Bermuda warned over tax status squeeze for reinsurers

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Bermuda warned over tax status squeeze for reinsurers

Bermuda's advantageous tax status for the re-insurance industry will be "reduced at the margin" and the "long term implications remain to be seen" says ratings agency Fitch, following the implementation of the recent OECD multilateral agreement to establish a 15% global minimum tax rate.

The overall benefits of maintaining a Bermuda market domicile and operations will likely endure, but the net profitability gap between Bermuda and non-Bermuda incorporated companies is expected to narrow over time, it said.

Fitch said it does not expect to take any near-term rating actions on its universe of Bermuda (re)insurers as a result of the agreement, although the long-term implications remain to be seen.

We view the current 2023 target effective date as aggressive, given the large number of countries that have to pass legislation.”

"Bermuda continues to benefit from an established position in the global (re)insurance marketplace, with demonstrated underwriting expertise, a strong and efficient regulatory regime, Solvency II equivalence and reciprocal jurisdiction status in the US."

Bermuda is a member of the OECD Inclusive Framework and joined the OECD statement in July 2021 as it seeks to be an active participant in shaping the final details of the BEPS plan.

The ratings agency said Bermuda was able to withstand The Tax Cuts and Jobs Act of 2017 (TCJA) that lowered the US corporate tax rate to 21% from 35% and established the base erosion and anti-abuse tax (BEAT).

"The TCJA reduced the long-standing tax advantage of companies incorporated in Bermuda versus the U.S. to a greater extent than is expected with the passage of a 15% global minimum tax rate.

The 15% minimum tax rate will reduce the gap between the effective tax rate of non-Bermuda (re)insurers and Bermuda (re)insurers, although it will not be entirely eliminated as most jurisdictions will have tax rates above the minimum."

It further said: "Bermuda-based (re)insurers have benefited from a low effective tax rate due to the lack of a Bermuda corporate income tax; however, Bermuda companies pay taxes to other jurisdictions given the international, diversified nature of their operations. They also pay a US excise tax on premium payments from the US to offshore affiliates.

Bermuda companies responded to the passage of TCJA with various strategic changes in how they manage offshore operations to mitigate the overall negative impact of the tax change."

Fitch added that Bermuda-based company start-up and scale-up formations have continued, particularly in response to the increased underwriting opportunities in the hardening market environment. In addition, many Bermuda entities have filed 953(d) elections to be taxed as if they were a US company, partly because it eliminates the requirement to pay the BEAT.

"Bermuda (re)insurers should have time to make necessary adjustments before the 15% global minimum tax is finally implemented, which is likely to serve as a catalyst for price increases to help offset added costs.

However, we view the current 2023 target effective date as aggressive, given the large number of countries that have to pass legislation."