
Taxing times
Bermuda’s consultation on a corporate income tax makes for an uncertain future. Bermuda:Re+ILS reports.
It’s 2026. Hamilton, Bermuda is a ghost town. The introduction of a corporate income tax has led to many international companies leaving. Having lost the main driver of the economy, the government faces a budget crisis and a plunging population. It may need to ask the UK for financial aid for the first time in living memory.
It’s 2026. Bermuda is booming after imposing a corporate income tax on international companies. While some companies have left, the vital reinsurance sector remains. With corporate income taxes added to government revenues, many consumer and employment taxes and fees have been cut or eliminated, reducing the cost of living and employment. The future is bright.
Bermuda is considering the most radical overhaul of its tax system in decades after launching a consultation on whether to introduce a corporate income tax on global companies with revenues of more than €750 million (about $820 million).
Neither of the above scenarios may turn out to be accurate, but they underline the uncertainty which the Island faces as a result of the Organisation of Economic Co-operation and Development’s (OECD) drive for a 15 percent global minimum tax on large multinationals.
If the tax is implemented, it may result in something more like the UK’s decision to leave the EU: neither utopia nor catastrophe, but somewhere in between. Even that is an unappetising prospect, but for a 20-square mile rock with 65,000 people on it, there is little margin for error.
Background
The Bermuda government’s consultation paper shows that careful thought has gone into the problem in conjunction with various industry groups, including the insurance associations.
The OECD’s 2021 agreement consisted of two pillars, but it is the second one that most concerns Bermuda.
Where a parent company with revenues of more than €750 million, regardless of where it is located, pays an effective tax rate of less than 15 percent, the governments of jurisdictions where the company operates will be able to levy “top-up” taxes to make up the difference.
This is a clever approach. Provided all countries sign up, it means there is no escaping the tax. If Bermuda says it will not collect the tax, another country where the relevant company operates will. And few countries will resist the temptation to add to their revenues.
Thus, maintaining the status quo in Bermuda seems impossible—someone else would simply collect the tax. Worse, Bermuda-based companies could be subject to double taxation, as taxes paid in Bermuda such as payroll tax would not be counted towards the 15 percent minimum.
Bermuda rejected setting up a regime whereby any top-up taxes determined under the rules on profits earned on the Island would be collected in Bermuda (rather than by another jurisdiction). But it rejected the idea as the provisions provided less flexibility and would not enable Bermuda to make policy around provisions such as tax incentives or tax credits.
Instead, Bermuda is now looking at implementing a full tax regime. This is unlikely to result in an overall effective tax rate on profits earned in Bermuda in excess of 15 percent.
While it is early days, the government expects the range to be between 9 and 15 percent. The reason it could be lower than 15 percent is because a company headquartered in Bermuda might have a subsidiary in a jurisdiction where the corporate income tax is higher—thus a lower than 15 percent tax rate could be levied in Bermuda.
The Bermuda government hopes that the tax will enable it to push its own policy initiatives, offering tax credits for programmes such as Bermudian employment and training schemes.
In a press conference on August 8, Premier David Burt noted that parts of the Bermuda tax system dated back centuries. This includes customs tariffs which are often set at 20 to 30 percent of the cost of the goods but can be much higher for items such as cars. Depending on the company and salary scale, taxes and the cost of benefits such as health insurance and pensions can add 25 percent to the cost of a salary.
To that end, the government may be hoping that a corporate income tax can be used to reduce the cost of living and doing business.
“For a 20-square mile rock with 65,000 people on it, there is little margin for error.”
Tax assurance to remain?
It is an understatement to say that the consultation is not without risks. Some larger re/insurance companies may accept that this is a cost of doing business, will enable them to continue to trade in the UK and Europe and they need to remain in the Bermuda market. But other companies may decide that the removal of the tax advantage means Bermuda no longer provides enough benefit for them to remain.
What has not yet been addressed is the fact that a major reason for many international businesses to come to Bermuda is the tax assurance certificates the Bermuda government routinely gives to international companies.
The certificate guarantees that any parliamentary imposition of taxes on profits, dividends or capital gains will not be applicable to the company and its operations in future years. Currently, the tax assurances being granted extend to March 31, 2035.
Just how companies will react to that assurance effectively being withdrawn remains to be seen, but the Bermuda government can argue that it was negated because the companies will be taxed up to 15 percent somewhere in the world and this is out of Bermuda’s hands.
In the event that re/insurance companies, especially those dealing with property casualty and catastrophe reinsurance, are the main contributors to the tax, care will have to be taken because of the volatility of earnings.
A boom year, as 2023 may turn out to be, would bring a flood of tax revenue for the government. But re/insurers can also lose hundreds of millions of dollars, and in those cases, the tax revenue could be negligible. The government’s budget planners would have to adopt a much longer timeframe than one year to be certain there were funds available to meet Bermuda’s basic needs.
For the most part, Bermuda’s tax collection system is relatively uncomplicated, for payroll tax and for Customs duties, whereas a corporate tax system would require more sophistication. Ensuring those structures are in place—and that the cost of collection does not become a burden—is another challenge.
At the time of Bermuda:Re+ILS's going to press, reaction to the initiative was relatively muted.
Many Bermuda re/insurance stocks opened down the day after the August 8 announcement, but by and large recovered their losses the same day.
The proposed introduction of a corporate income tax was “a modest but manageable negative” for insurers and reinsurers domiciled on the Island, said analysts at investment bank Keefe, Bruyette & Woods.
The firm said in a note: “In the near term, we think that reinsurers—especially for property-catastrophe reinsurance—retain significant pricing power that would allow them to largely incorporate a Bermuda corporate income tax in pricing.”
Perhaps the only thing that is clear right now is this that Bermuda faces interesting times in the next two years.
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.