On his recent European trip, Premier Burt announced to the international press that Bermuda will implement a Corporate Income Tax by end of this year. Locally, he also promised that this tax will solve many of our problems: cost of living, healthcare, and the condition of the roads.
However, the reality is very complicated. We must understand that this tax is a huge risk to Bermuda – remember, this tax is imposed on us by the OECD, not because we think it’s a good idea.
There are (at least!) three massive risks:
First, businesses may leave Bermuda because the tax will add on to the already incredibly high cost of doing business. We will have to make important changes to how we work with international business (IB) to ensure Bermuda remains attractive for them.
Second, the tax income can change a lot from year to year and will be hard to budget around. In some years we may get very little tax income, and even on average the tax income may be less than we hope. The Government must operate with a radically increased level of fiscal discipline to cope with this.
Finally, our economy and financial stability are at risk if we don’t properly handle the changes required to our tax system. It will be incredibly complicated and expensive to implement this new tax and related changes to our tax system, which are at least as complex as anything Government and the Civil Service has done previously.
This tax and its impact on Bermuda could be fairly described as one of the biggest changes in how Government operates in over fifty years. We propose the Premier names a bipartisan oversight committee to steer the key fiscal, policy, and implementation issues around this Corporate Income Tax. This committee would actively oversee what policies are created, and how any funds from the taxes are being used, including proposed tax credits.
We also urge much more transparency and communication with the general public, especially given that the tax is supposed to be law by the end of this year, 2023. While there has been lengthy consultation with relevant industries, that does not replace a meaningful public consultation and discussion with the people of Bermuda, who have a need and a right to know more.
Why is Government creating this tax? The new tax rules allow other countries to charge Bermuda companies 15% tax on profits in those countries if they aren’t already paying it here. So Bermuda companies may as well pay here, and some even prefer that for simplicity, rather than paying tax in multiple countries.
This sounds like free money for Bermuda, right? But it’s hard to draw any meaningful conclusions or make any promises because Government hasn’t said how many companies might pay this tax, and what amount they might pay.
For example, we can’t count on a steady stream of tax income every year. A large part of Bermuda IB is property and casualty (re)insurance. Those companies can all lose a lot of money in the same year due to massive catastrophe events like hurricanes or terrorist attacks. And for tax purposes, those companies can count the losses for multiple years, not paying taxes until the losses are earned back. One bad loss year for companies can turn into multiple bad tax years for Bermuda.
Won’t the Corporate Income Tax reduce taxes for the rest of us? It would be wise to take a wait-and-see approach. The OBA looks forward to participating on the Tax Reform Commission to work on ideas of what Bermuda’s new tax structure could be, but we do not expect to see those results before mid to late 2024 at the earliest.
It might even make sense not to make any big changes in our other taxes until we have experience with how the Corporate Income Tax operates. For example, we won’t really see any tax income for up to three years from now. The first tax year will be 2025, and companies won’t have to submit tax returns for 2025 until late 2026.
What tax credits will Government offer IB to allow them to manage their cost of doing business, and remain in Bermuda? How will Government sweeten the pot in other areas? And will Government engage the people of Bermuda in designing the credits?
How will Government and the Civil Service administer this new, incredibly complex tax? Will we rent expertise (consultants)? Will we create a new department? How much will that cost, where will we get the staff, and how will we train them?
Importantly, how will Government manage its finances and budget when the amount of tax revenue can vary greatly from year to year? What will we do if we are lucky enough to have a tax windfall? Will the sinking fund be resurrected rather than emptied? Will we create a sovereign fund like Ireland has with its recent strong tax revenues? Perhaps we should create laws about how much debt the Government must pay down with each budget.
The Corporate Income Tax is at the crux of a massive and historical change for Bermuda. We urge the Government to communicate and engage with the public much more significantly, and to bring the best people together to ensure the best outcome for all of us in Bermuda.