As per analysts from BMO Capital Markets, tax-related legislation, which is likely to be passed by the Bermudian government this week, “will push GAAP corporate income tax rates materially higher.”
Analysts at BMO said that this is a “once in a generation” tax code change, with headline income tax rates that are likely going to be 15%.
They added that Bermuda doesn’t want to implement a 15% tax rate, however, “their hand is being forced by OECD’s Pillar 2 because otherwise, other governments will claim taxation rights to taxes on certain income.”
BMO’s analysts continued, “The USA is not on board, partially because some folks estimate it’s already doing a better relative job of collecting foreign-based earnings. The U.S. Treasury is on board, as are most Democrats.”
Speaking on the potential impact for re/insurers, the firm’s analysts estimate that RenRe and Arch (who both have higher relative levels of earnings in Bermuda) will, in the short run, be able to elect a deferred tax asset-related lever.
According to the analysts, this could lower their cash (vs. GAAP) tax rates in the coming years, alleviating the cash vs. higher GAAP tax rates investors will initially see on each insurer’s respective earnings release.
BMO also observed that Bermuda has an increasing interest (debt) cost burden, so higher taxes “could solve that current conundrum and also offer benefits to residents.”
The firm went on, “However, if the corporate tax rate goes to 15%, on top of already high payroll taxes (= to ~12% of salaries), plus higher costs of living (think travel expenses, etc.), Bermuda’s all-in cost of business + tax rate would be in the 20’s relative to 21% in the USA and mid to high 20’s across Europe.”
Despite noting that this is a “once in a generation” tax code change, BMO’s analysts stated that over time, “Bermuda has permissible ways of lowering costs for corporations which are subject to the higher tax level.”
The analysts concluded, “There’s uncertainty into how other countries will interpret “give-backs/workarounds” that the Bermuda government could put in place, so it will take time for corporations + Bermuda to get to an end-result/framework which Bermudian’s are comfortable with.”
