How might a 15% global minimum tax rate impact Bermuda?
BY JONATHAN KENT
Bermuda is bracing itself for the uncertain impact of the global minimum tax (GMT), which is set to take effect by 2023. An international agreement involving 136 countries and territories – including Bermuda – and strong support from the G7 and G20 groups of the world’s richest economies have generated a seemingly unstoppable momentum behind the idea.
But that was the easy part. Next comes the complex matter of passing legislation in dozens of individual countries to build a brand-new tax system that can function across borders. And then dealing with the inevitable tensions of how taxation is allocated among revenue-hungry countries.
However, where there’s a will, there’s a way and while numerous experts say it seems unlikely that this overhaul of international tax rules will take effect by 2023, it appears likely to happen eventually.
The GMT, part of Pillar 2 of the Organisation for Economic Cooperation and Development’s Inclusive Framework on Base Erosion and Profit Shifting, is aimed at ensuring that all large multinational companies pay a corporate tax rate of at least 15 per cent, with mechanisms to allow the taxes to be paid in countries where the companies sell their goods and services, rather than low-tax jurisdictions, including Bermuda, in which many of them book a large portion of their profits.
The GMT will apply to companies with at least 750 million euros ($841 million) in annual revenue.
After the United States put its full weight behind the idea this year, Pascal Saint-Amans, head of tax administration at the OECD, told The Guardian the minimum tax would “kill the tax havens – the game is over”. In June, The Economist reported that “things look bleak for the palm-fringed, zero-tax territories, such as Bermuda”.
How bad will it get? That will depend partly on how much of the island’s international business sector is based here for purely tax minimisation purposes.
The holding companies and subsidiaries incorporated on island to own software, drug patents and other such intangible intellectual property, in order that profits can be channelled to Bermuda, are certainly in the crosshairs of the proposed new tax rules. They tend to employ no-one, but provide work to law firms and accountants. In any case, many of them have already fallen foul of economic substance rules.
The re/insurance industry, which provides hundreds of well-paid jobs and stimulates broader local economic activity, is the main concern for Bermuda. Many of its participants top the GMT revenue threshold and sell their coverage all over the world. Under the GMT, as proposed, they would see their effective tax rates climb.
Fitch Ratings, which provides financial strength and credit ratings for many of the island’s re/insurers, said Bermuda’s tax advantage in the industry would be “reduced at the margin” as a result of the GMT.
Fitch pointed out that Bermuda re/insurers already pay taxes in many countries, due to the international and diversified nature of their operations. The industry also survived the US Tax Cuts and Jobs Act of 2017, which established the base erosion and anti-abuse tax (BEAT). “Many Bermuda entities have filed 953(d) elections to be taxed as if they were a US company, partly because it eliminates the requirement to pay the BEAT,” Fitch added.
While the tax advantage has therefore been eroding for some time already, Bermuda’s regulatory advantage has gone from strength to strength. Its equivalence with the EU’s Solvency II insurance regulations and its reciprocal jurisdiction status in the US allow Bermudian companies to compete on a level playing field in the world’s two largest insurance markets. Together with a speed to market that enables risk capital to be deployed quicker and more efficiently than anywhere in the world and an industry talent base built up over decades, Bermuda remains an attractive domicile for international re/ insurance companies.
The proof is in the pudding: an influx of tens of billions of dollars of new capital, with start-ups and scale-ups, has occurred in Bermuda over the past two years despite the advance of the GMT plans.
The indications are then that the new tax rules are unlikely to spark a mass exodus of Bermuda’s re/insurance industry – however, the island must work hard to maintain, sharpen and add to its non-tax competitive edges in order to keep it that way.