24/02/22

BERMUDA: Report warns tax overhaul is needed.

As published on royalgazette.com, Thursday 24 February, 2022.

Dire warnings from the Fiscal Responsibility Panel highlighted Bermuda’s troubled economy, noting how imported inflation is squeezing household incomes.

Their seventh annual report observes how the impact on the Government’s finances has been severe, with net debt now exceeding $3 billion, up more than a billion since the panel first began its work in 2015.

But their recommendations have been steady.

They are again advising the Government to increase the working population in Bermuda to allow for a broadening of the tax base and adjust the tax system to capture more revenue.

The report states: “We welcome the commitment to expand the resident population and to modernise immigration policy and administration. Significant progress has been made but more needs to be done.

“Immigration offers an important counterweight to the negative impact of Bermuda’s adverse demographics on its potential growth and wellbeing, and the long-run sustainability of the pension and health systems.

“The ‘Work from Bermuda’ scheme is a welcome innovation, and could be broadened.

“In addition, much more could be done to streamline and modernise the work permit system, which would improve the business ecosystem.

“We also welcome the Government’s commitment to improve the speed and efficiency of processing; this will require political, institutional and financial commitments across a number of dimensions: investment, speedy and efficient procurement processes; and perhaps most of all streamlining of the underlying processes.”

The panel warned there seemed to be no clear guide as to how the Government can stick to the 2021-22 spending allocations.

They recommended that the Government commit to a budget surplus of $50 million per annum, to be achieved by fiscal year 2026-27, and continued thereafter, to pay down the debt and to demonstrate real progress towards meeting the debt-revenue target.

Noted early is the debt to revenue ratio, which has ballooned to 300 per cent, and “remains far above the target of 80 per cent, and in addition there are significant contingent liabilities”.

“Since, in our view, the debt to revenue target is the most important to long-term fiscal sustainability – and therefore to Bermuda’s credibility with international financial markets – this remains a concern.”

The recommendations include capitalising on the planned global tax changes on corporate profits by ensuring that a significant share of the increased total taxes that will in any event fall on the island’s international financial business sector accrue to Bermuda rather than elsewhere – while still preserving the attractiveness of the island as a location for international business.

But this should be done in tandem with the restructuring of Bermuda’s tax system, moving towards a more progressive structure that taxes earnings from capital, including interest, dividend and rental income, as well as labour, and broadens the tax base while disincentivising behaviour that is damaging to health or the environment.

The panel warned that the Government needed to exercise restraint in the provision of government financial guarantees, an interesting suggestion considering plans for the Fairmont Southampton Hotel redevelopment.

The latest Fiscal Responsibility Report, released yesterday, also warned that the proposed digital bank should be completely independent of government, that any government capital involved should be limited and that there be no government guarantee.

The panel continued their clear annual stance on the controversial issue of immigration and the Government’s commitment to expand the resident population and to modernise immigration policy and administration.

The panellists endorsed the government’s health reform proposals and noted that pension reform would require increased contributions through raising contribution rates and the number of contributors, adjusted benefits, and higher retirement ages.

Their health statement said: “We broadly endorse the government’s reform proposals, especially the introduction of the Bermuda Health Plan, which is planned to provide affordable, universal, health coverage. The incremental approach to implementation, starting with the public sector schemes, appears sensible and should help mitigate risks.”