What global tax overhaul could mean for Bermuda reinsurers

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Robert Moncrieff, associate partner at EY Bermuda

By Annabel Cooper

That some of the world’s most profitable companies appear to be paying less than their “fair share” of tax has long been the subject of outcry not just from politicians around the world, but from their tax-paying citizens too. Add to that the economic consequences of a global pandemic and pressure from the Biden administration in the US, and suddenly the momentum behind a minimum level of taxation has taken off.

After receiving approval from the G7 in June, the OECD announced in July that 130 countries and jurisdictions, including Bermuda, had joined the “new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate”.

Shortly after, Peru joined, increasing that number to 131. The eight who haven’t joined include low-tax EU nations Ireland, Hungary and Estonia, as well as Barbados, Saint Vincent and the Grenadines, Sri Lanka, Nigeria and Kenya.

In spite of this momentum and apparent agreement between so many different countries, there is still much negotiation ongoing and considerable detail to be determined.

A leading expert has also warned that larger economies are reacting more to perceived tax competition issues, and that there could not only be negative consequences for consumers, but they may not even meet their ultimate objective.

The two-pillar framework has been drawn up by the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) and is the latest plan from the OECD/G20 BEPS initiative which was formed in the aftermath of the 2008 global financial crisis. The aim of this was to update international tax rules to reflect the more digital, globalised 21st-century economy.

Pillar one is designed to reallocate certain taxing rights over multinational enterprises from their home countries, to the markets where they have business activities and earn profits, regardless of physical presence.

Pillar two is the introduction of a global minimum corporate tax rate of at least 15 percent. It is this pillar that is likely to have the most impact on Bermuda.

Robert Moncrieff, associate partner at EY Bermuda Ltd, and the firm’s global insurance international tax and transaction services leader, said he believed pillar two, which is supposed to be addressing residual BEPS concerns not previously dealt with, “is being advanced without proper consideration of the impact of some of the earlier commitments and the effects of measures such as the economic substance requirements”.

He added: “The global minimum tax proposal is less a measure needed to combat base erosion and profit shifting than an effort from large, diverse and developed economies to address perceived tax competition issues from smaller and less diversified economies.”

While the rules are still very much under development, should pillar two be implemented in its current form, the immediate impact is likely to be a larger tax bill for reinsurers.

“For reinsurers headquartered in Bermuda, we may see an increase in the overall amount of group tax payable, through increased taxation in the subsidiaries,” he said. “For Bermuda operations which are foreign owned, any tax increase might be reflected in the parent jurisdiction to the extent not already collected.”

While blaming lower tax jurisdictions for loss of revenue might be an easy political point scorer, a minimum rate of corporate income tax across all sectors does not necessarily mean a country’s coffers will suddenly fill up. In Bermuda’s case, if the cost of reinsurers doing business goes up, it could result in a “giving with one hand, taking with the other” scenario.

“As with most business tax increases, this is likely to be reflected in an increase in the cost of insurance protection globally,” added Mr Moncrieff, who warned that “since business taxation ultimately finds its way to consumers, the benefit or cost to any given jurisdiction should really be measured at a number of layers and might not always align with the objectives of the proposals”.

Bermuda’s reinsurance industry has a critical role to play in the world economy and as a jurisdiction, its reputation and history of co-operation should serve the island well as negotiations remain ongoing.

“The fundamental attractiveness of Bermuda, such as a widely respected regulatory environment, access to a highly talented workforce, ease of doing business and Bermuda’s record of compliance with regulatory and information exchange initiatives remains unchanged,” explained Mr Moncrieff, who also praised the government’s effort to engage with this process.

“Bermuda has consistently made the case as to the value which reinsurance provides to the global economy and thus the potentially detrimental effects of any increased pricing for businesses and individuals looking to obtain protection from the increasing perils, natural and otherwise, which face us all,” he continued.

“Bermuda is fully engaged in the OECD’s process in an effort to ensure that the rules are fairly and consistently applied across all jurisdictions and industry sectors, and that they remain focused on combating base erosion and profit shifting. This is in line with Bermuda’s continued commitment to global standards on transparency, disclosure and economic substance.”

In spite of the magnitude of these reforms and the number of countries involved, the OECD is planning to release model rules and other framework documents in October 2021 and hopes to have them in place in 2023. Mr Moncrieff, however, believes this timeframe to be “optimistic”.

“For many jurisdictions, those rules will need to be transcribed into legislative proposals and will need to go through some form of legislative process as well as possible domestic consultation with industry. It remains unclear how much latitude any given jurisdiction might have in drafting its rules and therefore how closely aligned the various jurisdictional proposals will be. We also have to factor in whether the existing rules in the US will be amended to align more closely with pillars one and two and how they might interreact.

“This suggests that anything prior to 2023/4 for effective dates is optimistic. Further, if consensus across the board proves to be difficult, given the need for the 139 members of the IF to agree, and the existence of eight objecting members at the time of writing, we may see a more phased implementation being adopted.”

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