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Higher payroll tax proposed for exempted companies

The Government is to consider charging exempt companies the employment portion of payroll tax at a higher rate (Photograph by David Fox)

There has been silence so far from business as companies determine how they would be affected by government proposals that represent a radical departure in Bermuda’s corporate tax structure.

The package of proposals includes deepening the take from international business and lowering the load on the working class and small, local business.

Not surprisingly, out of six key trade organisations the Government said they have invited to the table for consultation, only organised labour this weekend responded to a request for comment from The Royal Gazette, saying they welcomed the opportunity to consult on the matter with government and other groups.

The dramatic draft changes delivered by David Burt, the Premier and Minister of Finance, in a pre-budget address to Parliament on Friday, propose for the first time a bifurcation in the treatment of Bermuda’s corporate tax base for one of the Government’s major income streams.

It proposes a separation of Bermuda’s exempted company employers, singled out for a higher contribution rate in the employer portion of payroll tax, while all other employer groups either have proposed tax rates remain the same, or actually reduced.

On the table for consideration are sweeping changes, some of which could be implemented within weeks in the next fiscal budget as early as February.

The cash-strapped Government proposes to reduce employee payroll tax for the majority of Bermudian employees — all those making under $105,000 annually.

It accomplishes that by slashing, from 1.5 per cent to 0, tax payable on the first $48,000 of income for all employees — removing 30 per cent of the workforce from being liable for any payroll tax at all.

The next three income bands would be adjusted up, including from 9.5 per cent to 13 per cent for remuneration in the $235,000 to $900,000 (the existing tax cap) income band.

Other proposed changes include raising the payroll tax cap from $900,000 to a million dollars; ending temporary payroll tax concessions implemented as a result of the pandemic; and attempting to negotiate with Washington for foreign tax credits to allow Americans to deduct Bermuda taxes from their US tax liability.

The Government is proposing the elimination of payroll tax for farmers, fishermen, educational, sport and science institutions, and small businesses with an annual payroll of less than $200,000.

There could be a reduction for payrolls under $1 million, and a reduction for small hotels, restaurants and retailers.

But the employer portion of the exempted company payroll tax could rise from 10.25 per cent to 10.75 per cent.

Meanwhile, the Tax Reform Commission Report recommendations which the Government labelled “yet to be implemented” were also floated in the pre-budget document.

Proposed provisions for a new revenue stream, estimated to yield more than $55 million, include:

● A flat withholding tax on services outsourced by local companies to foreign service providers. The tax commission’s argument is that such services are a direct substitute for services that could be, and in many cases are, provided locally

● A flat withholding tax on interest and/or dividend income that is attributable to local companies

● An introduction of seven new fee bands into the existing company fee structure with the aim of aligning company fees with a company’s assessed capital, to provide a more progressive fee structure

Also on the table are increased duty for luxury imports and licensing with an appropriate fee for companies that locally manufacture and sell tobacco products.

The Government said it has been lobbied to raise the ceiling on the payroll tax exemption for local dividends, currently set at $10,000, and remove the payroll-related double taxation for those self-employed.

Other special interest lobbies include duty relief for the upgrading of small tourist facilities; duty elimination for school uniforms; employer payroll tax elimination for companies when employees are on maternity/paternity leave; extension of the current employer payroll tax concession for new jobs created from one year to two years; and, extending to personal care providers, the same duty relief for capital acquisition for premises upgrades already enjoyed by the retail and hospitality sectors.

The Government said they sought policy proposals for consideration from the Association of Bermuda Insurers and Reinsurers, Association of Bermuda International Companies, Bermuda Chamber of Commerce, Bermuda Hotel Association, Bermuda International Long-Term Insurers and Reinsurers and Bermuda Trade Union Congress.

The BTUC said they were not surprised by the proposals, considering recommendations from the 2021 Bermuda Fiscal Responsibility Panel to move towards a more progressive tax structure.

Kevin Grant, the general secretary, said: “Discussion on these matters are paramount specifically as it pertains to any initiatives that the Government are considering are human centred.

“These discussions should allow for the open dialogue needed to identify risks to employment opportunities and any impact on the conditions of employment for workers.”

He said the BTUC anticipates dialogue at their quarterly meetings with the Premier and the Labour Advisory Council.

But he said: “Recently, it seems as though some groups have been raising concerns over the lack of consultation. We should all be well aware of the importance of ‘buy in’ when we consider we are a rather small country, population-wise.

“However, the more important aspect that needs to be considered regarding consultation is whether we prefer to have confrontational dialogue or resolution oriented dialogue.

“We all should prefer the latter as opposed to engaging in so much party politics at a time when we really cannot afford to.”

See Tax Reform Commission Report in Related Media.

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Published December 12, 2022 at 10:18 am (Updated December 13, 2022 at 7:53 am)

Higher payroll tax proposed for exempted companies

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