Proposed new tax rules likely to hit Bermuda companies
New global rules that would force many Bermudian-based multinational companies to pay more tax have a good chance of becoming reality, despite the challenges of the required international consensus, says one of the island’s leading corporate tax experts.
Will McCallum, head of tax at KPMG in Bermuda, said the changes are likely to come: the big questions are when and in what form.
The Organisation for Economic Development and Co-operation is spearheading efforts to establish a two-pillar system that captures more tax from technology giants and ensures that all large, multinational companies pay a minimum rate of tax on their earnings.
This month, the OECD released a blueprint detailing its proposals. It set a target of mid-2021 for achieving consensus among the 137 members of the Inclusive Framework on Base Erosion and Profit Shifting, which include Bermuda.
If the new framework takes effect, many Bermudian multinationals, including those in the island’s flagship international re/insurance industry, were likely to be impacted, Mr McCallum said.
He added that Pillar 1, which focuses mainly on profit attribution in the digital economy and ensuring taxes are paid where value is being generated, is currently less of a concern to Bermuda than Pillar 2.
Mr McCallum said: “At the moment, it looks like Pillar 1 will carve out highly regulated financial services, including insurance, from most of the provisions. Nothing is done until it’s done, but the way the blueprint is laid out, it does scope out insurance right now.”
However, there is no such carve-out for insurance in Pillar 2, which seeks to impose an as-yet undecided minimum rate of tax on the profits of multinationals that meet thresholds including minimum annual revenue of 750 million euros and a presence in more than one jurisdiction.
The minimum tax proposal did not imply that countries like Bermuda would be forced to start taxing corporate profits, he said.
“Pillar 2 starts with the premise from the OECD’s perspective that countries can tax whom and how and when they want – that’s their sovereign right,” Mr McCallum said. “But it does want to ensure that all income of a multinational is subject to a minimum level of tax.
“It seeks to create a global set of rules that will hopefully be uniformly applied by everyone and which gives other countries the right to apply a top-up tax to income earned by multinationals in specific jurisdictions where it doesn’t attract a minimum level of tax.”
What that level will be remains unknown, but estimates are circulating.
Mr McCallum said: “Most people think the mid-rate will be between 10 per cent and 12.5 per cent, somewhere in that range. However, we don’t know yet. It feels like that will be one of the last political decisions to be made.
“If these rules are passed, then it is pretty likely that income earned in Bermuda will be subject to a minimum rate of tax through one of these Beps Pillar 2 collection mechanisms.”
The proposed mechanisms are complex, he said, but effectively involved analysis of intragroup transactions in order to determine where top-up tax should be paid.
Erosion of the island’s tax advantage may have an impact on the island’s attractiveness as an international business domicile. As Mr McCallum noted, from the perspective of a multinational company in Bermuda, with a significant amount of income that does not attract much tax, “this is not a welcome development”.
He added that KPMG had been working with companies in the insurance industry in Bermuda and elsewhere to assess the impact the new rules could have.
“We haven’t seen any situations yet with an absolutely terrible outcome that has people dramatically altering their business plans,” he said. “And, for what it’s worth, it affects all the players the same way.
“There are so many reasons still to be in Bermuda. We have businesses that are structured in a particular way, primarily around the efficient deployment of capital globally.
“Where is there a better place to do that in the world than Bermuda, a place that’s tried and tested? We have a regulator that’s very highly regarded and a regulatory regime that works well with the US and Europe. These businesses are set up this way for a reason.
“Having to pay more top-up tax? Not welcome, of course, but I don’t know that the net outcome will be ultra-dramatic to a lot of these organisations.
“When you peel back the layers, it’s amazing how nuanced these rules are for each specific group: where they generate their income, whether it’s related party or third party, which regions it comes from – all of those things factor into whether this bites and to what extent.”
Some have dismissed the idea that the rules can become reality, given the difficulty in achieving international agreement. Countries have different ideas on how a new international tax system should work and whether it should happen at all.
The United States, for example, sees Pillar 1 as an attack on its own industry, given that the tech giants that fall within its scope are predominantly American.
Mr McCallum said the mid-2021 target date for consensus seems unrealistic, but added: “It would be naive to say, ‘it’s too complicated, it will never get political agreement’.”
Several agreements that had seemed unachievable at the outset, such as the Beps initiatives, had been realised over the past decade. He added: “I think there’s a broad feeling this will happen in one form or another.”
The alternative would be unilateral measures taken by different countries, which could lead to double taxation and other unintended consequences, a scenario that no one wanted, Mr McCallum said.
However, even if the OECD achieves broad agreement, translating the blueprint proposals into domestic legislation would be time-consuming, he added.
Mr McCallum said his work with clients had been a massive education process over recent months and the issue was now “percolating up to the C suite and boardroom level”.
The OECD had made “superhuman efforts” to draw up a highly complex blueprint and was seeking feedback from Inclusive Framework members, an opportunity that Bermuda’s government and international business community has seized.
Mr McCallum said: “The Bermuda Government has been very active through the summer in trying to inform the process to the fullest extent possible. There have been a lot of voices that have fed into comment letters.”
The OECD had always been receptive to points made, he added, without necessarily changing its tack.
He added: “Bermuda has responded to this like it has to other global initiatives – we do it together. There’s such an alignment of interests around these key issues and such a willingness to weigh in and help and provide feedback.”
Tomorrow KPMG will host a virtual session, featuring Mr McCallum giving high-level overview of the OECD proposal, the blueprint report, and discuss the potential implications on multinationals with a Bermuda presence. The hour-long session will start at 4pm. To register, click here