Recently, much noise has been made and ink spilled over the G7 agreement that may lead to a minimum corporate tax rate across the developed world. It remains to be seen what such a regime would look like, or even if it comes to be.
However, the Rubicon has surely been crossed in that large, rich nations have now said aloud what they have privately thought for many years: that the right of all jurisdictions to set their own tax rates and systems is not sacred and ought to be trampled in their own pecuniary interests. The offshore world should begin crisis planning. If we were in charge in Bermuda, the following is what we might to do to adapt.
Unfortunately, there seems to be little point fighting the minimum tax regime, unjust though it may be. As the Athenians said to the conquered people of Melos: “the strong do what they can, and the weak suffer what they must”. [i] Appeals to conscience will fall on deaf ears. Both the governments and populations of the G7 and similar countries decided long ago that offshore finance is evil and must be stopped. The good news is that now that these governments have attained what is arguably their Holy Grail in this area, we may be able to do away with certain pointless and irritating regimes that Bermuda and others were bullied into, thinly-disguised steps on the path to destroying tax sovereignty altogether. Therefore, in the same legislation that imposes the minimum tax on Bermuda, we would abolish economic substance regulation and as much of the AML/ATF regime as is sensible.
Economic substance aimed to achieve much of what a minimum tax regime will, so perhaps we can do away with it quietly, without objection. Regarding AML/ATF, we all know it broadly does not work and serves primarily to increase time, expense, and hair-tearing despair. The verification of sources of funds and wealth is quite sensible but the obsession with beneficial ownership should be ended in the name of privacy and saving resources. So much is sacrificed to comply with it properly and yet to beat it, you simply have to lie. Problem solved, for the money launderer.
Tax Credit System
After the visceral joy of slaughtering those sacred cows, it is important that within this new regime, Bermuda’s interests should still be advanced. While we may have to have a minimum corporate tax rate, it might be possible to keep international companies here and encourage local investment through a system of tax credits. If the corporate tax is set at 15 per cent, this would be the maximum paid, with a tax credit for any money spent in the jurisdiction. There would be very few restrictions on this, though some would be sensible and necessary. For example, you could not simply decant capital into a different local corporate or trust, and call it spending. Nor would it apply to funds directed to entities with the same ownership, or to the owners themselves (except for salaries). Dividends would therefore not count. However, beyond that all expenditure flowing towards persons ordinarily resident in Bermuda, or sole proprietors or corporations organised and operating in Bermuda, could be fully offset against the 15 per cent ceiling rate, whether a business expense or not. This system would have the following intended effects. Money would be spent in the local economy, perhaps more efficiently distributed than it has been in the last 70 or so years of international business in Bermuda. Secondly, foreign companies would still be incentivised to have a presence in Bermuda, and maybe a bigger one than they might have now, even including the insurance “whales” which are the largest companies in Hamilton. Despite having done away with economic substance requirements, economic substance would actually be assured – perhaps the EU’s greatest fear! Thirdly, with this extra investment and activity in the country, it would be possible to reduce the rates of consumer taxes that currently exist. Thus, the cost of living would be reduced while government receipts would increase.
While often said, it is true that COVID-19 has decentralised the knowledge economy in a way anticipated by only the most hopeful technophiles. This puts Bermuda in a better position than in the past to attract large corporations and family offices to our shores. It has been shown for decades that it is possible to run large insurance operations from here. There is little reason why this cannot be so for other industries whose production is sizably intellectual. It must be admitted that manufacturing would be nearly impossible at any decent scale. However, other financial services and research and development could thrive here. R&D spending would be eligible for tax credits under the tax credit scheme that we would institute. Without economic substance requirements, Bermuda could become a research, development and IP hub for software developers, digital finance, and more. However, even with economic substance requirements, in this scenario companies would still be compliant since their actual operations would move to Bermuda. One issue might be the need to ship in equipment and pay our admittedly handsome import duties. However, under the tax credit regime any other taxes paid, such as duties, licence fees and payroll taxes, would also be eligible for a credit against the 15 per cent ceiling rate. Such equipment would also be capable of 100 per cent depreciation in the first year.
These developments would also bode well for family offices. Like many other organisations, they have shown themselves to be extremely adaptable during the last 18 months’ forced experiment at remote working. Bermuda has been a popular destination for high-net-worth individuals and families during the pandemic since we have largely been able to control outbreaks and have been mostly open, especially during the all-important summer months. The island has also been popular due to its position. It takes less time to reach Hamilton than the Hamptons from New York on a busy weekend and it is only seven hours direct from London, much less than other islands to the south. Furthermore, the island retains a certain nostalgic charm, unlike certain Caribbean places which do their best to ape South Florida. A number of HNWIs have apparently even purchased bolt-holes here in the last year in anticipation of the next pandemic.
Given that the world is only becoming more populated and more mobile, this is a when, not an if. In a Bermuda with a 15 per cent maximum rate and tax credits, along with all of the above benefits, you could effectively have a free family office. If offshore operations generated US$1 billion in a given year, the tax payable would be US$150 million. With that US$150 million, they could invest in Bermuda, hire locals, bring in their people (more on this to come) and run their investment operations from Bermuda, all for an effective rate of 0 per cent. Once a sizeable portion of operations are in Bermuda, it may then make sense for HNWIs to become tax-resident in the jurisdiction, thereby saving themselves a fortune in personal taxation. Family offices and HNWIs would also finally be free of the image issues of “tax morality”. Once a rich-world minimum tax is in place, any complying jurisdiction cannot any longer be called a “tax haven” by definition, so this label can no longer be lobbed as a missile.
Liberal Immigration Regime
A key requirement of this plan would also be a more liberal immigration regime. This has been a sensitive issue here, partly due to fears of cultural change and partly due to fears of competition for employment and places to live. However, roughly 10 years of (somewhat) restrictive policies have been a drag on economic growth and this state of affairs unfortunately cannot continue. Bermuda needs new faces and this would be a good way to get them. Indeed, the plan would not work without them. Happily, the country has already instituted some new immigration regimes which demonstrate a trend in the right direction and are particularly geared towards immigration by wealthy participants in the knowledge economy. One of these is the Work From Bermuda Certificate which began during the pandemic to allow remote workers from all over the globe to escape their lockdowns, and live and work in Bermuda for one year. It has proved very popular. Another is the Economic Investment Certificate and Residential Certificate (EIC). The EIC allows individuals to reside in Bermuda as long as they make a US$2.5 million investment. There is a list of qualifying investments, the simplest of which is the purchase of residential or commercial real estate. After five years, an EIC holder can apply for a residential certificate which permits the holder to live and work in Bermuda indefinitely.
Despite the G7 agreements, a global minimum tax regime is still a long way off, and many factors may change or even prevent the plans as currently envisaged. However, we hope the foregoing demonstrates that it need not be the destructive force that many media reports have cast it as and that many onshore authorities hope it to be. If Bermuda builds on its existing expertise and inherent advantages, we believe it can survive and thrive in the changing environment.
[i] Thucydides, History of the Peloponnesian War, 5.89
John Gibbons is a Family Office Specialist at Harbour Trust Company Limited in Bermuda.