Former Premier Sir John Swan has described a new tax law which stops the deferral of income tax paid on compensation earned by US taxpayers working in Bermuda as a "warning shot across our bows".

The Emergency Economic Stablisation Act of 2008, which was enacted at the start of this month, added the new section to the US Internal Revenue Code which affects American employees' compensation earned after the end of this year for services carried out for non-US employers based in certain tax havens including Bermuda, Dubai, the Cayman Islands and Hong Kong.

The report on the bill, which appeared on lawyers Dewey & LeBoeuf's website, said: "This marks the death knell of certain long-standing practices of offshore entities permitting US employees to defer compensation."

But Sir John reckons it will remove any tax incentive for highly-skilled US workers who make a big contribution to the country's economy to stay on the Island. "This is from the US Congress, who obviously recognise that Bermuda is a jurisdiction that has a convention with the US of offshore re/insurance and tax deductibles," he said.

"This bill is saying that any citizens of the US which accrue benefits in a tax haven that is named, and they have named Bermuda, will no longer be able to have these taxes deferred.

"This is removing the incentive for people of talent and high-income people who get large stock options and benefits to stay in Bermuda from a tax point of view."

He said the fact that Bermuda and the US had enjoyed a good relationship in the past and this was the first time the Island been targeted on the American Government's hitlist of tax havens.

"If they have taken this step, what other steps will they take?" he said. "I think we have to start to look at what other alternatives we have and how we are going to act and do things so we can look after our people in a very challenging 21st century."