‘Tough new legislation which would stop US companies registering in Bermuda to dodge income tax back home was introduced in Washington yesterday’

— Stephen Breen The Royal Gazette March 7, 2002.When is a tax haven not a tax haven? Answer: When Bermudians say it isn’t. It used to be as simple as that. Frankly, years ago one risked being tarred and feathered if not shunned completely if the two words tax haven just happened to spill out your mouth. In the Bermudian context it was the supreme insult. We were not to borrow a phrase like those less than reputable offshore centres to the south of us.

We were different, a cut above the rest, a legitimate centre of international commerce. But the truth is that Bermuda has had one chief asset as a favoured business domicile that surpassed all others and that is that Bermuda did and currently does not levy any corporate income taxes, or for that matter, capital gains taxes, on companies that choose to make Bermuda their corporate address.

The official public view revolved around our great location, light regulatory environment and the fact that these multi-million dollar companies were here because they absolutely loved us. The real truth has always been that they were here because by shedding a significant portion of their onshore tax load, they were able to be far more competitive than rivals that were left behind to face the tax collectors music back home.

The term “back home” in this context however is a relative one. After all, when one takes in to account that many companies such as the Tyco’s and Global Crossing’s which do have a physical presence here and others have never really left their onshore locales, where they continue to conduct their world wide operations, it is quite easy to see why they are now under the legislative spotlight.

A fine example of the above is provided by the toolmaker Stanley Works, a part of the new wave of companies seeking to take advantage of the Bermuda option through reincorporation on-Island.

As reported, Stanley’s tax rate will shrink from 32 percent to 23 percent, thereby shaving off about $30 million per year from the companies current tax load.

Stanley’s website trumpets the move as follows: “While we will be incorporated in Bermuda, at this point, there are no plans to move any business operation there.” While a case can be made about the legitimate presence of most of the companies that comprise our Insurance sector, those with either a Re, Cat or Cap as a prefix, a very large percentage of our American derived offshore based companies, particularly the so-called paper companies are likely to see the sorts of legal loopholes that made this phenomenon possible, partially or fully eliminated.

It all makes some pine for a return to a more uncomplicated time. An era when those who had always benefited immensely from this offshore phenomenon and who were some of the most powerful and influential individuals and the corporations that they represented in the US could exercise their considerable financial and political muscle to thwart all efforts at reform.

This all changed with the events of September 11 and, following that, the Enron scandal. Enron, which has now become a byword for unimaginable greed, hubris, deceit and if allegations are proven, corporate criminality and which at last count had created at least eight “paper” subsidiaries in Bermuda, may have proved to be the final nail in the coffin.

Let us not be naive to believe that this issue has arisen out of thin air. The heat really began to rise three or four years ago when the giants of the offshore insurance industry led by the two Brian’s of XL and Ace, flush with cash, began buying up anything that wasn’t nailed down. Among which, was an American insurer named Cigna, practically an American household name for years.

In Cigna’s case it was either join them — ‘them’ being the increasingly powerful tax-light Bermuda insurers in this case Ace — or face going out of business. It was then, fearful of the mercenary and at times ruthless logic that was at work here that the American political establishment, largely Northeastern legislators such as Congressman Neal, a member of the all powerful House Ways and Means Committee and sponsor of one of the current bills, began to place Bermuda in their cross hairs.

They were continually stymied however by not only the powerful forces arrayed on the private sector but also by the Republican-controlled Congress and White House. And if the events spoken of earlier such as that, which occurred in September and October, had not taken place it is very likely that the status quo would have remained.

One example of the above dynamic currently at work here revolves around the issue of campaign finance reform. Much like the tax loophole question, this too was an issue that was destined to rot on the vine prior to the events of the last few months but was quickly resurrected and passed once the financial scandal, represented by Enron, had erupted onto the American consciousness, revealing the unholy nexus between money and power that exists in American politics.

With massive amounts of treasure being expended on the so-called war on terrorism and the realisation that the off-shore option was liberally used by the executives at Enron to literally cook the books, a golden opportunity presented itself to those within the American political establishment to resume their effort to reign in the type of abuses that were resulting in the loss of billions of dollars to the US treasury.

Quickly wrapping their effort, much like the Republicans did with the war itself, in the bright shiny cloak of patriotism, they have virtually guaranteed themselves a better than even chance — according to my Washington sources — of succeeding in changing the offshore landscape considerably. Their argument is somewhat simplistic, yet potentially compelling and effective. At a time when America itself is at risk, why should wealthy corporations avoid carrying their fair share of the tax load by establishing a paper presence in an offshore locale like Bermuda.

The corollary to all this, based upon the prevailing view is that to support such practices would be unpatriotic. And what American Congressman (or even President) wants to be considered unpatriotic during a congressional election year with a war going on? Very few I would hazard to guess. Thus the dilemma for the Republican establishment and ultimately our Government.

Obviously, the most vulnerable target will be the so-called American derived ‘paper companies’. These are companies that have reincorporated in Bermuda but do not actually have any real physical presence here. A strong case can be made that they are here primarily to avoid paying the sorts of taxes that they would back home. A clear case of tax avoidance? Well that’s in the eye of the beholder now isn’t it!

The irony about all of this is that many of these companies, while saving tens of millions of dollars in taxes, actually pay very little to the Bermudian Government — just over $27,000 per annum-for the privilege of being placed in some file at either AS&K or Conyers Dill & Pearman.

Next in line of vulnerability would be the companies that while domiciled here, do not carry on any substantial business from our shores. These companies remain for all intents and purposes American companies and direct most of their American and or worldwide operations from the US.

The only other variables are whether the proposed legislation will be retroactive in its provisions as the Neal bill now threatens, and if so how far back will it go? Another variable is, whether the final look of the legislation once having gone through Congress conforms to the American penchant for compromise, thus producing a final bill that while causing us some pain, such as raising the price of exit from the onshore world to our own, doesn’t result in our economy being placed on life support.

In the Bermudian context this should only cause us to redouble our efforts to diversify this economy. It is no secret that it has become too overly dependent, some would say dangerously dependent, on international business for growth. This is easier said than done, however, when many in our community are, frankly, blithely unaware of the impending storm gathering to our west.

And our political leadership has offered scant direction and, yes, leadership on this matter. After all, the need for a more sustainable and diverse economy was palpable long before now.

This issue also calls into question the continued suitability of the Bermuda tax model. It is becoming very problematic and unsustainable internationally to continue to allow these global companies the sort of tax holiday that even other successful off shore locales such as Ireland have eschewed. In Ireland, for example, the tax rate is somewhere in the region of 12 percent.

There have also been calls on the local front for change as advocated of late by columnist Larry Burchall and businessman Eldon Trimingham. Both have called for the imposition of a moderate and competitive tax rate to be established on the corporate profits of these international companies.

A rate of between seven or ten percent, besides injecting more equity into our fiscal regime, would, at the very least add more credibility and weight to our arguments internationally. However, even this moderate proposal could be problematic bearing in mind our Government’s somewhat shortsighted commitment to extend the tax holiday, within this sector to the year 2014.

Perhaps we have gotten too comfortable with the notion that the gravy train would last indefinitely, as we did with tourism in another era.

The events over the last three weeks should have dispelled that notion forever.

Even if —charmed as we are — we manage to get off rather lightly, we should thank our lucky stars and begin to ensure that we never again find ourselves in quite such a position of vulnerability, as we apparently find ourselves in today.