechanisms to incentivize personal responsibility for health care.

In spite of these challenges, the Prime Minister proposed bold solutions after

consultation with both regional and global health organizations. The implementation of a

Universal Healthcare scheme, the full commissioning of the Owen King EU Hospital,

the St Jude’s Reconstruction Project along with other health care projects seem to be

very ambitious over the Medium-Term Plan, but measured risk can lead to success

even with the boldest of ambitions.

The pace of change required to bridge the education gap is getting faster each day with

the advent of technology and its involvement in the daily lives of all citizens at varying

levels. In light of this one cannot help but ask, are we really preparing our high school

students today for a job that they will face in 5 years? Do we even know what the jobs

of the future are? The Prime Minister praised the Minister of Education for her hard

work and while that is extremely important, we have to think beyond the traditional

classroom. We have to ask, how can we encourage learning about Artificial Intelligence,

Block chain Technologies, Cryptocurrencies, etc.?

OJO labs have now hired and trained numerous Saint Lucians at their Artificial

Intelligence center in Saint Lucia. Technology can support diversity and re-shape the

lives of countries, big or small. Just as Estonia is to Europe, Saint Lucia can be to the

Caribbean. The ingredients are here, (i) an amendment to the IBC Act (Head Quarters

provisions) encourages companies to relocate and invest in Saint Lucia, (ii) no foreign

exchange controls, (iii) a pro-business government, the Citizenship by Investment

Program and (iv) a digital currency initiative by the Eastern Caribbean Central Bank.

Budget overview

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Territory Leader

The SMART Schools project referred to by the Prime Minister is a start towards a digital

literacy curriculum. Building out a technology sandbox to encourage discovery,

experimentation, creation and collaboration can attract more companies like OJO Labs

to Saint Lucia. A lot of islands in the Caribbean are talking and few are making real

strides, Saint Lucia can make a difference.

Crime certainly has a negative impact on economic activity but, beyond business

activity and the impact on tourism, people have a right to feel safe in their homes. While

a reduction of 45% of serious crimes seems highly aspirational, one must understand

that much of the serious crimes are believed to be gang related and many of the

programs being considered by Government are meant to address the gangs directly,

therefore meaningful reduction can be potentially achieved. The Prime Minister

mentioned a number of game changers in reference to the safety of Saint Lucians, but

did not list them all. However, the following could be considered if not already included

in the Citizen Safety Strategy:

• a citizen security program to divert at-risk youth from lives of crime and gangs;

• further modernisation of the police force – building out specialist capabilities,

investing in the right tools and the continued improvement of the police stations;

• increasing investigative and court efficiency;

• improved border security – a complex area where the goal posts are always moving;

and

• improved business involvement to tackle business and community crime.

A 40% increase in tourist arrivals by 2022 is impressive, but the Prime Minister recently

said “We are on a mission to ensure that more Saint Lucians can benefit from our

record-breaking performances in tourism. The year 2019 is focused on revenue

generation within the tourism sector.”

The tourism sector is yielding impressive results (having recorded growth of 10.3% and

4.3% in 2017 and 2018 respectively) and has the potential to provide sustainable long

term economic growth for Saint Lucia.

For the month of March 2019, there was an estimated 145,000 tourist arrivals from

cruises, with twelve cruise ships calling at the island on the first three days of the

month. The Caribbean Tourism Organization is projecting a 6-7% increase in cruise

ship arrivals this year over 2018. The Prime Minister recently travelled to the UK and

Switzerland to hold discussions with Global Ports and MSC Cruises to advance

discussions on expansion and sustainable development of Saint Lucia’s cruise and

cargo ports to accommodate the increased traffic .

It is expected that the tourism sector will continue to experience growth as:

• airlift by British Airways and Virgin Airlines is expected to increase this year by 17%

and 27.9%, respectively over 2018;

Budget overview

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Territory Leader

• the Hewanorra International Airport Redevelopment Project has started and there

are planned upgrades to the Ports for the purpose of accommodating more arrivals;

• construction starts/continues on – Hyatt at Choc Estate, a Marriott Courtyard,

Sandals La Source, the completion of the Sandals Golf Course at Cap Estate; the

Cabot Links property and Golf Course, a 300 room Honeymoon Beach project, Bay

Gardens Residences and a hotel in Choiseul;

• a result of the implementation of the Façade Improvement Program, the launch of

the Village Tourism Program and the “Limitless Saint Lucia” marketing campaign;

and

• revision of the country’s Tourism Strategy Plan and the establishment of the Tourism

Advisory Committee (the initial focus of which will be the generation of revenue from

the tourism sector).

A country with a buoyant tourism sector could only benefit from an equally vibrant

agricultural sector.

The current agriculture strategy focuses primarily on bananas and cocoa, whereas

Saint Lucia has an edge on the provision of higher quality fruit and beans. The

strategies for general food production are being developed, but can lead to viable

business opportunities given that sustainable agriculture is an underlying objective of

many economies.

The infrastructure strategy is focused on supporting the economic activity in tourism,

agriculture, retail, trade and the general well-being of the citizens. The large scale

investments include:

• the Hewanorra International Airport Redevelopment Project funded by a dedicated

component of the airport tax;

• development of cargo and container facilities at Cul-de-Sac and the upgrade of Port

Castries;

• development of Vieux Fort Cruise Port to facilitate Home Porting; and

• rehabilitation of almost 100 kilometers of roads, including the Millennium Highway,

West Coast Road and other secondary roads funded primarily by the gas tax.

Included partially, but not separately identified as specific strategic areas, were the

concepts of “going green,” a focus on climate resilience and using technology to

transform a country. There is no doubt, however, that these areas would be considered

more fully in a wider National Development Plan.

The reality we face in the Caribbean is that mosquito borne diseases and natural

disasters like the 2017 hurricanes can affect our fragile economies adversely. Add to

that equation, the collapse of Venezuela virtually on our doorstep and the battle

between the USA and Russia for influence over the crisis-stricken country, which can

impact our tourism market, especially in the Southern Caribbean.

Budget overview

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Territory Leader

The Prime Minister stated that significant progress was made since Saint Lucia’s

blacklisting in December 2017. Through the dedicated efforts of the Inland Revenue

Department and the Ministry of Finance, Saint Lucia was grey-listed on the basis of

positive steps taken toward compliance with EU standards. It is noteworthy that in spite

of all efforts grappling with the requirements of both the OECD and EU, the tax

collections for this fiscal year, has for the first time crossed the $1b mark. Saint Lucia

has also committed to working collaboratively with other Caribbean countries and the

EU to achieve full compliance status. The foregoing efforts are in concert with Saint

Lucia’s OECD compliance efforts; for example, Saint Lucia has been rated largely

compliant with the Global Forum’s EOIR standard.

The fiscal measures focus primarily on simplifying income tax, discussing the proposed

tourism head tax and the re-introduction of property tax.

On the corporate tax side, once the Government reaches agreement with the EU, one

can expect changes to both the offshore and onshore tax regimes and possibly even

harmonization of both if the Territorial Tax Regime is fully accepted. Like “airport

security,” we are encouraged to comply, so we should look at it as an opportunity for

Saint Lucia to promote economic growth and improve its ability to compete in global

markets.

The overall impact of the Prime Minister’s message was that there is a plan and we can

be optimistic provided that we are all committed to do what it takes to implement it.

These proposals are admirable and the government must demonstrate its capacity and

willingness to execute on the same on a timely basis.

Budget overview

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Territory Leader

Budget overview

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Analysis of fiscal measures

Accommodation Fee

The government announced that it is currently in consultation with the industry

about instituting an accommodation fee to be used for marketing the island.

Commentary

This proposed charge is intended to supplement the 10% Value Added Tax (VAT)

in the tourism sector (the Hotel Tax). While we will have to wait to understand how

exactly this charge will be implemented, the following taxes/charges of a

comparable nature exist in tourist destinations worldwide:

• Room Tax – this tax is generally implemented by charging a tiered or fixed rate

per room per night. Some jurisdictions, such as Barbados, have ranked hotels,

resorts and other tourist accommodation properties into different classes, with

each class having its own fixed rate per room per night.

It is not uncommon to find a room tax being represented as a percentage of the

room/ accommodation rate. This can also be seen in Barbados in the 10%

charge that is levied on shared accommodation such as Airbnb.

• Head Tax – while not as commonplace as the Room Tax, this tax is typically

applied by charging a fixed fee per guest per night of stay. In such a system, it

is also possible to rank the country’s tourist accommodation properties into

different classes and implement a standard rate per class of property.

From a management and oversight point of view, the head tax, especially if

applied in its simplest form, will be easier to implement, calculate, audit and

administer.

The following represents an overview of current charges/taxes incurred by stay -

over tourists in Saint Lucia:

- Hotel Tax – 10%;

- Airport Development Tax – US$35 (EC$70);

- Airport Departure Tax – US$63 (EC$126);

- SLHTA Tourism Enhancement Fund initiative – US$2 (EC$5.40) per room

per night; and

- 10% service charge.

It is essential that, in implementing any additional tourism related tax, the

Government strike a balance that will permit the tourism sector to remain

competitive. Where a head tax approach is desired, the government must be

careful to consider the rate per person, as this could potentially reduce the overall

length of stay of visitors and/or deter families and large groups from visiting the

island.

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Analysis of fiscal measures

Property Tax

The existing Property Tax system

The government has signalled its intention to review the current Property Tax

structure with a view to determining a more equitable and transparent way of

assessing the value of the properties. However, the Minister did not indicate when the

new approach will commence and as such, properties will continue to be assessed in

the manner set out below.

The current system allows for Property Taxes to be levied on all immovable property

situated anywhere in Saint Lucia, whether land or house or both. The only exception

to the charge to tax is in respect of properties that are exempt by law. Currently,

property taxes accounts for one percent (1%) of the total tax revenue so they have the

potential to add significantly to the Government’s coffers.

The tax is assessed annually and there are two applicable rates:

• Commercial property tax – 0.4% of the open market value

Each owner is required to obtain a commercial valuation assessing the open

market value of the property.

• Residential property tax – 0.25% of the open market value

Currently, new residential properties benefit from a three-year exemption from the

tax. However, this exemption will not be available beyond 2019.

Commentary

Forms of property tax, and methods of assessing same, vary across jurisdictions. In

general, property tax is viewed as “a good tax”, as it has an essential role in funding

much needed public services. However, property tax must be administered fairly to

avoid inefficiency and inequity in the distribution of the tax burden.

The government has indicated its willingness to find a more equitable means of

assessing the tax, however, in reviewing the tax structure it is critical to determine:

• the purpose for collecting the tax;

• the tax burden that will be created given the overall tax regime; and

• the social and other effects of modifying the existing tax regime.

In this regard, the basis of assessment for the tax is at the core of any property tax

regime and in our view, any changes to the system should seek to avoid ambiguity on

the basis and method of taxation.

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Analysis of fiscal measures

There is no single magic solution to achieve this goal, but some of the more common

methods include:

1. Capital value – that is the price that the property would sell for in the open market.

This is possibly the most common method used globally and is relatively easy to

understand. The drawback is that the potential value from improvements to

property/development of land is likely to be ignored. Additionally, there is a

challenge where there is a lack of data necessary to determine the true capital

values.

2. Rental value – the price at which the property could be let/rented for from year to

year. This approach works in any circumstance and has many fiscal advantages.

It is probably the easiest option to determine the tax base. However, it is on our

view, one of the most misunderstood. Another downside is that it is not easy to

apply in practice and it does not take into account potential value from

redevelopment in relation to an annual value. The key issue with this methodology

therefore is similar to the capital value approach, which is the lack of common

standards and data that drive the values ascribed.

3. Site value – the value of the land only, the price that the land would sell for without

building and other improvements. This basis of assessment often works well and

can have administrative advantages as it is a relatively cheaper system to run. The

different use of land may be determined by physical planning or zoning. The

downside is that it is not easy to understand the system and as such, this could

affect collections.

Other variants to the three approaches include capital improved value, capital

unimproved value and annual value. Yet, other countries adopt a “flat rate property tax”

which has no relation to the value of the property and is often a system of creating

bands for values to enable local offices/governments to have a reasonable amount to

provide certain public services.

While both methods 1 and 2 above, reflect the income to be derived from a property,

the distribution of that income may not be aligned with the property values. Rental

value reflects the income from a property in its current use. Capital value reflects the

market’s assessment of the income to be derived from a property in the future,

including income generated by more intensive use of the property. Most commentators

seem to favour the capital value approach, since arguably it promotes a more equitable

method of valuation and also encourages land use efficiency.

The selection of an appropriate tax base is a critical policy decision that ideally should

be based on the available property-related data. The approach should be in harmony

with the general philosophy underlying the tax; for example, is it intended as a tax on

ownership of property, as opposed to a tax on occupation of that property?

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Analysis of fiscal measures

This will not only drive the basis, but is fundamental to drafting the appropriate

legislation. Where most properties are rented, a rental basis of valuation would be

more likely the appropriate choice; where more properties are sold based on their

capital value, this may provide a more reasonable and appropriate basis.

The reform of the system should be based on a comprehensive and integrated

vision of the property tax system and this should properly balance the need for

revamping the tax system to improve collections and efficiencies against the

potential impact on the society.

Personal Allowance

Effective 1st January 2020, personal allowance is expected to be adjusted

upwards as follows:

a) From $18,000 to $23,000 for non-pensioners; and

b) From $24,000 to $31,000 for pensioners

Commentary

An increase in basic personal allowance is likely to result in an increase in

disposable income for lower income brackets. However, in light of adjustments

made to the tax brackets and applicable tax rates the benefits of this measure will

be neutral for mid-tier income brackets but high income earners will have an

increased tax bill.

The Prime Minister indicated that pensioners and persons 60 years and over will

enjoy a personal allowance of $31,000. For this group, the measure represents

the second upward adjustment in their personal allowance in two years. For fiscal

2019, personal allowance for pensioners was increased from $18,000 t0 $24,000.

Together with the adjustment for fiscal 2020, pensioners’ personal allowance has

increased by $13,000. A likely driver for these increases is Saint Lucia’s

population demographics. According to the Human Development Indices and

Indicators 2018 Statistical Update, Saint Lucia’s life expectancy is 75.7 years .

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Analysis of fiscal measures

Revised Tax Tiers

The government has proposed adjustments to the tax brackets and income tax

rates that will apply to the 2020 tax year. Three marginal tax rates at 10%, 20%

and 30% will now be applicable. The brackets and the applicable rates are:

The Prime Minister explained that revisions were being implemented because the

tax system was not sufficiently progressive and second, to make tax

computations less complicated.

Commentary

Currently, income is taxed at the following rates:

Taxable Income Tax Rate

$0 – $10,000 10%

$10,001 – $20,000 20%

Over $20,000 30%

Taxable Income Tax Rate

$0 – $10,000 10%

$10,001 – $20,000 15%

$20,001 – $30,000 20%

Over $30,000 30%

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Analysis of fiscal measures

The reduction in tax brackets from four to three, will impact individuals in the higher

income brackets. Individuals with taxable income within the $0 - $10,000 bracket will

not be affected by the revision since the tax rate remains constant. For individuals in

the new tax brackets however, the proposal may cause a neutral tax position for some

but others are likely to experience a 5% and 10% increase on their marginal tax rates.

The below is a comparative illustration.

Taxable

Income

Current

Rate

Tax

Liability

Proposed

Rate

Tax

Liability

Variance

Increase/

(Decrease)

$10,000 15% $1,500 20% $2,000 $500

$20,000 20% $4,000 30% $6,000 $2,000

The increase may alternatively be demonstrated as follows:

Taxable Income Tax on Excess Tax on Income

Over Not over 2019 2020 2019 2020

0 10,000 10% 10% $1,000 $1,000

10,000 20,000 15% 20% $1,500 $2,000

20,000 30,000 20% 30% $2,000 $3,000

TAX LIABILITY $4,500 $6,000

This measure increases the tax burden on some individuals, and consequently

reduces their disposable income. While higher income earners are the intended

target for this measure, the computation above demonstrates that individuals with

incomes over $10,000 will be adversely affected.

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Analysis of fiscal measures

The Prime Minister stated in his speech that the reconfiguration of the tax

brackets would be revenue neutral, with no adverse impact on the government’s

revenue collections from PAYE, which will indeed be the case. The corollary of a

more progressive tax system is that the government will raise more revenue from

taxes.

Deductions to be capped at EC$25,000 per income year

The government has proposed to limit total deductions to $25,000 in any one

income year. Furthermore, the categories of deductions previously available will

be reduced from twenty-eight to the following categories:

• Housing Deductions

• Future & Financial Benefits

• Medical Deductions

• Child and Education Benefits

The rationale for the proposed measure as with the revised tiered tax rate is the

simplification of the tax system. The Prime Minister also indicated that the

reduction in deductions should enhance efficiency and reduce the administrative

burden on the Inland Revenue Department.

Commentary

Currently, the deductions and allowances available to individuals include among

others: spousal allowance; maintenance or alimony; child allowances; deduction

for higher education; allowances for housekeeper and dependent relative and

interest on student loans. While certain deductions are currently capped, the sum

total of the capped deductions far exceed the $25,000 limitation. Overall, the

proposed measure will significantly limit the allowances and deductions available

to individuals to reduce chargeable income.

Consideration should also be given to providing guidelines on the apportionment

of the $25,000, where the capped deductions are not fully utilised. Furthermore,

the increase in personal allowance is unlikely to offset the impact of the new

$25,000 cap on deductions.

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Tourism as a natural resource

Saint Lucia’s tourist arrivals continue to

demonstrate favourable growth with a

record breaking 1.2 million arrivals in

2018. This figure represents a 10.2%

increase over 2017 arrivals, contributing

to growth of the hotel and restaurant

sector by 4.3%. The year 2018 also saw

increases in the UK, USA and

Caribbean markets by 4.9%, 4.1% and

1.6% respectively.

Formula for success

Factors significantly contributing to this

progress include:

• marketing the island in high net

worth areas such as North-Eastern

USA and South East London;

• focusing on the Martinique and

wider Caribbean market, evidenced

by the launch of the ‘Caribcation’

Campaign in mid-2018; and

• an expansion of Berth #1 at Point

Seraphine (allowing Port Castries to

accommodate larger cruise liners).

However, caution must be exercised in

forecasting future growth in line with the

above trends, as competing tourism

destinations which were negatively

affected by adverse weather

circumstances are seeking to regain

their momentum. Therefore, efforts to

entrench continued sustainable growth

must be a matter of priority.

Diversification of tourism product offerings

Whereas one must be cautious of

continuously over-relying on one sector,

or more appropriately one aspect of one

sector, Saint Lucia’s approach appears to

be to diversify within its tourism sector to

create one that is agile, adaptable and

resilient to varying trends. While not

suggesting that Saint Lucia turn a blind

eye to its other sectors, we welcome this

approach.

1. Stakeholder engagement and

community-based tourism strategies

The Village Tourism Programme, an

initiative of the Department of

Tourism, is geared towards creating a

distinctive tourism experience by

highlighting the unique culture,

cuisine, heritage and history of eight

communities. Gros Islet, Anse La

Raye and Soufriere are the first

communities to be targeted.

Diversifying Saint Lucia’s tourism

offerings in this way is a welcome

move to set the country apart.

The Saint Lucia Tourism Authority

(SLTA) will also be launching its

newest marketing campaign “Limitless

Saint Lucia” aimed at promoting the

destination as a true escape via the

utilisation of images and stories

submitted by everyday Saint Lucians

to provide potential visitors with an

intimate look into life on the island.

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Tourism as a natural resource

2. Infrastructure

Against the backdrop of consistent

expenditure by cruise visitors and

the findings of a 2014 survey that

highlighted lower levels of spending

by cruise visitors to Saint Lucia as

compared to other islands,

government has sought to focus on:

a. the rejuvenation of Castries

(Castries City Tourism Project)

to enhance the visitor

experience and thus to

encourage increased tourist

expenditure in the city; and

b. initiatives aimed at increasing

stay over arrivals on the

premise that an increase in stay

over visitors will increase

overall revenue from that

source, even where the spend

per visitor remains flat.

Castries City Tourism Project

Dr. Lorraine Nicholas, Project

Manager of the OECS Regional

Tourism Competitiveness Project

(ORTCP) states that “the City is so

congested” making “navigation

difficult and uncomfortable for

tourists, whether they are walking or

in a taxi”. In addition, “the lack of

signage, and the lack of uniformity

of the buildings (combined with

aged architecture in some cases)

make parts of the city unattractive

and may be partly responsible for

the lack of spending by tourists”.

To address this, the government

has committed to playing a central

role in the rejuvenation of Castries

by funding the re-development of the

Castries Central Market and seeking

to transform the visitor and local

shopping experience in Castries.

Among the first activities to be

implemented under the ORTCP are

the Façade Improvement Grants

Programme (focused on enhancing

sections of the Central Business

District) and the enhancement of the

William Peter Boulevard (into a hot

spot for tourists to ‘chill’ and immerse

in the Saint Lucian way of life). Other

projects, such as the beautification of

King George V Park, are also in the

pipeline.

The government also plans to

upgrade the cruise amenities and

facilities at Port Castries and have

flagged the development of a cruise

port at Vieux Fort in an attempt to

expand and sustainably develop St.

Lucia’s cruise and cargo ports to

accommodate the increased traffic.

Initiatives aimed at increasing stay

over arrivals

The re-development of the Hewanorra

International Airport, at a cost of

US$175 million, is expected to

commence later this year, along with

the construction of several new

resorts. In addition to adding to St.

Lucia’s hotel room count, these

projects will provide much needed

employment opportunities. A

continued focus on increasing stay

over tourists is important, given their

expenditure has increased by 400%

over 2001-2016.

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Tourism as a natural resource

Ensuring continued growth

Saint Lucia’s tourism sector must be viewed as one dependent on a natural resource

and the same level of planning required for growth with regard to any natural resource

must be applied.

In this regard, and in light of the high level of planned activity, it would be incumbent on

the government to develop a clear sustainable medium to long-term development plan

to ensure the smooth delivery of the proposed projects.

Conclusion

These projects, if properly planned and implemented, will also go a long way in:

1. reducing the unemployment rate by the creation of much need long-term job and

business opportunities;

2. providing improved infrastructure to foster overall economic activities; and

3. providing Saint Lucians with a better standard of living, as they too will enjoy the

benefits of projects such as the Façade Improvement project and the Village

Tourism Programme.

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Blockchain and tax

“We must make Saint Lucia an incubator for technology, but we must do it responsibly.”

Honorable Allen Michael Chastanet, Prime Minister and Minister for Finance, Economic

Growth, Job Creation, External Affairs and Public Service.

The Blockchain Revolution

A quiet revolution is taking place in the Caribbean. At the center of this revolution is a

technology that has the potential to help our governments to collect taxes, deliver

benefits to citizens, issue passports and record land registries. This technology, known

as blockchain or Distributed Ledger Technology (DLT), is already at the centre of

emerging use cases that will affect St. Lucia.

The first use case is being led by the Caribbean Examinations Council (CXC) and was

piloted during the May/June 2018 exams.¹ This use case involves the issuing of

electronic credentials in addition to traditional paper-based CXC certificates. The

electronic certificates or ‘blockcerts’ are a highly secure credential wallet that stores,

shares and verifies evidence of candidates’ achievements in the CXC exams. This

move affects approximately 24,000 candidates across the region, including many Saint

Lucians.

The Eastern Caribbean Central Bank (ECCB) which recently announced a bold move

to issue the worlds’ first Central Bank Digital Currency (CBDC) is leading the second

use case. This pilot will involve securely minting and issuing a digital version of the EC

dollar (DXCD). The digital EC dollar will be distributed and used by licensed financial

institutions and non-bank financial institutions within the Eastern Caribbean Currency

Union (ECCU).

¹https://www.cxc.org/cxc-pilots-e-certificates-on-the-bl ockchain/

PwC 19

Blockchain and tax

Broader than these two use cases, blockchain technology can serve as the backbone of

e-government. In his 2018/2019 budget speech, Prime Minister Chastanet noted, “an

agile and responsible public service can make a significant contribution to economic

growth and national development.” Blockchain technology is at the centre of public

sector transformation across the globe and many use cases have developed in areas

which governments in developing countries find particularly challenging, i.e. land

registration and tax collection.

Blockchain has emerged at a time when many in the tax world are thinking about

whether the current tax system – which was designed for the days when physical goods

were traded, bought and sold – is still fit for purpose in the digital era. The application of

blockchain therefore has the potential to move the tax function from retroactive analysis

and historical financial information gathering to a position where transactions,

expenses, assets and liabilities can be recorded in real-time and scrutinised. ²

Blockchain has the potential to assist governments to proactively collect taxes and the

use of smart contracts, address issues with quasi-compliant companies and

uncertainties around corporate tax. The UK government’s Chief Scientific Adviser, in a

recent report, said that a blockchain-based VAT system could: ³

• reduce the administrative burden imposed on companies and other organisations to

collect and pay VAT;

• increase transparency of real-time transactions throughout the economy; and

• enable smart contracts between treasuries and commerce

In addition to corporate taxes and VAT, blockchain has the potential to transform

income tax. One can easily imagine a scenario whereby salary payments are tied to

self-executing smart contracts. Taxes will be automatically extracted upon payment

when due by the smart contract, time stamped and remitted to authorities. While

blockchain is not the cure all for the tax system, it could be applied in a number of areas

to reduce the administrative burden and the cost of collecting taxes, thus helping to

narrow the tax gap.

Although blockchain technology is still relatively new, it holds tremendous promise and

its adoption could help transform the region. It is therefore imperative that we not only

prepare for this revolution but also be at the forefront of it .

²http://www.internationaltaxreview.com/Article/3721378/The-future-of-tax-technology-is-now.html

³http://www.internationaltaxreview.com/Article/3573467/Blockchain-and-tax-What-businesses-need-to-

know .html

PwC 20

Territorial tax system

Introduction and context

The evolution of international tax

standards promulgated by the OECD

and the EU had, and continues to have,

a significant impact on the Caribbean

region and in particular, St. Lucia. In

May 2018, the government announced

that Saint Lucia had joined the

OECD/G20 Inclusive Framework on

Base Erosion and Profit Shifting (BEPS)

and had committed to the abolition of

harmful preferential regimes as

determined by the EU Code of Conduct

Group for Business Taxation. In an

effort to comply with these global tax

initiatives, the government signalled its

intention to transition from a worldwide

tax system to a territorial tax system for

corporations. This move would lead to

Saint Lucia joining the 30 out of 36

developed OECD member countries

operating a territorial tax regime.

Interestingly, the US recently

announced that it is also shifting to a

territorial tax system.

Analysis: Worldwide vs territorial tax

systems

Simply put, under a worldwide tax

system, taxation is imposed on

residents on the income earned from all

sources around world. In contrast, under

a territorial tax system, taxation is only

imposed on income derived from/earned

from within that country’s borders.

Some opponents of worldwide tax

systems typically point to the fact that

many countries lose the opportunity to

earn more tax revenue because of

companies deferred repatriation of

foreign-sourced profits and engaging in

profit shifting to low tax jurisdictions.

Until the recent passage of legislation in

the United States, the “worldwide” or

“residence-based” corporate tax system

in the US was credited with encouraging

corporate tax inversions.

Proponents of territorial systems argue

that companies will no longer be

incentivised to engage in corporate

inversions, since tax will no longer be

residence-based; another touted

advantage is the elimination of the “lock-

out” effect, allowing capital to flow freely

back to the companies’ country of

residence without worrying about tax

eroding profits. The territorial system,

however, is not without its

disadvantages, one of the key issues

being the system’s potential complexity.

While territorial systems purport to tax

companies based on active business

income, the reality is that production

processes often span multiple

jurisdictions and determining the source

of income can become a complicated

question. Furthermore, territorial tax

systems may also be subject to base

erosion. For instance, passive income

arising from mobile assets may be

diverted to low tax jurisdictions, so one

can understand the need for clear rules

to prevent this abuse.

PwC 21

Territorial tax system

Designing a territorial tax system

Given the foregoing, it is unsurprising

that countries adopting the territorial

approach incorporate rules that

determine whether foreign profits will be

exempt from tax and design rules to

prevent base erosion. These features

would include inter alia:

1. participation exemptions and

dividend deductions;

2. controlled foreign corporation (CFC)

rules; and

3. limitations on interest deductions.

Participation exemptions range from full

to partial deductibility, allowing

companies to either ignore foreign-

sourced income in the calculation of

taxable income or alternatively to deduct

foreign income when repatriated to the

parent company in the form of

dividends. CFC rules discourage

multinationals from diverting mobile

income (interest, dividends, royalties) to

low tax jurisdictions.

CFC rules follow a basic structure:

firstly, set ownership thresholds to

determine whether an entity qualifies as

a controlled foreign company; secondly,

applicability rules determine whether a

CFC will be subject to domestic

taxation. This threshold may involve

comparison against a whitelist or

blacklist to determine if the CFC’s

country of residence encourages tax

avoidance. Alternatively, the type of

income the CFC earns (passive or

active) may determine whether it will be

subject to

tax. Finally, CFC rules will define which

portion of the CFC’s income will be

subject to tax.

In respect of interest deductions

limitations, these aim to combat abuse

of interest deductions.

Trend toward territorial systems

The foregoing demonstrates the

significant complexity that may

accompany a shift to a territorial tax

system. Commentaries also suggest

that “pure” territorial tax systems are

rare and that a type of hybrid system

has emerged which is popular. Further,

a shift to a territorial tax system will not

automatically cause a country to be

viewed as compliant with global tax

initiatives and frameworks. This system

must be done in conjunction with other

safeguards and issues, which can

withstand scrutiny from the international

community.

Notwithstanding the challenges with a

territorial tax system, OECD countries

overwhelmingly seem to favour a

territorial approach to taxation. Of the 36

OECD member countries, six utilise

worldwide systems.¹ While an in-depth

analysis of the tax systems of OECD

members is well beyond the scope of

this comment, it is noteworthy that the

UK and Japan in 2009 adopted territorial

tax systems, followed more recently by

the US in 2017. In the past, Finland and

New Zealand shifted to a worldwide

system, however, however they have

both since reinstated a territorial tax

system approach.

¹ Ch ile, Greece, Ir eland, Israel, Korea, Mex ico, Poland

PwC 22

Territorial tax system

Conclusion

The ty pical drivers behind a country’s shift toward a territorial tax sy stem are likely

different from Saint Lucia’s motivation in adopting this corporate tax sy stem.

This shift has occurred in the context of a mandate to abolish harmful preferential tax

regimes, such as the International Business Company (IBC). Generally, a territorial tax

system must balance three competing objectives, namely, completely exempting

foreign business activity from domestic taxation, protecting the domestic tax base and

simplifying the tax system. When that delicate balance is found, it is likely that Saint

Lucia’s tax reforms will set the island on a path to eventual compliance with the new

international tax landscape.

Sources

United States Senate Republican Policy Committee 2012, Territorial vs Worldwide Taxation

Berkley Research Group, 2013, Implications of a Switch to a Territorial Tax System in the United States: A

Critical Comparison to the Current System. Eric Drabkin, Kenneth Serwin, Laura D’Andrea Tyson

PwC 2013, Evolution of Territorial Tax Systems in the OECD, Prepared for The Technology CEO Council

Tax Foundation 2012, Special Report: A Global Perspective on Territorial Taxation. Philip Dittmer

Tax Foundation 2012, The United Kingdom’s Move to Territorial Taxation

Tax Foundation 2015, Worldwide Taxation is Very Rare. Kyle Pomerleau

Tax Foundation, 2017, Designing a Territorial Tax System: A Review of OECD Systems. Kyle Pomerleau,

Kari Jahnsen

Tax Foundation 2018, A Hybrid Approach: The Treatment of Foreign Profits under the Tax Cuts and Jobs

Act. Kyle Pomerleau

Tax Foundation 2018, Inversions under the New Tax Law. Kyle Pomerleau

Tax Policy Center 2015, A Look at the Territorial Tax Systems in Four Countries Finds No Magic Bullets.

Howard Gleckman

Tax Policy Center 2017, Is a Territorial Tax System Viable for the United States. Eric Toder

IMF 2013, Territorial vs Worldwide Corporate Taxation: Implications for Developing Countries. Thornton

Matheson, Victoria Perry and Chandra Veung

PwC 23

Tax facts - individuals

Personal income tax rates Tax rates on chargeable income 2018/2019

Tax rates on chargeable income 2020

Individual - Other Taxes

Taxable Income (XCD) Tax on column

1(XCD)

Tax on excess

(%)Over Not over

0 10,000 10

10,000 20,000 1,000 15

20,000 30,000 2,500 20

30,000 and above 4,500 30

PwC 24

Tax facts - individuals

Personal Allowances and deductions (XCD)

PwC 25

Tax facts - individuals

Personal Allowances and deductions (XCD)

PwC 26

Tax facts - companiesCorporation Tax Rates

Compliant Resident Companies 30%

Non compliant Resident Companies 33.3%

Non Resident Companies – taxed on

Saint Lucia-source income

25% on gross amount

15% on Interest

Underwriters 30% on 10% of gross premium

arising in Saint Lucia

Life Insurance Companies 30% on 10% of gross investment

income arising in Saint Lucia

Value Added Tax (VAT) 12.5% / 0%

Hotel Tax 10%

Commercial Property Tax 0.4% of the open market value

Residential Property Tax 0.25% of the open market value

PwC 27

Tax computation FY Individual Employee

Gross Income

XCD XCD

2019 2019 2020 2020

Income from Employment 140,000 50,000 140,000 50,000

Director Fees 10,000 - 10,000

Total Income 150,000 50,000 150,000 50,000

Less tax-exempt income - - - -

Net Income 150,000 50,000 150,000 50,000

Less Allowances

Personal Allowances (18,000) (18,000) (23,000) (23,000)

Spouse Allowance (1,500) (1,500) - -

Child allowance (3,000) (3,000) -

Child higher education (5,000) - (5,000)*

Medical Expenses (400) (400) (400)* (400)

Life insurance (8,000) - - -

Mortgage Interest (18,000) (5,000) (18,000)* (10,000)

Insurance Premium (1,500) - (1,600)* -

Upkeep and maintenance (1,500) - -

Chargeable Income 93,100 22,100 102,000 16,600

Tax Payable

2019 – Tax on first 30,000 =

4,500; remainder @ 30%

23,430 2,920

2020 – Tax on first 20,000

=3,000; remainder @30%

27,600 2,320

* Max banded allowances $25,000

PwC 28

Tax computation FY IndividualPensioner

PwC 29

Tax computation FY 2018 – 2020 Companies

PwC 30

Let’s chat

PwC helps organisations and individuals create value they’re looking for.

We’re a network of firms in 158 countries with more than 250,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.

Michael BynoeTerritory Leader,

Pw C East Caribbean

1 246 626 6801

michael.bynoe@pwc.com

Gloria EduardoEngagement Leader (Tax),

Pw C East Caribbean

1 246 626 6753

gloria.eduardo@pwc.com

Ronaele Dathorne-BayrdEngagement Leader

(Corporate Services),

Pw C East Caribbean

1 246 626 6652

ronaele.dathorne-bayrd@pwc.com

Brian Hackett Territory Senior Partner,

Pw C Trinidad & Tobago

1 868 299 0710

brian.hackett@pwc.com

Angelique BartTerritory Tax & Legal Services

Leader, Pw C Trinidad & Tobago

1 868 299 0722

angelique.bart@pwc.com

Rendra GopeeBusiness Development Leader,

Pw C Trinidad & Tobago

1 868 299 0712

rendra.gopee@pw c.com

PwC 31

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Saint Lucia