Fear over unified tax threat to Bermuda
A former finance minister “is scared for Bermuda” because of an international movement towards a global minimum corporate tax.
While the island has previously faced such global pressures, Bob Richards, who was finance minister from 2012 to 2017, fears this threat could scuttle Bermuda's international business – the main driver of the economy.
One time banker, investment management business owner, financial services regulator and now author, Mr Richards said: "This is worrying. I am actually scared for Bermuda."
He is a Joe Biden fan, but when the US president went before Congress and named Bermuda as one of three offending “tax havens“, he admitted: “It was a very scary thing. You want to know how I feel about it. I’m scared.”
Mr Richards said that in the past, Bermuda was criticised by either the US or European countries. This time, it appears to be a unified threat from both.
At issue is a plan to harmonise corporate income tax rates internationally to remove the incentive for multinational corporations to shift profits through jurisdictions, seeking lower tax rates.
Because Bermuda's corporate tax rate is zero, large countries see Bermuda as a place designed to help companies evade taxes due in their countries of origin.
One concern for Bermuda is that by not establishing a Bermuda corporate tax regime, Bermuda companies, especially in the insurance industry, may decide to move to jurisdictions that do not have reputational issues.
European countries have been battling for corporate tax revenue for many years, hoping to get it from the giant hi-tech firms that grew out of America – global companies operating on European soil but paying little in taxes.
The Organisation for Economic Co-Operation and Development (OECD) member countries used the tax harmonisation initiative to target them. The US is a founding OECD member, but the group is dominated by European interests. It is based in Paris with sister group, the Financial Action Task Force.
"These organisations have a particular bias against places like Bermuda,” says Richards.
“They feel that we are an aberration to the natural economic order of things. They see such an order exclusive to OECD countries. Others are simply Third World countries.”
He recalled first seeing this in person while working at the Bermuda Monetary Authority in 1981, and being with officials at the International Monetary Fund headquarters in Washington.
Richards says, “They see dots on the map like Bermuda doing so much business that we become what the accounting industry calls ‘material’ – big enough to notice and make a difference.”
This predates the massive influx in insurance capital starting 1985/86 (ACE and Exel) and the reinsurance capital that began in the 90s.
Even before then, money flows associated with the island were so large they showed up in global statistics.
Richards’ world view was built during a career in financial services – banking, the Bermuda Monetary Authority, his own investment management business and as a director of Invesco.
Later, he would become finance minister and Deputy Premier and have to deal with these issues head-on.
In an ideal world, the imports of all the countries should be counterbalanced by their exports – netting out to zero. But in reality, even before Bermuda became an insurance capital of the world, they didn't.
“They were out by billions of dollars,” he said, “and a key reason for that was because of places like Bermuda.
“Today, there are the tech giants, so it’s no longer billions. It’s trillions. And the tech giants are very sophisticated and scientific in how they seek tax reduction.
“What were murmurs in 1981 have risen to screaming in 2021. They see Bermuda as a rogue agent that must be put down.”
Here at home, the Bermudian perspective is not just the protest that we’ve done nothing wrong. We also have an insurance industry that hugely benefits the global economy, the gospel of which is preached by Bermuda’s finance ministers on stages and in board rooms in major capitals.
But Richards sees the American and European governments a long way from pulling the trigger on an international tax agreement.
He admits to no special knowledge outside of publicly available information.
But he said: “They are still at the starting gate of a long, tortuous process in this global minimum tax journey. And not everyone is on-board. Ireland, Cyprus and some of the Eastern European countries, are not.
“The way the EU works, they need unanimous agreement within the Council. Consensus is not good enough. So, one country can hold the whole thing up. If the EU can’t fly altogether, it will never fly.”
But why are only small countries being targeted? Europe, itself, has tax havens.
“The double standard is outrageous,” Mr Richards agrees. “Luxembourg is a tax haven. Ireland is, as well. Inside France, the most rabid of tax collectors, there is Monaco, a tax haven. And Cyprus is a tax haven. These are all EU members.”
“Considering the kind of standards they require from small countries like Bermuda, they have their own jurisdictions inside the EU which do the same things and no one says anything about them.”
There are similar issues in the United States. In fact, the US is considered one of the largest tax havens through legal differences found in states like Nevada, Delaware, Montana, South Dakota, Wyoming and New York.
Says Richards, “Again, the double standard doesn’t seem to bother these people.”
The EU was chasing some of America’s greatest companies such as Amazon and Google but now, America and Europe seem to be joining forces
Bob Richards projects: “They are going to have some problems with the minimum tax proposals in the US Congress, as well.”
But he said it is still not clear where that leaves Bermuda.
“We have Bermuda insurance/reinsurance companies, and perhaps others, that are global companies – not subsidiaries of US or European companies, but actually headquartered here. These are real companies with executives and a physical presence here.
“They have offices and do business worldwide. So, how will they be treated in the global economy? That is the question and I don’t know the answer.
“I’m sure that international business has working groups figuring out strategies, going forward.
“In the UK, there is a move seeking a carve-out for the entire City of London from these proposals. There are always carve-outs in these types of rules.
“Maybe, we should seek a carve-out for insurance. Insurance and shipping industries have companies that are global by their very nature. These are sectors that must be looking for carve-outs. They don’t fit the types of models that these guys are trying to stamp out.”
Multinationals with paper Bermuda companies for tax purposes are the target.
The former finance minister points out: “I’m not sure how much that type of company benefits Bermuda, anyway – companies that exist only in a lawyer’s file cabinet. They don’t pay much in government fees and taxes, and probably not that much to the private sector.
“When I was Minister, my sense was that there was a problem with the permit companies that didn’t even incorporate in Bermuda. They were mostly Irish companies with a branch in Bermuda.
“They were ridiculously costly to Bermuda, because they were hurting our reputation and the revenue from them was minuscule.
“They may have been paying the law firms $70,000 a year, and moving billions of dollars through these companies, but the cost to Bermuda’s reputation was gigantic.
“The Ministry of Finance was spending a lot of time and effort trying to blunt the criticism as it relates to these companies.
“I would make a speech in Brussels extolling the virtues of Bermuda’s insurance companies and their benefit to the world and the first question when I finished was about Google. It was ridiculous. They didn’t want to know about the good.
“The cost benefit to Bermuda was so out of balance, that I sought ways we could stop doing that kind of business. My first step was to increase the permit cost from less than a couple thousand dollars to $25,000. Perhaps, I should have increased it to $2.5 million to get their attention, or end that business completely.”
Mr Richards said the government may have to face up to a choice.
“We must find a way to keep the meaningful business. Other business, such as permit companies, we may have to let go.”