23 January 2025News

Bermuda grapples with implications of Corporate Income Tax advent

Bermuda formally introduced its first Corporate Income Tax on January 1, but many questions remain unanswered.

The tax was introduced after the members of the Organisation for Economic Cooperation and Development (OECD) agreed on a global minimum tax for all its member nations.

Because the global tax regulation stipulated that multinational companies who operated in a non-compliant country could then have its tax collected by a country which did have the tax, Bermuda had no option to join despite never having had such a tax and having given international companies a guarantee it would not impose such a tax.

Multinational companies with annual revenues of more than €750 million are required to pay a 15% tax on their profits.

Most countries around the world have joined the system, but a number have opted out, most notably the US.

While that seems relatively straightforward, the tax is not yet fully bedded in. There are questions about how deferred tax assets will be treated and how tax credits will be applied. That these have not been answered is not the Bermuda government’s fault – it and other governments have been waiting for clarification from the Organisation of Economic Cooperation and Development.

Some clarification has now come from the OECD, which will have tax accountants examining the deferred tax assets declared by many international companies last year to determine if they are acceptable.

The Bermuda government is keen to use tax credits to encourage job creation, training and career development, infrastructure investment and investment in support of the environment.

However, that could cause problems if the credits resulted in companies paying less than 15% tax, and to date there has been no detail on whether they will be imposed.

Further, it is not clear exactly how many companies are liable to pay the CIT or how much will be raised in an average year. This is further complicated in the re/insurance sector because financial results can vary widely.

For example, in 2023, Association of Bermuda Insurers and Reinsurers (ABIR) member companies earned $28.3 billion. This number includes Chubb, which is not Bermuda-based but has substantial Bermuda operations. Without Chubb, the companies earned $19.3 million.

By comparison, in 2022, a poor year for Bermuda re/insurers as Hurricane Ian, other disasters and an investment market slump wreaked havoc on their earnings, ABIR member companies earned $5 billion, and if you take Chubb out, they lost around $250 million, with two companies, RenaissanceRe and PartnerRe, each losing more than $1 billion.

Still, of those ABIR companies who submitted returns, some 16 would appear to be in scope for the tax based on their annual gross written premiums in 2023. But others will be exempted because they have already elected to pay US corporate income taxes or because they operate in fewer than five jurisdictions.

Others will pay taxes in other jurisdictions where they operate.

Despite the uncertainty, the Premier, David Burt, said the Government expects to earn an average of $750 million a year from the tax.

A Tax Reform Commission was also formed and tasked primarily with recommending what other taxes should be reduced or eliminated as there is a consensus that this tax should not be viewed as a windfall. The Government currently collects $1.2 billion.

It is due to report in June and its chair admitted at a public meeting last December that it was difficult to predict what the annual revenue would be, saying there was “a great deal of uncertainty and variability with the corporate income tax revenue number”.

Darren Johnson (pictured), a former managing partner of PwC, added that the TRC did not have the data of every company and was hampered by the way in which companies’ profitability could change from year to year.

“There is not one person in Bermuda who knows what that number is,” he said.

But Burt did announce in the Government’s pre-Budget Statement in December that it expected to raise $187.5 million in the 2025-26 budget year which begins on March 1, and had earmarked tax breaks valued at $5 million as a result.

The report said a further $50 million would be spent to kickstart the Government’s long-awaited universal healthcare reforms, while a substantial part of the projected budget surplus would be ringfenced for debt reduction.

However, the Fiscal Responsibility Panel, a blue-ribbon advisory group to the Government, warned that much of the tax revenue would need to be placed in a “suspense account” until final tax returns were submitted in 2026 because of the risk of fluctuations in earnings. That could delay any plans for spending and tax cuts.

The Government has conceded the point, telling The Bermuda Royal Gazette: “The Government intends to place a proportion of the 2025-26 revenue from the corporate income tax in a suspense account.

“This approach provides critical headroom to address potential fluctuations between projected and actual CIT revenues as final tax returns are submitted.

“However, it is vital that costs are reduced in Bermuda to ensure our economy remains competitive and that preventive healthcare is expanded; it is for that reason that the Government has set out significant tax reductions and major investment to start universal healthcare.”

The FRP also recommended that money be placed in a stabilisation or rainy day fund against the risk of domestic or global economic shocks that could affect government revenue collection and also recommended using some of the CIT revenue to shore up the island’s Contributory Pension Fund, which has an unfunded liability of $3 billion.

Those suggestions were politely rejected by the Government, which said it had more pressing priorities.

But the Government will have received a sharp reminder of the risks of relying too heavily on re/insurers’ profits in the past two weeks.

Insured losses from the Los Angeles wildfires are now estimated to be as high as $40 billion, and Bermuda re/insurers will certainly be paying a piece of that. While it is early days and most companies say the losses are within their catastrophe budgets, it is a reminder that profits – and tax revenues – are never guaranteed in the re/insurance business.

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More on this story

Re/insurance
2 October 2023   Bermuda’s consultation on a corporate income tax makes for an uncertain future. Bermuda:Re+ILS reports.
News
18 July 2024   The agency will be responsible for collecting the tax from international companies.
News
22 July 2024   The independent agency will collect the 15% corporation tax.

More on this story

Re/insurance
2 October 2023   Bermuda’s consultation on a corporate income tax makes for an uncertain future. Bermuda:Re+ILS reports.
News
18 July 2024   The agency will be responsible for collecting the tax from international companies.
News
22 July 2024   The independent agency will collect the 15% corporation tax.