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

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

bermuda-satelliteThe rating agency warns that this will erode Bermuda’s competitive tax advantage at the margin, perhaps making the island less attractive as a base for some enterprises.

While the profitability of basing yourself in Bermuda could wane a little, Fitch also noted that, “the overall benefits of maintaining a Bermuda market domicile and operations will likely endure.”

For now, Fitch said it will not take any rating actions on Bermuda domiciles insurance or reinsurance companies, but said that long-term implications are now uncertain under the shadow of the tax changes.

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

As a result, it will be increasingly challenging to offer lower corporate tax rates it seems, without being considered to be standing outside of global norms.

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

Fitch explained that, “Bermuda continues to benefit from an established position in the global (re)insurance marketplace, with demonstrated underwriting expertise, a strong and efficient regulatory regime, Solvency II equivalence and reciprocal jurisdiction status in the U.S. Bermuda is a member of the OECD Inclusive Framework and joined the OECD statement in July 2021 as it seeks to be an active participant in shaping the final details of the BEPS plan.”

It’s also important to note that Bermuda has already weathered the passage of the The Tax Cuts and Jobs Act of 2017 (TCJA) that lowered the U.S. corporate tax rate to 21% from 35% and established the base erosion and anti-abuse tax (BEAT).

“The TCJA reduced the long-standing tax advantage of companies incorporated in Bermuda versus the U.S. to a greater extent than is expected with the passage of a 15% global minimum tax rate,” Fitch said.

However, while the new global 15% minimum tax rate will reduce the gap between the effective tax rate of non-Bermuda re/insurers and Bermuda re/insurers, the gap may still persist and an advantage still be evident, as most global jurisdictions are likely to keep their tax rates higher than the minimum anyway.

It’s also notable that insurance and reinsurance companies in Bermuda pay corporate tax in other locations around the world where they operate, while Fitch also highlighted that they also pay a U.S. excise tax on premium payments from the U.S. to offshore affiliates.

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

They would be expected to do the same in response to the OECD minimum tax rate.

Fitch also highlighted that Bermuda start-up and scale-up of insurance and reinsurance businesses continues apace, despite tax considerations.

Given the significant expertise on the island and its re/insurer friendly regulation and operating environment, Bermuda is likely to remain an extremely attractive location to operate in these markets, as well as in ILS.

The tax changes will certainly erode some of Bermuda’s competitive advantage, as it levels the global tax playing field much more.

But there are many more reasons to base a re/insurance or ILS business in Bermuda and the island has for many years been ensuring its attraction would remain as global views on tax have changed.

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

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

The timetable for ratifying the global minimum tax rate seems less certain though and Fitch said that, “We view the current 2023 target effective date as aggressive, given the large number of countries that have to pass legislation.”

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

But, with Bermuda being so well-established in global insurance, reinsurance and ILS markets, as well as more broadly in offshore finance and capital markets, it suggests that Bermuda is perhaps much less exposed to the ramifications of a minimum tax rate than other, perhaps less globally active, or actively diverse, domiciles where low-tax has sometimes been the main driver of businesses domiciling there.

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