As published on royalgazette.com, Thursday 17 June, 2021.
A proposed shake-up of the global tax system has the potential to create big insurance industry issues.
How that might happen, and the impact it could have on captives and large reinsurance companies in Bermuda, was discussed at the Bermuda Captive Conference.
Earlier this month, finance ministers of the Group of Seven countries issued an accord supporting the outlines of a new global tax system, and a commitment to a minimum corporate tax rate of 15 per cent.
The development has been described as “a new headwind for Bermuda’s reinsurance hub,” by Insurance Insider in a report on its website.
Among the G7 ministers there was a consensus of support to a proposal that could impact multinational companies of a certain size and who earn a profit margin of more than 10 per cent, whereby a portion of the profit above 10 per cent is reallocated to market jurisdictions.
Robert Moncrieff, EY Global insurance international and transactions tax services leader, said that was significant if it happens.
He was one of two tax professionals who, at the captive conference, discussed the OECD’s Base Erosion and Profit Sharing initiative and the accord released by the G7 ministers.
Mr Moncrieff also said the proposal of a minimum global corporate tax rate of 15 per cent was important, but there were other players who are not part of the G7, notably China. This proposal has to go through the G20 in July, where there could be pushback from countries such as Hungary, Ireland and Malta, and then on to the 139 jurisdictions that are part of the OECD’s Inclusive Framework.
Mr Moncrieff, who is also BEPS leader for the EY region of the Bahamas, Bermuda, British Virgin Island and Cayman Islands, said there was double taxation risk and so there needed to be coordination and “a referee”.
He added: “Going forward there is an awful lot of work. No one should assume it is a done deal.”
Asked about the impact on the insurance industry and captives, Will McCallum, managing director and Bermuda tax practice leader at KPMG, said: “These rules are very, very complicated and they will bite in a lot of different ways.
“If we look at the large reinsurance groups that have a presence in Bermuda and elsewhere, a lot have an effective tax rate at group level that is less than 15 per cent.
“Top-up tax may well apply to large reinsurance companies with a relatively low effective tax rate. That will have an impact on them and on the industry.”
He said that if large reinsurance companies ended up having to restructure their affairs, or had to pay more tax, “that's not going to bring premiums down”.
With premiums already increasing due to the hardening market, Mr McCallum said: “There are a lot of people who need this reinsurance capacity that might have to pay more for their premiums going forward, because any time we raise tax on an industry, a lot of that is going to be passed on to consumers.”
Captives that are not part of large multinationals would less likely to be impacted, but those that are could be.
Mr McCallum said: “Given the global reach of this industry and the size of some of these multinationals, it really is felt it could have a big impact and I think it will. There is the potential here for some pretty big industry issues.”
He added: “There is a lot of momentum around this, but there is still a lot of uncertainty and rules are still developing.”
According to the Insurance Insider’s report, senior re/insurance executives in Bermuda “see the coordinated initiative as a clear long-term threat” but one that is mitigated by other attractions of operating in Bermuda.
It said one executive believed Bermuda would be “wounded, not obliterated” by a higher minimum tax, while others felt “a 12 to 13 per cent differential in tax rates would not be ‘enough of a reason to hollow out Bermuda’, as it would take a generation to recreate the advantages of its local hub of expertise”.