US tax reform is biggest theoretical threat to Bermuda, says insurance boss

By added on 27/06/2014

One of the biggest threats Bermuda faces in keeping its international business is US enlightenment to the realisation that it need only change its tax laws to lure many companies home or repatriate corporate profits. And more insurance start-ups could be won with less regulatory bureaucracy, reports the Royal Gazette.

This from a top insurance executive out of Princeton, New Jersey, who was speaking at the Insurance Day Summit, as it wound to a close yesterday.

Conan Ward is CEO of Hamilton USA, but he previously spent a number of years working in the Bermuda insurance market. He outlined a SWOT (strengths, weaknesses, opportunities, threats) analysis for the Bermuda market.

While Mr Ward said a US about-face on its corporate tax strategy would weaken Bermuda’s attractiveness, he was confident that the US government was too unwieldy and inflexible to make it happen.

And he said of US insurance regulation: “In the US there is a see-saw battle between the 50 states and the different regulatory environments within the states and Dodd-Frank, which is the federal government’s attempt to get more involved in the insurance business.

“That presents a whole host of regulatory challenges to those in the US.”

He added that Bermuda faces a shrinking population and had lost thousands of jobs lost since 2006.

“Bermuda lost about 5,000 jobs and that is devastating, but GDP growth can help turn that around,” Mr Ward said.

“There are definite issues in the Bermuda economy, but I draw some comfort from what I’ve seen, with the government willing to tackle the issues and some of the (construction) development that is on the horizon.

“Bermuda stacks up well to the US in terms of governance. But Bermuda can outpace the US, because of the small nature of the government compared to the bureaucracy that exists as the US government. It is easier to actually get things done.”

Other threats to Bermuda include punitive sanctions from angry neighbours. He noted the recurring Neal bill in the US Congress.

He said: “Bermuda creates headlines because of its success. One manifestation of that threat is the Neal bill, which never seems to die, and always like “Lazarus” seems to rise from the dead.

“This is a way for Bermuda’s competitors to say: ‘I live in a bad mousetrap. Can I make you more like me?’

“There are western governments who say the problem is Bermuda. But they should be quoting William Shakespeare’s Julius Caesar: ‘The fault, dear Brutus, is not in our stars, but in ourselves.’”

Mr Ward took aim at the tax stance taken by some governments in belittling “tax free” Bermuda.

“Bermuda Government does not live on air and sunshine,” he said. “There are tax revenues and they are a substantial amount. It’s just that it is not taxed on income. Western governments are obsessed with the idea that they have to tax on income. Historically, western governments have used tariffs and point of sales taxes, such as Bermuda does.

“The criticisms aren’t always fair, but Bermuda can do a bit more to get its message out there.

“World Bank data shows that the commercial tax rates in the US (including the 35 per cent federal tax and state taxes, etc) nets out to an average of 41.3 per cent. Yet tax revenues being collected are less than 15 per cent. Why is there such a huge gap?

“The reality is that global players find sophisticated tax mechanisms — ways around the relatively high corporate tax rate in the US. All the wrong people are probably paying this tax. Small businesses don’t have the resources or foreign tax credits to offset this. So a larger rate is paid by all of the wrong firms.

“If the US were to lower that rate to something like 15 per cent and get rid of the loopholes and go to what the rest of the world calls a regional tax regime, I think that would be a big threat to Bermuda. But given the politics in the US, I don’t see that occurring anytime soon.

“In 2010, businesses in OECD [Organisation for Economic Co-operation and Development] countries spent more than 200 man-hours on taxes. But while they are doing that, they are not paying attention to their customers.

“One of the fundamental points in Adam Smith’s book, ‘The Wealth of Nations’, is that the pie is not fixed. The pie can grow.

“So this demagoguery that you hear from the US that its success is mutually exclusive from Bermuda’s success is just not the case. A rising tide lifts all boats.

“Bermuda has an opportunity to be lifted with all the boats and be world class, not just in the businesses in which that is so now — but in other fields as well.

“The challenge is to bring that new business and intellectual talent into the Island and make those people job creators.”

Mr Ward cited a long list of Bermuda strengths including: ease of company start-ups; a forward-thinking, principles-based, business-friendly regulatory environment; excellent legal framework; terrific geographic advantages; attractive tax system; existing market for insurance, reinsurance, banking, and investing; and, reasonable infrastructure — housing, transportation, power, technology.

With regard to weaknesses, he discussed today’s historically higher unemployment; social issues very similar to other western countries driven by the economy; unsustainable debt; weak economic growth; education; and revenue concentration (tourism and international business).

He said: “Bermuda’s current economy is a challenge and fallen on hard times. A lot of what the Government is doing is very helpful. Things are moving in the right direction, but things are still not close to what it was in 2006. And that is troubling. Economic decline in any country leads to all sorts of bad social issues. So it is good to see the Island starting to turn things around.

“But you do have this spectre of public debt. I think there is a lot of good news on future (infrastructure) development. It is unfortunate that the country rating has been recently downgraded.”

With regard to opportunities, he discussed the continued complacency of large western economies; recommendations from the SAGE Report to pursue other lines of business; continued innovation in insurance/reinsurance; and, developing alternative, creative industries.

The ability of the Bermuda regulatory environment to accept new companies (after events such as the World Trade Center attacks and the Katrina/Rita/Wilma hurricanes), particularly when the market most needed them, he remarked, was of tremendous benefit. “And Bermuda was more a partner than anything else,” he said.

Mr Ward noted how the Bermuda Monetary Authority (BMA) faced European Union demands for new challenging solvency rules, “but came up with a solution to the bureaucratic regulations.

“The BMA came up with a solution that would gain acceptance in the pedantic structure from Europe — a solution that would be effective but still be business friendly enough.

“I think they really have come up with something that makes a lot of sense. The BMA has done a super job. Bermuda has a lot going for it with respect to regulation. And there’s balance in the tax, legal and regulatory environment.”