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OECD Tax Plans To Have Relatively Small Impact On Bermuda: Fitch

by Jason Gorringe, Lowtax.net, London
01 November, 2021

Bermuda's appeal as a domicile for (re)insurance will be dulled by the OECD's latest international tax plans. However, the impact is likely to be less than the territory experienced after the US tax reform of 2017, says credit ratings agency Fitch Ratings.

In newly published research, the ratings agency said: "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."

However, the agency said: "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. 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."

The ratings agency observed: "Bermuda was able to withstand The Tax Cuts and Jobs Act of 2017 (TCJA) that lowered the US corporate tax rate to 21 percent from 35 percent and established the base erosion and anti-abuse tax (BEAT). The TCJA reduced the long-standing tax advantage of companies incorporated in Bermuda versus the US to a greater extent than is expected with the passage of a 15 percent global minimum tax rate."

The agency predicts: "The 15 percent 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."

It noted: "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."

"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 US company, partly because it eliminates the requirement to pay the BEAT."

"Bermuda (re)insurers should have time to make necessary adjustments before the 15 percent global minimum tax is finally implemented, which is likely to serve as a catalyst for price increases to help offset added costs. However, we view the current 2023 target effective date as aggressive, given the large number of countries that have to pass legislation."

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