July 12, 2006Dear Sir,American tax laws have indirectly caused significantly higher rents and house prices in Bermuda, and the Government of Bermuda can meaningfully reduce the cost of housing for everyone on the island simply by denying “Good Corporate Citizen” status to companies who grant large housing allowances. It works as follows:

All non-American expatriates living in Bermuda receive their worldwide income free of tax because their home jurisdictions only tax them while they are residents of or domiciled in those jurisdictions.

Conversely, American expatriates living in Bermuda remain subject to US tax on their worldwide income because the US tax system applies to all US citizens regardless of where they live. Americans do, however, have some tax relief. The full amount of housing allowances they receive while living outside the US is tax-free. As a result, Bermuda international companies skew the compensation packages for their American employees toward large, tax-exempt housing allowances so that the total amount of tax paid by the employee is reduced. Since any part of the housing allowance that is not used to pay rent is forfeited, the employee is effectively encouraged to negotiate a rent at least as high as the housing allowance, thereby driving up rents for everyone else on the island. Sound bad? Well it gets worse.

In an effort to treat all employees equally, many companies also give housing allowances to their non-American employees even though there is no tax benefit to either the company or the employee. The efficacy of this policy is particularly dubious when you consider that the persons receiving the benefit — the non-American employees — are, in fact, worse off when they receive any part of their compensation in the form of a housing allowance rather than simply receiving a commensurate increase in their salary because they lose the ability to choose how they spend their money. In essence, they are forced to negotiate rents at least as high as the housing allowances they receive because any amount of the allowances that they don’t use is forfeited. Once again, rents and housing prices are driven higher. Sound bad? Well it gets worse.

Local companies, including the banks, are also granting housing allowances to their employees because they must compete with international business to attract the best employees. Once again, rents are driven artificially higher. So who loses? Almost everyone.

Bermudians who are trying to save enough money to buy a house are not only saving less money because their rents have been driven higher as a result of US tax laws, but the cost of the houses they are trying to save for are significantly more expensive because speculators attracted by artificially high rents have further driven up house prices. For those persons who do not work either directly or indirectly in the international business sector (fishermen, farmers, artists, chamber maids, bus drivers, teachers, mailmen, shopkeepers, etc.,) the burden is particularly onerous because they do not have the bargaining power to demand higher wages to compensate for the higher rents and house prices they must pay so that rich American executives can get bigger tax deductions. But the loss to Bermuda doesn’t stop there.

Where individuals do have the bargaining power to demand higher wages to compensate for the higher rents, their employers must either suffer commensurately lower profits or pass those costs on to the consumer. Either the company loses or its customers lose, but either way, Bermuda is worse off.

This entire misadventure by international business has reached the point of absurdity. What started out as a simple attempt to help a few American executives has mushroomed into a herd of companies collectively inflating the entire Bermuda housing market harming both the business community and the community at large. It is overwhelmingly clear that the collective benefit to the few is greatly outweighed by the collective detriment to the many. So what do we do about it?

At a minimum, the Government of Bermuda should require companies to disclose in their annual government filings the total dollar amount of housing allowances they award, and this information should be made public so that everyone will know the names of the chief economic polluters of the housing market. Further, this information should be a major factor in determining whether a company obtains the status of “Good Corporate Citizen” and the loss of “Good Corporate Citizen” status should adversely affect the number of work permits these companies receive and speed at which their applications are processed.

This letter should not be interpreted as suggesting that international companies or their American employees are acting improperly. A company’s purpose is to maximise profits within the confines of the law, and in doing so it is prudent for the company to attract the best and the brightest employees by offering the most attractive compensation package the law permits. Further, there is nothing improper about an American employee negotiating his compensation package to minimise his taxes. He is only doing what is in the best economic interest of himself and his family.

But Bermudians also have a right to maximise their own economic self-interests, and their legislative representatives have a duty to protect those interests. Isn’t it time Bermuda’s interests were represented when companies and their employees negotiate housing allowance awards that so adversely affect the cost at which the rest of Bermuda can buy or rent a house?

If you want to reduce your rent and the cost of housing in Bermuda, if you want to decrease the speed at which the middle class is eroding, if you want to give Bermuda a more stable future, then call your Member of Parliament today. Tell him to enact legislation that denies “Good Corporate Citizen” status to any company that grants numerous or inordinately large housing allowances. Tell him to adopt a new immigration policy that imposes additional limitations on work permits for companies who are not Good Corporate Citizens. Most importantly, tell him that affordable housing for the people of Bermuda is more important than a tax deduction for foreign executives.

CALL YOUR PARLIAMENTARIAN

Smith’s