Tuesday, May 21, 2024

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Captive industry fully engaged in Bermuda’s 15% corporate income tax discussions

The potential introduction of a 15% corporate income tax in Bermuda will prompt complex business discussions, but is not expected to drive captives out of the jurisdiction.

The Government of Bermuda published a public consultation paper on 8 August as it works with industry to find the most appropriate way to meet the Organization for Economic Cooperation and Development’s (OECD) global minimum tax rules.

A proposed corporate tax would likely come into effect from 2025 and would only apply to multinational enterprise groups (MNEs) with annual revenue of €750M or more.

Local industry has been fully engaged with the consultation and there is expected to be a further, more detailed consultation, later this year before any new tax in finalised and confirmed.

A panel of tax experts at the Bermuda Captive Conference, including Deloitte tax partner Andy DeGregorio, Mikhail Raybshteyn, partner for global insurance tax at EY, and Scott Slater, partner, tax services leader at PwC Bermuda.

For qualifying MNEs with a captive in Bermuda, the impact of a new 15% corporate income tax will vary, depending on the group’s location, other taxes it is paying elsewhere or, for US companies for example, if the captive is already making the 953(d) election.

DeGregorio said the announcement in August was not a surprise with Bermuda already signed up to the OECD’s Pillar 2 initiative and the potential tax referenced in the February budget statement.

With the OECD pushing ahead with the introduction of a global minimum tax of 15%, to be paid on the group’s income in each jurisdiction a qualifying company operates, Bermuda is trying to minimise top-up taxes paid in other jurisdictions, while ensuring companies are not paying more than 15% in Bermuda.

“These taxes are going to be paid either way – if Bermuda does nothing, then the tax would be collected elsewhere,” DeGregorio said.

The United States has yet to sign up to Pillar 2 with the US Congress split, broadly along party lines, on whether it will support a global minimum tax.

For US-owned captives in Bermuda that make the 953(d) election – meaning they are subject to US federal income tax – it is expected no additional tax would need to be paid in the 15% regime, but it is not mentioned specifically in the consultation.

Those captives in Bermuda operating under 953(d) should ensure they have an Internal Revenue Service certificate confirming that election.

Any additional tax liability could be influenced by a variety of factors, including number of captives in the group, type of captive, ownership structure, whether the captive(s) are profitable, in run-off or whether there are other Bermuda companies within the group.

“Is there an easy fix? No, probably not,” Raybshteyn said. “For large companies especially, this is going to take a lot of effort to work out.

“At this point, we have more questions than real answers. We rely on what’s been published to date and what has come up in other jurisdictions that may or may not be mirrored by Bermuda.”

Slater emphasised that a lot of captives will not be big enough to fall into scope of the proposed new tax regime, while many US-owned Bermuda captives are unlikely to have an additional tax liability.

The biggest impact could be on non-US owned Bermuda captives that do not currently pay any tax today.

The panellists agreed, however, that if a 15% corporate income tax is introduced it is not expected to prompt a wave of exits from the Bermuda captive market.

“I don’t see anyone running for the hills,” Raybshteyn added. “I don’t think much will change. Companies need to make prudent business decisions (and those will differ for all), but is there a line to leave the island? No.”