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Minimum tax is bad for the global economy – and Bermuda

G7 leaders pose on a beach in St Ives, Cornwall, last weekend. They agreed on a 15 per cent global minimum tax at their meeting. Leaders from left, Canadian prime minister Justin Trudeau, European Council president Charles Michel, US president Joe Biden, Japan's prime minister Yoshihide Suga, British prime minister Boris Johnson, Italy's prime minister Mario Draghi, French president Emmanuel Macron, European Commission president Ursula von der Leyen and German chancellor Angela Merkel. (Photograph by Patrick Semansky/Pool/AP)

Bermuda has lived for decades with the spectre of foreign governments shattering the economy with the stroke of a pen.

Changing a few words in a tax code could cause immeasurable harm to international businesses, which has as one of its cornerstones the commitment that companies’ profits will not be taxed. It should be emphasised that this exemption is not the same thing as not taxing companies at all; international companies, especially those with a physical presence, contribute massively to Bermuda Government revenues.

Still. this commitment puts Bermuda at odds with much of the world, where taxes are regularly levied on corporate profits. Bermuda, as a self-governing territory, has the right to decide how it will tax itself and has created a unique tax structure that meets the needs of its people while enabling international companies to base themselves in Bermuda. Indeed, one of the flaws in most of the campaigns from large Western countries is to focus on a single means of taxation when there are many forms of revenue-raising out there.

Equally, many of the businesses that do locate in Bermuda deal with risk and are inherently risky. Reinsurers and investment companies can make enormous profits, but they can also make eye-watering losses — for example, if there is a hurricane of the scale of a Katrina in 2005. If Bermuda was dependent on a tax derived from corporate profits in that scenario, it would face a budgetary catastrophe.

Had Bermuda’s unique structure not existed, it is unlikely the island would have become a major market for re/insurance, where much of the innovation in this industry has taken place while also being the engine of the local economy.

Nonetheless, Bermuda’s tax structure, along with other no or low-tax jurisdictions, is aggravating to those countries who feel that if a global company decides to base itself in a lower-tax jurisdiction, this takes away from their fair share of revenue.

As a result, Bermuda has faced threats from other countries over the years to make changes that would force companies onshore.

There is a risk of panicking every time a threat emerges, as it has now. A calm and measured approach is often better, but Bermuda cannot afford to be complacent. Those who resent the existence of international financial centres have a number of powerful weapons in their arsenals that could shatter the island’s economy.

The present threat comes from the Group of Seven — the seven liberal democracies with the largest economies — which declared over the weekend that they will have a 15 per cent minimum tax on corporate profits.

They have also agreed that multinational companies should pay tax where they make their sales rather than where they are based, provided that their profit margin is ten per cent or higher. The tax is aimed primarily at technology companies, although it turns out that Amazon, often accused of paying minimal taxes, would be excluded as few of its sales reach the ten per cent benchmark.

For Bermuda, two questions arise. The first is the effect that a global minimum tax would have on the Island’s international business sector. The second is the probability that such a measure will be enacted.

Forcing all of the world’s nations to adopt a minimum level of corporate tax would mark an irrevocable change in Bermuda’s economy. Some companies would no doubt consider their options, although the reinsurance industry has more reason to stay because Bermuda has a bustling market here for many reasons other than tax. But other companies might well ask if other jurisdictions would better meet their needs. More importantly, at a time when Bermudian-based companies offer a risky world a degree of security through insurance and other financial means, forcing them to consider where they should be located is an unnecessary distraction.

There may be a slender silver lining for Bermuda in terms of the second part of the agreement. Bermuda gets minimal income from tax arrangements for giant technology companies but incredibly bad public relations. If ever there was an example of the costs outweighing the benefits, it is when a tax wheeze involving a tech company subsidiary in Ireland but “tax resident” in Bermuda means the tech company pays no tax and Bermuda ends up in the headline. So Bermuda could benefit in a small way if this went away, although it is not clear what other companies might be inadvertently hurt as a result.

Still, the overall impact of the global tax initiative would be catastrophic for Bermuda, and likely bad for the global economy as well.

The question arises of whether it will happen. It could take effect only if the G7 was able to convince a wider group of countries — the members of the European Union and the G20, who make up about 90 per cent of the world’s gross domestic product — to take it up as well.

If they did, they could bring pressure to bear on companies based in places such as Bermuda by barring them from their markets unless their domiciles’ tax structures were aligned with the rest of the world’s.

This is easier said than done. The Biden Administration faces an uphill task getting the agreement through Congress, while there is also opposition from within the EU because Ireland, Hungary and Lithuania have tax rates that are 15 per cent or lower.

That this agreement should be made in Britain, which has just exited the EU to assert its independence from multinational agreements, is ironic especially since many of Brexit’s most fervent supporters envisioned London becoming “Singapore on the Thames” with competitive tax policies at the heart of attracting businesses to Free Britannia.

Then, too, attempts to carve out loopholes have already begun. Britain wants to have the City of London excluded, for example.

Despite that, this approach must be taken seriously. Countries have borrowed vast amounts of money to keep their economies and people afloat through the pandemic and now need to pay for it. At the same time, the notion that taxes and public spending can be used to reduce inequity is growing in popularity and people who legally reduce their tax burdens are portrayed increasingly as selfish and evil.

Even if this action fails, other more modest attempts will be tried — which Bermuda needs to resist.

There are strong arguments against attempts to eliminate tax competition and sovereignty, not just for Bermuda’s benefit but for the world’s.

The Wall Street Journal has reported that China will almost certainly not agree, which would make the rest of the world even less competitive with that economic behemoth, and the newspaper also argues that governments would be mad to give up the ability to compete on tax policy and the use of tax incentives.

Tax competition also helps the world to experiment with what forms of taxation work best and what do not. Harmonising tax rates effectively forms a cartel that would limit competition, as business website CapX posits in a well-argued opinion.

It states: “That’s why adopting the kind of one-size-fits-all approach favoured by the G7 would be so damaging.

“It is an assault not just on nations’ independence, but on the very concept of competition. Politicians harping on about a “level playing field” should realise they are levelling down, making everyone more mediocre in the process.

“It is just that kind of deadening, overmighty approach that Britain decided to leave by rejecting the EU. It would be a great pity if the government now embraced it once more in a different guise.”

This is just the argument Bermuda needs to make. It is not merely an intellectual argument. It is a matter of survival.

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Published June 15, 2021 at 8:00 am (Updated June 15, 2021 at 8:04 am)

Minimum tax is bad for the global economy – and Bermuda

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