Wednesday, July 28, 2021

‘It’s a sovereignty issue’: Bermuda rages against global tax deal

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Bermuda’s political and business elite are responding to the G7 push for a minimum corporate income tax as they would in the face of an approaching hurricane in the Atlantic. Officials seek to weather the storm and keep intact a 19th century revenue regime that leaves the company’s profits intact.

In an interview with the Financial Times, Curtis dickinsonBermuda’s finance minister said he was reluctant to introduce new taxes while the island’s tax haven of around 64,000 people was still struggling to recover from both the Covid-19 pandemic and the 2008 financial crisis.

“Bermuda has the right to determine for itself what it believes is an appropriate tax system for its jurisdiction,” he said.

“We have a system in operation for 200 years. Not perfect.Requires some adjustments. But we would like to do that on our own and that no one tells us to change our system to adapt it to some global initiative. . . I would say that it is a question of sovereignty. “

Bermuda Finance Minister Curtis Dickinson is a Former Wall Street Investment Banker | © Akil Simmons / FT

Taxing corporate profits would make Bermuda more bureaucratic and add complexity to business, Dickinson said, threatening its role as a global center for reinsurance, the coverage that insurance companies buy to protect against claims stemming from hurricanes, wildfires and other. disasters. Bermuda currently generates income through payroll and property taxes, customs duties, and fees charged to international companies.

Bermuda’s current tax system. . . it is based on consumption, it is a function that seeks to be simple to administer, simple to archive, ”he said. “That is the system that we have had. . . It has not been modified to encourage people to move here. It has been what it has been. The system works for us. “

Pressure on tax havens increased this month as G7 countries moved to close loopholes that multinationals use to cut their tax bills, agreeing to a minimum global tax of 15 percent on corporate income. However, whether anything will actually change depends on broader global negotiations, which means that the implications for Bermuda remain hypothetical.

The sensitivity of the subject quickly becomes clear to a visitor in Hamilton. In more typical times, the Bermuda capital has all the pizzazz of a place where the locals boast of the large number of actuaries in the neighborhood. Start asking tax questions and corporate lips get even harder. Trade associations and leading companies alike avoid responding to or referring your inquiries to Dickinson.

A restaurant in Hamilton. Bermuda’s Mild Climate Makes For A Pleasant Lifestyle | © Nicola Muirhead / Bloomberg

Headquarters of BF&M and Aon. Insurance accounted for about a quarter of GDP in 2019, © Akil Simmons / FT

A man of carefully chosen words, the Finance Minister is a former Wall Street investment banker who worked at firms such as Donaldson, Lufkin & Jenrette, and Credit Suisse First Boston before entering government. He was educated at Morehouse College in Atlanta, the historically black institution where Martin Luther King Jr earned his undergraduate degree, and at Columbia University’s business school.

Dickinson’s argument is that it is unfair to group Bermuda with tax havens that have more corporate mailboxes than people. He said it was an “anomaly” when Google in the last decade transferred tens of billions of dollars through its Dutch holding company to Bermuda under an intellectual property licensing scheme called “dutch irish double sandwich. “Google has scrapped the deal, which allowed it to delay paying US taxes.

Thanks to its tax system and simplified regulatory regime, Dickinson said, Bermuda has become a suitable financial center. The large buildings of the major insurers, AIG, Chubb and BF&M, among them, loom over the capital. Most recent arrivals include Duct Re, which raised $ 1.1 billion last year through a listing on the London Stock Exchange, and Advantage, a reinsurer launched in 2020 with $ 1 billion in equity capital from Carlyle, Hellman & Friedman and their management.

The Chubb Building in Downtown Hamilton | © Akil Simmons / FT

Renaissance Re is based in the capital | © Akil Simmons / FT

“We want companies here that have the boots on the ground,” said Dickinson.

Responding to climate change is giving reinsurers an additional boost. Andrew Engler, CEO of Kettle, a start-up that uses machine learning to better understand wildfire risks, said it established its holding company in Delaware and based its operations in Bermuda to be closer to the action and to a regulatory system that can act faster than the state. state licensing in the US

“It’s very well structured,” said Engler, a Californian who also finds Bermuda’s mild climate pleasant. “You have this crazy island that is probably the most important financial market for climate change that we can all imagine.”

Dickinson’s challenge is that Bermuda’s economy is not “diversified,” as he puts it. Reinsurance and other “international business activities” accounted for about a quarter of gross domestic product in 2019, official statistics Show. In contrast, leisure and hospitality in the tourist spot known for its turquoise seas produced about 4 percent.

Bermuda GDP bubble chart in 2019 by industry.  Financial activities constitute a significant proportion of the country's GDP

The question for Bermuda is how tax-sensitive its reinsurers might be. Donald Trump’s 2017 tax changes have already made it less attractive for American insurers to buy reinsurance in Bermuda. It remains to be seen whether the imposition of corporate taxes would nullify the regulatory advantages of operating a reinsurance business on the island.

“It’s definitely not going to be a positive thing,” said Brian Schneider, an analyst at Fitch Ratings. But he added: “It doesn’t seem like it’s enough to destroy the whole purpose of being on the island.”

For their part, Bermuda officials don’t want to be rushed. Adjusted for inflation, Fourth quarter GDP it was down 4 percent year-on-year. Dickinson said Bermuda officials have been trying to tell their counterparts in larger countries that now is not the time to change things.

“Obviously, we are concerned that there is a risk of a one-size-fits-all approach that may not work for everyone,” he said. “We have had a sustained period of low economic growth and the notion of introducing more taxes in my mind amounts to slowing down the economy.”

Insurers like AIG play an important role in Bermuda’s economy © Akil Simmons / FT

Front Street in Hamilton. The tax system is tough on Bermuda’s working class © Nicola Muirhead / Bloomberg

Dickinson’s position is even more uncomfortable because it’s not just foreigners who have concerns about Bermuda taxes. In 2018, the government itself Tax Reform Commission highlighted the need for change after meeting with more than 50 stakeholder groups, including local and international companies.

“A recurring theme across almost every stakeholder group was that Bermuda’s tax structure was neither fair nor equitable,” the report says. “There was a consensus. . . that Bermuda’s tax structure placed a disproportionate tax burden on those least able to pay. “

For all its appeal to international businesses, the system is harsh on Bermuda’s working class, who say their biggest taxes are the high prices of imported goods. As the conversation a few nights ago focused on pocket questions in Harry’s Bar, a favorite Hamilton watering hole for the actuarial set, a bartender told a visitor the joke.

“It’s not a tax haven, it’s a hidden tax,” he said as he served a $ 12 glass of beer to his thirsty customer.

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