Bermuda’s tax status for the insurance and reinsurance industry will be lowered following the expected passage of the multilateral agreement to establish a 15% global minimum tax rate, reports Fitch Ratings.
Historically, Bermuda-based re/insurers have benefited from a low effective tax rate due to the lack of a Bermuda corporate income tax.
The island was able to withstand The Tax Cuts and Jobs Act of 2017 (TCJA) that lowered the U.S. corporate tax rate to 21% from 35%, and developed the base erosion and anti-abuse tax (BEAT).
However, the TJCA has reduced the tax advantage of firms incorporated in Bermuda versus the U.S. to a greater extent than is expected with the passage of a 15% global minimum tax rate.
As explained by Fitch: “The 15% 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.”
While companies on the island have benefited from the lack of a corporate income tax, Bermuda-based firms pay taxes to other jurisdictions, and also pay a U.S. excise tax on premium payments from the U.S. to offshore affiliates.
“Bermuda companies responded to the passage of TCJA with various strategic changes in how they manage offshore operations to mitigate the overall negative impact of the tax change.
“Moreover, Bermuda-based company start-up and scale-up formations have continued, particularly in response to the increased underwriting opportunities in the hardening market environment. In addition, many Bermuda entities have filed 953(d) elections to be taxed as if they were a U.S. company, partly because it eliminates the requirement to pay the BEAT,” continues Fitch.
In the near-term, the ratings agency does not anticipate any rating actions on its universe of Bermuda re/insurers as a result of the agreement, but warns that the long-term implications are unknown.
“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,” says Fitch.
