Bermuda's political and business elite is responding to the G7 push for a minimum corporate income tax as it would to the approach of an Atlantic hurricane. Officials are looking to ride out the storm - and keep intact a 19th-century revenue regime that leaves company profits untouched.
In an interview with the Financial Times, Curtis Dickinson, Bermuda's finance minister, said he was loath to introduce new levies while the island tax haven of about 64,000 people was still struggling to recover from both the Covid-19 pandemic and the financial crisis of 2008.
"Bermuda has a right to determine for itself what it thinks is an appropriate tax system for its jurisdiction," he said.
“We have a system in place for 200 years. It’s not perfect. It does require some adjustment. But we would like to do that on our own and not have someone tell us to change our system to fit some global initiative... I would say it’s a sovereignty issue.”
Taxing corporate profits would make Bermuda more bureaucratic and add complexity for business, Dickinson said, threatening its role as a global hub for reinsurance, the cover that insurance companies buy to protect themselves against claims arising from hurricanes, wildfires and other disasters. Bermuda currently raises revenue through taxes on payrolls and property, customs duties and fees charged to international businesses.
“Bermuda’s current tax system... is consumption based - it is a function of seeking to be simple to administer, simple to file,” he said. “That is the system we have had in place... It has not been changed to encourage people to move here. It has been what it has been. The system works for us.”
The pressure on tax havens grew this month when the G7 countries moved to close loopholes that multinationals use to reduce their tax bills, agreeing to a minimum global 15 per cent levy on corporate income. Whether anything will actually change, however, depends on wider global negotiations - meaning the implications for Bermuda remain hypothetical.
The sensitivity of the issue quickly becomes clear to a visitor in Hamilton. In more typical times, the Bermudian capital packs all the pizzazz of a place where the locals brag about the large number of actuaries in the neighbourhood. Start asking questions about taxes, and corporate lips press together even more tightly. Trade associations and leading companies alike either avoid responding or refer inquiries to Dickinson.
A man of carefully chosen words, the finance minister is a former Wall Street investment banker who worked at firms including Donaldson, Lufkin & Jenrette and Credit Suisse First Boston before entering government. He was educated at Morehouse College in Atlanta, the historically black institution where Martin Luther King Jr earned his undergraduate degree, and the Columbia University business school.
Dickinson's argument is that it is unfair to group Bermuda with tax havens that have more corporate mailboxes than people. He said it was an "anomaly" when Google last decade shifted tens of billions of dollars through its Dutch holding company to Bermuda under an intellectual property licensing scheme called the "double Irish Dutch sandwich." Google has scrapped the arrangement, which enabled it to delay paying US taxes.
Thanks to its tax system and streamlined regulatory regime, Dickinson said, Bermuda has become a proper financial centre. The big buildings of the leading insurers - AIG, Chubb and BF&M, among them - loom over the capital. More recent arrivals include Conduit Re, which raised $1.1bn last year through a London Stock Exchange listing, and Vantage, a reinsurer launched in 2020 with $1bn in equity capital from Carlyle, Hellman & Friedman and its management.
“We want companies here that have boots on the ground,” Dickinson said.
Responding to climate change is giving the reinsurers an additional boost. Andrew Engler, chief executive of Kettle, a start-up that uses machine learning to better understand wildfire risks, said he set up his holding company in Delaware and based its operations in Bermuda to be closer to the action - and to a regulatory system that can act more quickly than the state-by-state licensing regime in the US.
“It’s very well structured,” said Engler, a Californian who also finds Bermuda’s balmy weather agreeable. “You have this crazy island that is probably the most important financial market for climate change that we can all imagine.”
Dickinson’s challenge is that Bermuda’s economy is “undiversified”, as he puts it. Reinsurance and other “international business activity” accounted for about a quarter of gross domestic product in 2019, official statistics show. By contrast, leisure and hospitality in the tourist locale known for its turquoise seas produced around 4 per cent.
The question for Bermuda is how tax sensitive its reinsurers might be. Donald Trump’s 2017 tax changes already have made it less appealing for US insurers to buy reinsurance from Bermuda. Whether the imposition of corporate taxes would override the regulatory advantages of operating a reinsurance business on the island remains to be seen.
"It's definitely not going to be a positive thing," Brian Schneider, an analyst at Fitch Ratings. But he added: "It doesn't seem like it would be enough to destroy the entire purpose of being on the island."
For their part, Bermudian officials do not want to be rushed. Adjusted for inflation, fourth-quarter GDP was down 4 per cent year-on-year. Dickinson said Bermudian officials have been trying to tell their counterparts in bigger countries that now is not the time to shake things up.
“We are obviously concerned that there is a risk of a one-size-fits-all approach that may not work for everyone,” he said. “We have had a sustained period of low economic growth and the notion of introducing more tax in my mind is equivalent to applying brakes on the economy.”
Dickinson's position is all the more uncomfortable because not only foreigners have concerns about taxation in Bermuda. In 2018, the government's own Tax Reform Commission highlighted the need for change after meeting with more than 50 stakeholder groups including local and international businesses.
“A recurring theme across almost all of the stakeholder groups was that Bermuda’s tax structure was neither fair nor equitable,” the report said. “There was a consensus...that Bermuda’s tax structure placed a disproportionate burden of tax on those least able to pay.”
For all its appeal to international businesses, the system is hard on working-class Bermudians, who say their most significant taxes come in the form of the high prices for imported goods. As the conversation a few nights ago turned to pocketbook issues at Harry’s bar, a favourite Hamilton watering hole for the actuarial set, a bartender let a visitor in on the joke.
“It’s not a tax haven, it’s a tax hidden,” he said as he served a $12 glass of lager to his thirsty customer. – Copyright The Financial Times Limited 2021