International business leaders have been weighing the impact of the sweeping payroll tax changes in the Bermuda Government’s Budget on their employment costs.
While only the employee’s share of the tax was increased for anyone earning more than $136,000, the employer’s share was either reduced or left unchanged. David Burt, the Premier and finance minister, said correctly that no business would face a greater payroll tax liability as result of the changes that kicked in on April 1. However, in practice many international companies will end up seeing their employment costs rise.
Given that international businesses generally pay all or most of the employee’s share of payroll tax — and the sector includes many high-earning, specialist roles — the changes could have a significant impact.
Chris Schaper, chief executive officer of AIG Bermuda and deputy chairman of the Association of Bermuda Insurers and Reinsurers, warned at the Chamber of Commerce Budget Breakfast that the changes would raise significantly increase employment costs.
“I wanted to just be clear that for ABIR companies this is an important aspect of how we think about our overall costs,” Mr Schaper told The Royal Gazette after the event. “And some of those changes can drive decisions.”
Those “decisions” Mr Schaper referred to are likely to include whether the jobs located in Bermuda actually need to be here and which can be transferred into other lower-cost locations, said one source, an experienced business services provider, who asked not to be named.
He said: “Twenty-five years ago, every international business employer would pay the employee’s share of everything — payroll tax, health insurance and social insurance.
“Some companies still pick up everything, but now that things have become much more expensive, that is starting to change. It’s becoming more common to see them asking the employee to pay 2 per cent or 5 per cent.”
Employee payroll tax rates for the income band from zero to $48,000 fell 1 percentage point to 0.5 per cent. For the band between $48,000 and $96,000, the rate increased 0.25 of a point to 9.25 per cent.
For the restructured higher bands, the rates are for $96,000 to $200,000, 10 per cent; from $200,000 to $500,000, 11.5 per cent; and from $500,000 to $1 million, 12.5 per cent.
The employer’s share for exempted companies remained at 10.25 per cent, while for other business classes the rates were reduced.
So what does this mean in practice?
For local companies, who generally pay only the employer’s portion of benefits, the changes mean a fall in the cost of employment. But for international companies footing the bill for the employees’ share as well, the opposite is true.
With the help of a spreadsheet supplied by a payroll worker in IB, who asked not be named, we were able to calculate how this year’s tax regime would change the cost of employing executives compared to last year at different salary levels.
These calculations assume the employee is a single person with a second-tier health insurance plan from one of the local insurers, that no other costs changed from last year, and that the IB employer is paying the employee’s share of all benefits (payroll tax, pension, health insurance and social insurance). No other benefits are included.
- An employee with a $500,000 salary would have cost the employer a total of $665,556 in 2022-23, rising to $673,388 in 2023-24, an increase of 1.2 per cent. Payroll taxes for this employee will increase by $7,832, or 8 per cent, to $104,901.
- An employee with a $750,000 salary would have cost the employer a total of $992,400 in 2022-23, rising to $1,008,107 in 2023-24, an increase of 1.6 per cent. The payroll tax element of this will increase $15,707, or 10.6 per cent, to $163,339.
- An employee with a $1 million salary would have cost the employer a total of $1,304,274 in 2022-23, rising to $1,335,629 in 2023-24, an increase of 2.4 per cent. Payroll taxes paid for this employee will increase by $31,355, or 17.1 per cent, to $214,580.
These employment costs will often be higher still, because an executive may have a number of dependents on their health insurance plan, or they may be receiving a housing allowance.
The uncomfortable reality, said our business services source, is that Bermuda is already one of the most expensive places on Earth to employ someone and every time that cost becomes higher, employers are likely to explore other options.
He added that this had been happening over the past two decades with the relocation of back-office staff and non-core functions, as well as some outsourcing. Executives have also relocated, taking entire teams with them. The advance of technology has added momentum to these trends.
“After the 9/11 terrorist attacks in 2001, a new wave of reinsurers set up in Bermuda and everybody who worked for those companies was based here — marketing, IT, financial, legal, underwriters,” the source said. “Now, insurers tend to have only the critical functions on island, typically the underwriting service.
“As technology has evolved, there has been another change. Ten or 15 years ago, people would leave the company and the island. Sometimes, now they may leave the island without leaving the company and continue to work remotely. Effectively, they take the job with them.”
Outsourcing has also become more popular, particularly for back-office and finance functions. A company could shave between a half and two-thirds off the cost of employing a lower-level, non-qualified accountant by outsourcing to lower-cost jurisdiction, the source said, making it difficult to justify locating such roles in Bermuda.
He added that he knew of two Bermuda insurers considering a move to Cayman, where there is a scaled fee structure for work permits as an alternative to payroll tax.
How the looming global minimum tax may influence Bermuda’s taxation landscape and the resulting impact on employment costs remain to be seen.
For now, if Bermuda wants international business jobs, it will need to stay on the right side of the cost-value equation: ensuring that the benefits of being in Bermuda outweigh the added cost of locating employees on island.