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Global pact reduces Bermuda tax advantage: Fitch

Fitch Ratings believes that tax advantages held by Bermuda (re)insurers will eventually be reduced as a result of the 15 per cent global minimum tax.

But Bermuda will remain favoured as an insurance domicile and the agency will hold off on any rating action against Bermuda companies.

Fitch said: “Bermuda’s advantageous tax status for the (re)insurance industry will be reduced at the margin with the expected passage of the recent multilateral agreement to establish a 15 per cent global minimum tax rate under Pillar Two of the OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

“The overall benefits of maintaining a Bermuda market domicile and operations will likely endure, but the net profitability gap between Bermuda and non-Bermuda incorporated companies is expected to narrow over time.”

Fitch does not foresee taking a near-term rating action against Bermuda (re)insurers as a result of the agreement, although there is some long-term uncertainty.

But Fitch is clear that Bermuda continues to benefit from an established position in the global (re)insurance marketplace, with demonstrated underwriting expertise, a strong and efficient regulatory regime, Solvency II equivalence and reciprocal jurisdiction status in the US.

The agency said: “Bermuda is a member of the OECD Inclusive Framework and joined the OECD statement in July 2021 as it seeks to be an active participant in shaping the final details of the BEPS plan.

“Bermuda was able to withstand The Tax Cuts and Jobs Act of 2017 (TCJA) that lowered the US corporate tax rate to 21 per cent from 35 per cent and established the base erosion and anti-abuse tax (BEAT).

”The TCJA reduced the longstanding tax advantage of companies incorporated in Bermuda versus the US to a greater extent than is expected with the passage of a 15 per cent global minimum tax rate.

“The 15 per cent minimum tax rate will reduce the gap between the effective tax rate of non-Bermuda (re)insurers and Bermuda (re)insurers, although it will not be entirely eliminated as most jurisdictions will have tax rates above the minimum.

“Bermuda-based (re)insurers have benefited from a low effective tax rate due to the lack of a Bermuda corporate income tax; however, Bermuda companies pay taxes to other jurisdictions given the international, diversified nature of their operations.

“They also pay a US excise tax on premium payments from the US to offshore affiliates.”

Fitch said that Bermuda companies responded to the passage of the 2017 TCJA tax cuts with various strategic changes in how they manage offshore operations to mitigate the overall negative impact of the tax change.

Also, Bermuda-based company start-up and scale-up formations have continued, particularly in response to the increased underwriting opportunities in the hardening market environment.

Moreover, many Bermuda entities file 953(d) elections to be taxed as if they were a US company, partly because it eliminates the requirement to pay the BEAT.

Fitch believes that Bermuda (re)insurers will have time to make necessary adjustments before the 15 per cent global minimum tax is finally implemented, which is likely to serve as a catalyst for price increases to help offset added costs.

But they say that the current 2023 target date is aggressive, given the large number of countries that have to pass legislation.

Fitch Ratings: Bermuda (re)insurers should have time to make necessary adjustments before the 15 per cent global minimum tax is finally implemented (File photograph)

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Published October 20, 2021 at 7:48 am (Updated October 20, 2021 at 7:48 am)

Global pact reduces Bermuda tax advantage: Fitch

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