Navigating tax reform
I am writing to discuss a topic of paramount importance that directly affects the economic landscape of Bermuda — tax reform. As we stand at this crossroads, I would like to share my thoughts on the potential impacts and offer concrete suggestions that can shape a positive outcome for Bermuda’s future.
Given our dependence on international business, we face either a once-in-a-generation opportunity or potential catastrophe with the enactment of a global minimum tax. While the Organisation for Co-operation and Economic Development measure is primarily aimed at global technology firms, it has the potential to significantly impact our international business sector. We are entering uncharted territory.
Consider two potential paths:
• Pessimist view: If the OECD implements a 15 per cent minimum tax and Bermuda follows suit while the United States and Cayman Islands abstain, we risk partial international business relocation. This would cause a departure of Bermudian-based jobs and a subsequent decline in tax revenues (see Chart 1 for tax revenue breakdown). This trajectory could potentially push Bermuda back towards a service and tourism-based economy, making servicing the national debt completely unsustainable both from income and foreign currency perspectives (see Chart 2 for income analysis and Table 1 for foreign currency/balance of payments analysis).
• Optimist view: By thoughtfully aligning Bermuda’s policies with the new international standards and combining them with other policy measures, we can preserve our competitive advantage in the international business sector and potentially lower the cost of living in Bermuda. This approach would reinforce our position, safeguard jobs and unlock the possibility of rectifying our national fiscal situation.
In the pursuit of the optimist view, I propose three strategic steps:
1, Revisit non-tax policies: We possess the critical mass necessary to retain our international business sector. Let us enact non-tax policies that offset the potential loss of tax incentives. Policymakers must ensure that more is done to encourage international business to stay, whether it be immigration policy, work-permit policy, opportunities for property ownership, citizenship, etc. My concrete suggestion is to review all the benefits of Cayman in these areas and match the key items before this new tax is enacted. Cayman has the lead.
2, Enact transitional measures and revisit other taxes: A transition of this magnitude needs to consider existing taxes and include a mechanism to defer should the global tax not go ahead. If a new tax is to be introduced, we will need to lower the cost of business elsewhere. Let's simultaneously:
a, Simplify or eliminate payroll tax
b, Expand the list of customs duty-free items, benefiting residents and visitors alike
c, Roll back or eliminate other corporate fees
3, Enhanced budgeting: Recognising the inherent volatility of corporate income tax (see Table 2), we must adopt a prudent approach to budgeting. Establishing a segregated account for any unexpected windfall revenues will assist with cash planning in lean years. With a segregated account in place, replenishment of the sinking fund and debt reduction would be within reach. These measures will safeguard our economic stability for the next generation.
I will close with the numbers to support my points above. Per Fitch Ratings, net income of the Bermuda (re)insurance market has ranged from $4.7 billion in 2021 to a $2.8 billion loss for the first nine months of 2022 (see Table 2 for five-year operating data). This highlights the volatility of (re)insurance corporate income. It also demonstrates that a corporate tax rate on a good year could exceed any other individual tax on Bermuda’s books at present.
Bermuda’s gross domestic product per capita is $115,000 versus $75,000 for the US and $35,000 for tourism-based islands. If this goes ahead and we fail to achieve the optimist case, we will be facing an extremely painful adjustment, to put it mildly (see Chart 2 for a comparison of select finance, service and tourism-based economies).
Note: this letter represents my personal opinion as a Bermudian and father of three. I have written this for the generations to come. I hope this analysis helps to put discussions in context.