Global minimum tax could reduce Bermuda’s competitive advantage: Fitch



The net profitability gap between companies incorporated in Bermuda and non-Bermuda may narrow over time given the expected adoption of the OECD’s multilateral agreement to establish a global minimum tax rate by 15%, according to Fitch Ratings.

The rating agency warns that this will erode Bermuda’s competitive tax advantage to the margins, possibly making the island less attractive as a base for some companies.

While the profitability of relocating to Bermuda might decline a bit, Fitch also noted that “the overall benefits of maintaining a home and operating in the Bermuda market are likely to last.”

For now, Fitch has said he will not take any rating action on Bermuda’s home insurance or reinsurance companies, but said long-term implications are now uncertain in the shadow of tax changes. .

The global minimum tax rate of 15% is expected to be ratified under the second pillar of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

As a result, it will be increasingly difficult to offer lower corporate tax rates, it seems, without being seen as falling outside global standards.

So this has clear ramifications not only for Bermuda, but for other key domiciliations in the insurance and reinsurance market, as well as where hedge funds, including insurance-related securities (ILS ), tend to be managed.

Fitch explained that “Bermuda continues to benefit from an established position in the global (re) insurance market, with proven underwriting expertise, a strong and efficient regulatory regime, Solvency II equivalency and Solvency II status. of mutual jurisdiction in the United States. Inclusive Framework of the OECD and joined the OECD statement in July 2021 with the aim of actively participating in the development of the final details of the BEPS plan.

It is also important to note that Bermuda has already resisted the passage of the Tax Cuts and Jobs Act of 2017 (TCJA) which lowered the corporate tax rate in the United States from 35% to 21% and reduced established the base erosion tax and the anti-abuse tax (BEAT).

“The TCJA has reduced the long-standing tax advantage of Bermuda-incorporated companies over the United States to a greater extent than expected with the adoption of a global minimum tax rate of 15%,” said Fitch.

However, while the new global minimum tax rate of 15% will narrow the gap between the effective tax rate of non-Bermudan re / insurers and Bermuda re / insurers, the gap may still persist and a benefit still obvious, as most of the world’s jurisdictions are likely to keep their tax rates higher than the minimum anyway.

It’s also noteworthy that insurance and reinsurance companies in Bermuda pay corporate tax in other places around the world where they operate, while Fitch also pointed out that they also pay corporate tax. US excise on premium payments from the United States to offshore subsidiaries.

Bermuda-based companies have responded to the TCJA, making strategic changes to counter the effects of the tax implications.

One would expect them to do the same in response to the OECD minimum tax rate.

Fitch also noted that the start-up and expansion of insurance and reinsurance business in Bermuda continues at a strong pace, despite tax considerations.

Given the island’s significant expertise and its reinsurer-friendly regulatory and operating environment, Bermuda is likely to remain an extremely attractive location to operate in these markets, as well as the ILS.

The tax changes will certainly erode some of Bermuda’s competitive advantage, as they level the global tax game much more evenly.

But there are plenty of other reasons to start a re / insurance or ILS business in Bermuda and the island has for many years ensured that its appeal will continue as global visions for taxation have changed.

Fitch said that “Bermuda’s (re) insurers should have time to make the necessary adjustments before the overall 15% minimum tax is finally implemented. “

The rating agency also noted that the global minimum tax rate may also prove to be a catalyst for further price increases, to offset the additional costs of taxation.

The timeline for ratifying the global minimum tax rate seems less certain, however, and Fitch said that “we view the current target effective date of 2023 as aggressive, given the large number of countries that need to pass legislation. “

Global tax changes clearly have ramifications for offshore homes around the world.

But, with Bermuda being so well established in the global insurance, reinsurance, and ILS markets, as well as the offshore financial and capital markets more generally, this suggests that Bermuda may be much less exposed to global markets. ramifications of a minimum tax rate than others, domiciliations perhaps less globally active, or actively diversified, where low taxation has sometimes been the main driver of businesses moving there.

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