Aiming for a less taxing time through growth
David Burt wants to see economic growth in return for scrapping plans to increase payroll tax rates for higher earners.
The Premier, speaking to an international business audience on Friday, said growth was a priority after a period in which the economy had contracted in seven out of eight years.
Economic contraction and a fall in population over the last decade had caused major strains on systems including healthcare, pensions and businesses.
Tax increases in recent years, to address the deficit issue, had made Bermuda a more expensive place to do business. Economic growth was the antidote to these problems, he told the audience at the Alternative Investment Management Association’s event at the Hamilton Princess.
The former government had laid out a two-tier payroll tax increase, the first half implemented last year and the second due to come in this year.
“There was a large amount of concern in industry about the impact that these tax increases would have on Bermuda’s competitiveness,” Mr Burt said.
“Because we are committed to growth and we recognise that growth is important, the Government has indicated that it’s not going to implement the second part of this payroll tax increase.”
The proposed increases would have meant the employee’s share of payroll tax would have risen from 7.75 per cent to 9 per cent for the income between $96,000 and $235,000, and from 8.75 per cent to 11 per cent for income between $235,000 and $900,000.
“That will be welcome to some, but the fact is that you cannot continue to have a budget that is continually in deficit,” Mr Burt said. “So we have to make sure we get growth in return for it.
“And in exchange for that the Ministry of Finance has been working with organisations to find ways in which we can get more people living and working in Bermuda.
“From a plain and simple aspect, if you want more jobs, you should tax jobs less, but clearly we have this reliance on payroll tax, which is a very easy tax to collect and raise.
“But over the years, it has been an inhibitor to the number of jobs on the island.”
Payroll tax makes up about 42 per cent of government revenue.
As Minister of Finance, Mr Burt will present his first Budget statement on February 16.
He is considering taxing commercial rental income, levying a professional services tax on legal and accounting services, and raising taxes on mobile phone services.
The Premier described the outlook for 2018 as “challenging” and talked of a “triple threat” from a European Union blacklist, an upcoming assessment of the island’s progress in implementing measures to prevent money laundering and terrorism financing by the Caribbean Financial Action Task Force, and recently enacted US tax reform.
He said Bermuda rejected the label of “non-cooperative jurisdiction” that was the basis of the EU blacklist.
“While we reject that label, we have to make sure that we do the things that keep us off the EU blacklist,” Mr Burt said.
“The mischief that the European Union is trying to solve — that of looking to avoid tax leakage — is not an issue that Bermuda can solve. It’s an issue for home countries.
“And as long as we share the information that’s required, it’s something that they can use to adjust whatever their home tax rules are to capture whatever income they feel is coming to Bermuda.”
The Bermuda Government was planning its response to the EU and would hold briefings with the Opposition’s finance team and industry bodies, as well as holding an official consultation, he added.
Last December, the EU’s economic and financial affairs council affirmed that Bermuda is a co-operative jurisdiction on tax matters, but Bermuda has agreed to address “economic substance concerns” by the end of this year.
On the challenge of the imminent CFATF assessment, Mr Burt said the island had work to do.
“We are not in the place where we need to be,” he said. “If we get a bad mark, it will be very much felt across the community. We can see what’s happened to other countries that have not done as well as they should have done.
“If you’re a big country such as Canada, you get a not-so-good mark under AML assessment and it won’t necessarily affect you much. When you’re a small country like Bermuda and you don’t get a good mark, then it’s something they can use to pull out the punch bag and start to chip away at what we have spent so long building. We’re not going to allow that to happen.”
He said a Cabinet committee was working on the issue with the financial-services industry.
On US tax reform, Mr Burt said it was something that Bermuda had long feared as a potential Doomsday.
“The emerging consensus now is that it may not be as bad as initially feared and it may present some opportunities,” he said.
He added: “The Minister of Home Affairs, who is responsible for immigration, had a meeting in which we made clear to members of the industry that if they were looking at any transfers of staff in order to take advantage of some of the tax changes, that Government would be able to facilitate that process to make it quick and painless.”
The Premier said the Government’s biggest budgetary challenge was to tackle the deficit and its $2.44 billion debt burden.
Mr Burt added that investments in infrastructure and digitising government services needed to be made, so “when we return to growth the Civil Service will not be as expensive as it once was”.