Corporate income tax for Bermuda?
Former finance minister Bob Richards believes that bowing to international pressure to establish a corporate tax regime in Bermuda could be a fool’s errand.
The average person thinks that income tax is easy to understand, he says, but in financial services the concepts of profit and income can be very subjective.
He said: “I hear people talking about instituting corporate income tax – 15 per cent, or whatever. I don’t think that is practical for us. The Bermuda Government already has enough trouble collecting taxes.”
In a country where some think government is already too big, establishing an expanded, or new, bureaucracy to chase down income tax may be prohibitive.
But Mr Richards, who was Minister of Finance from 2012 to 2017, said: “When you think of the difficulty in defining income, you can see how problematic this is. Because the more complex a business is, the more you are able to massage profit and loss.
“An insurance company is very complex and the net profit is therefore the result of a bunch of assumptions that could change.
“Secondly, the biggest corporate entities are insurance companies. And if you look at the publicly traded ones that are in Bermuda, you will see over ten years or so, that profits are very volatile. One or two Florida hurricanes can blow the profit away. That’s what insurance is for, to cover claims.
“The tech companies like Microsoft are predictable. But the bottom line for insurers/reinsurers is very unpredictable. There are going to be years of catastrophic events when reinsurers won’t make any money – losses from flooding, wildfire, hurricanes.
“If corporate income tax is instituted in Bermuda, international insurance companies will be the biggest payers. And there are not that many of them. So it would be an unreliable source of government revenue.
“It wouldn’t matter in a large country, because you would have thousands of other kinds of companies and industries. Revenues may rise and fall based on good times or recession, not based on whether a hurricane hit Miami.”
And you can’t count on a government keeping money from the good years in the bank for a rainy day.
He said: “That doesn’t happen anywhere. A classic example was seen right here in Bermuda when we had the big boom of insurance in the 80s and 90s. What did we do with that money?
“Government revenue? It all got spent, as though it would continue for ever. And when the music stopped, we found that the government was scratching for money, and started to rack up debt.
“And local companies pale in comparison to the international companies, if you are looking for tax revenues.
“Trying to mimic large industrialised, diversified countries is likely to be suicidal. Right now, we have a system that works reasonably well for us. The rest of the world doesn’t seem to like it. But quite frankly, they would not care if they didn’t think we were eating their lunch.
“Nobody cared that Bermuda didn’t have income tax until we became ‘material’ in the world of global finance.
“They don’t care about our system. They only care about themselves and if we become collateral damage, so be it.”