Set to shrink? The payroll tax increase proposed in last week's Budget has caused great unease in Bermuda's international business community.

Payroll tax increases proposed in the Budget could cause some international companies to leave Bermuda or stop hiring on the Island.

That is the view of retired corporate lawyer Kevin Comeau, who said the the raising of the payroll tax salary cap could even give companies a reason to take legal action against the Government - but the firms would more likely simple leave or scale down their operations here.

Those who run the international companies that are the biggest contributor to the Bermuda economy have a legal obligation to look at other jurisdictions if they offer a lower tax burden in the interests of shareholders, Mr. Comeau said.

Finance Minister Paula Cox raised the amount of salary on which high earners pay payroll tax from the first $350,000 to $750,000.

The proposal has caused considerable unease in the international business community, according to some sources.

Although the number of people affected by the raising of the cap is limited, those impacted are high-level executives, whose relocation to another jurisdiction would result in the loss of many support jobs.

International business directly contributed around a quarter of GDP in 2009, according the National Economic Report.

Mr. Comeau stressed that he did not represent international business people in any way, but he understood the frustration they must now feel.

"These companies that form our international business sector moved to this island for the simple reason that the Bermuda Government promised that they would not be subject to income tax," said Mr. Comeau, a permanent residency certificate holder who has lived in Bermuda since 1999.

"To legally support that promise the government issued to each of these companies a Tax Assurance Certificate that says, 'in the event of there being enacted in Bermuda any legislation imposing tax computed on profits or income or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any tax described herein shall not be applicable to such [company] or to any of its operations or the shares, debentures or other obligations of the said [company]'."

Payroll tax system requires these companies to pay a portion of the taxes payable on their employee's income, yet the Tax Assurance Certificate says that any legislation imposing tax on income shall not be applicable to companies holding these certificates, Mr. Comeau said. "For years these companies have simply paid these taxes even though they have always had a pretty good legal argument that such taxes are in breach of the written assurance given to them by the government.

"The problem is that this tax has been dramatically increased since the 1990s when the maximum salary cap was $60,000 and the taxable rate was nine percent making the maximum tax payable per employee $5,400. Under the new Budget, the taxable rate is increased to 16 percent and the salary cap is increased to $750,000 making the maximum tax payable per employee $120,000. That is a 2,122 percent increase."

Mr. Comeau said in reality these companies are unlikely ever to sue the government for breach of the assurance under the Tax Assurance Certificate as it would be seen as a public relations negative.

He added: "You may then say, 'so what if the government has breached its legal guarantee. These companies are rich. They can afford it.'

"You would be correct but you would have missed the point. These companies can simply move.

"It may not even matter that the directors and officers of a company love Bermuda and don't want to do anything that would hurt the Island. The simple fact is that they are under a legal obligation to conduct the company's affairs in the best interests of the company and its shareholders.

"That means that they are duty bound to look at the taxes in the various jurisdictions in which they can elect to reside and put that information in the hopper of facts that they must weigh when deciding what is best for the company. They are not even legally allowed to consider the devastation to Bermuda if they leave the island.

"So they will likely do one of three things: (i) they will continue paying the increased taxes, and postpone to a later day the decision whether to leave the island; (ii) they will pack up and leave the island; or (iii) they will simply put a freeze on all hiring in Bermuda and slowly wind down their operations through attrition—what you call the 'Silent Exit'.

"But no matter which exit plan they adopt, the loss of jobs and income to Bermuda will be devastating to us all."

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