Last December, David Burt, the Premier, tabled Bermuda’s answer to the global minimum tax, the Corporate Income Tax Act 2023, which will impose a 15 per cent tax on multinational enterprises with annual revenue of €750 million (about $808 million) or more.

Valentin Bendlinger is a legal tax academic and researches in the field of Pillar Two. The GMT, is a key part of Pillar Two. Here, he answers questions about the tax and its possible impact on Bermuda.

Question: The Government in Bermuda is developing a package of qualified refundable tax credits. In an article in the Financial Times, Will Morris, global tax policy leader at PwC US, said jurisdictions, like Bermuda, would be likely to collect additional tax revenue under the new regime and “give that back to business” via another arm of government. He was quoted as saying: “Tax competition will not die — it will shift to subsidies and credits.”

The race to the bottom of corporate tax rates has, in effect, ceased, except for tax credits. Will we see a battle of the tax credits to attract – and keep – businesses in places like Bermuda?

Answer: Qualified refundable tax credits are definitely treated favourably under Pillar 2, nevertheless, also with QRTCs the effective tax rate might fall below the minimum tax rate.

I agree, that Pillar 2 will, of course, not be the end of tax competition. However, Pillar 2 will limit the leeway of jurisdictions like Bermuda to provide for a zero tax environment for MNE groups hitting the threshold of €750 million (be aware that below that threshold, Pillar 2 is not effect.)

A “battle of tax credits” is — under my opinion — an exaggeration. Of course, jurisdictions like Bermuda will try to design their legal framework around the minimum tax rules, however, there is only a certain degree to which this can be done.

As a matter of fact, in the long run, under my opinion, the attractiveness of investment hubs like Bermuda is likely to decrease.

Again, this might not be true for high net worth Individuals (individuals are not subject to Pillar 2) and MNE Groups below the €750 million (however, be aware, that if Pillar 2 turns out to be successful, implementing states may decide to reduce this threshold.)

Q: What are the dangers and/or advantages of tax credits? For instance, if a firm gives say, $2 million, it may want $4 million back in credits.

A: Exactly that is a credit. However, they need to be designed in a specific way in order to benefit from a preferential treatment. If a Bermuda entity of a big MNE group pays $2 million in tax but receives a $4 million credit, it might happen that the effective tax rate of that group in Bermuda will even fall below 0 per cent, meaning that any other state could even collect more than 15 per cent minimum tax.

In order to qualify as a tax credit, the credit needs to be payable within a couple of years and in cash equivalent. So a simple credit will not do it. Tax credits are highly inefficient.

This is like the Government simply pays money to corporations to do their business there. The resources of any jurisdiction — even if this is Bermuda — is limited to some extent; and, as favourable the credit will be designed, Pillar 2 will pose limits as to how far governments can go.

Under my opinion, at least in the long-run, low-tax investment hubs like Bermuda will become significantly less attractive to foreign direct investment. Furthermore, be aware that Pillar 2 might not be the end of tax competition, however it will certainly neither be the end of the efforts of the Western hemisphere to tackle low-tax environments.

Q: While revenue from the GMT could be very significant, it could also vary considerably every year: how can a country like Bermuda best deal with that? For instance, the Bermuda Government has indicated that GMT revenue will be used to lower the cost of living and doing business by reducing import and payroll taxes, but if GMT revenue varies, how can that be managed over time?

A: As a well-developed country like Bermuda, it will be important to, on the one hand, collect the tax that would be collected by others anyway and on the other hand, still provide for the most favourable tax environment that can be provided even if Pillar 2 is widely implemented.

As a tax academic, I would — instead of simply implementing a QDMTT consider the implementation of a moderate but stable corporate income tax. For example, the UAE decided to give up its zero per cent CIT policy and instead applies a 9 per cent corporate income tax rate.

Although 9 per cent is still lower than the minimum of 15 per cent, already a rate of 9 per cent significantly reduces the amounts of top-up tax arising. Furthermore, the revenues will be more stable than those of a "soak-up" tax like the QDMTT.*

(*Note: a QDMTT is minimum tax that is incorporated into the domestic law of a jurisdiction.)

Q: Countries like Bermuda stand to be among the big winners in terms of revenue, but they are also, equally, at risk, if corporations decide to leave. Can you speculate as to why corporations subject to the GMT would want to leave, and what can jurisdictions like Bermuda do to stop any leaving?

A: Frankly speaking, for MNE groups, Bermuda has not much to offer, beside tax benefits. However, due to Pillar 2, the compliance costs, even if Bermuda will manage to retain its beneficial environment due to tax credits will, at some point, outperform the tax benefits.

As a matter of fact, it will, from a business point of view, simply not be attractive any more to set up shell entities in Bermuda, even if some of the tax benefit might still be there.

The risk of tax litigation and multiple taxation due to uncoordinated Pillar 2 implementation will be higher than the benefits Bermuda could ever provide for.

If a MNE group would ask for advice, whether they should set up an entity in Bermuda: 15 years ago, you would have found several advisers telling you that this might have been a good idea. Today, I bet that only a very uneducated tax adviser would not actively advise against setting up a shell co-operation in Bermuda.

Q: Can corporations elect to pay the GMT in any of the countries where their economic activities take place? Doesn’t this add a layer of extra risk for jurisdictions such as Bermuda in that firms could suddenly switch?

A: You cannot simply check a box to decide where you want to pay the GMT. There are fixed rules where they are to be paid. The risk that firms will switch is there and I have no doubt that this risk is real. For jurisdictions like Bermuda, as I wrote, I would design a very basic — still favourable and straight forward — corporate tax at a rate close to 15 per cent and would try to set up an economic environment that benefits investors beside corporate taxes. Favourable treatment for individuals and beneficial corporate environment and moderate corporate taxation can still keep Bermuda attractive.

Q: Could the above also lead to firms having increased influence over government policymaking? If yes – why, if no – why?

A: Yes. Bermuda has to give even more to remain attractive. On the other hand, Bermuda’s abilities to plan around the GMT are limited anyway. So there is not much leverage for the firms.

Q: An article in the Financial Times said: “People weren’t thinking let’s reward Ireland for being a tax haven, but that may be an unintended consequence.” Isn’t this the case?

A: I don’t think so. What rewarded Ireland for decades was the low-tax environment. Now that is very limited. The tax revenues of high-tax jurisdictions would have been marginal anyway.

What the GMT does is basically drying out tax havens without much risk for high-tax jurisdictions. It is true that the OECD initially sold Pillar 2 as raising revenues for high tax jurisdictions which it will not provide. However, their revenues will rise anyway because many firms will simply move out of tax havens back to their market jurisdictions.

I still think that — from a competition point of view — the one’s suffering are tax havens. Their revenue gains will be marginal.

Q: You said in the Financial Times that you expected “a compliance monster for both tax administrations and multinationals”. Given all the variables, what is the best way for small jurisdictions to manage this? It appears to be an administrative – and expensive – nightmare.

A: Design the rules as easy as possible and set up the administrative resources for that; and to be honest: In the case of Bermuda the costs to collect the tax might soak up a significant part of the revenues the government hopes to gain (at least that's my fear).

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• For an OECD report on the economic impact assessment of the global minimum tax, see Related Media