EY Bermuda’s Moncrieff: OECD tax changes likely to be reflected more in pricing than business changes

The recent historic OECD statement providing a framework for reform of the international tax rules has significant implications for multinationals with operations in Bermuda and businesses headquartered on the island but the extent of any impact is not yet clear, EY’s Robert Moncrieff has told this publication.

A group of 130 countries announced at the start of July that they had signed up to the new two-pillar plan, which is intended to ensure that the largest companies pay more in taxes, particularly in the countries where they do most of their business.

That formal agreement followed a G7 meeting in the UK in June at which finance ministers agreed a 15 percent minimum global tax rate.

Moncrieff, who is EY’s global insurance international tax and transaction services leader, told The Insurer that the precise details of the proposed changes are not yet clear.

“It is significant to see broad based support for such a fundamental change in taxation,” Moncrieff said.

“That said, what is agreed upon is very much a set of high level principles, and there is still a lot of work to be done to ensure those principles are fairly enshrined in legislative proposals.”

He added: “It is then equally important to ensure those legislative proposals are uniformly implemented and have proper frameworks for rule co-ordination and dispute resolution.”

The two-pillar OECD package was the outcome of negotiations coordinated by the OECD for much of the last decade. It aims to ensure that large multinational enterprises (MNEs) pay tax where they operate and earn profits, while adding certainty and stability to the international tax system.

Pillar one is intended to ensure a fairer distribution of profits and taxing rights among countries with respect to the largest MNEs, including digital companies. It would re-allocate some taxing rights over MNEs from their home countries to the markets where they have business activities and earn profits.

Pillar two seeks to put a floor on competition over corporate income tax through the introduction of a global minimum corporate tax rate that countries can use to protect their tax bases. 

The impact on Bermuda

Discussing the implications of these two pillars for Bermuda, EY’s Moncrieff said the impact of Pillar 1, which reallocates profits to market jurisdictions in digital businesses, is “likely to be less significant”.

“Multinational reinsurers are likely to be out of scope and others, including captives, do not typically conduct significant remote sales that would lead to major reallocation of income,” he explained.

“In principle, multinationals headquartered elsewhere with operations in Bermuda may have to pay incremental taxes overseas in the parent or intermediate holding locations in respect of the Bermuda operations, and Bermuda headquartered business may see some impact in the form of increased taxes in the subsidiary locations, both through the operation of Pillar 2” 

Robert Moncrieff, EY’s global insurance international tax and transaction services leader

Pillar 2 is more significant, Moncrieff said, because it seeks to ensure that taxable profits earned in each of a multinational’s operating jurisdictions are taxed at no less than 15 percent.  

“Groups with operations in countries with lower or no corporate tax rates may therefore find their global tax bill being increased,” he said. 

The rules are still under development so the extent of any impact is not yet clear.

“However, in principle, multinationals headquartered elsewhere with operations in Bermuda may have to pay incremental taxes overseas in the parent or intermediate holding locations in respect of the Bermuda operations, and Bermuda headquartered business may see some impact in the form of increased taxes in the subsidiary locations, both through the operation of Pillar 2,” Moncrieff said.  

He added that the comparative size of any increase is very much driven by individual facts and circumstances.

“The ultimate impact is likely to be reflected more in terms of pricing adjustments than any more fundamental business changes,” he said.

Technical working parties to refine rules

The historic announcement by the G7 finance ministers and the OECD Inclusive Framework statement are important developments, with potentially large implications for the industry. But a lot of work remains to be done before any of the agreements become a reality. 

Various technical working parties will now get down to business on refining the rules, consulting further on remaining technical concerns and producing a set of Model Rules for consideration at the end of October.

Moncrieff commented that the OECD has set itself “a highly ambitious goal” of completing the legislative proposals by the end of 2021 and having implementation of final rules take place in 2023.

“Not only is there much work to do within the Inclusive Framework, the outcome to some extent depends on what happens with the US legislative developments and the extent to which existing US tax rules can and will be conformed to Pillar 1 and 2 standards,” he noted.

The exact impact on (re)insurers, then, still needs to be ironed out. 

“Part of the remaining technical work involves ensuring that the effective rate calculation, which lies at the heart of whether a given jurisdiction is considered to be taxed at the Global Minimum rate or not, is computed in a fair manner,” Moncrieff said. 

He added: “Rather than simply take the same effective rate that lies in companies’ consolidated financial statements, Pillar 2 makes a number of adjustments. Specifically, insurers are disadvantaged in that there is a ‘carve-out’ from the amount of income that is in that calculation based on a market return on assets.”

Moncrieff explained that this favours asset rich businesses, but there is no corresponding relief for industry groups that have other kinds of substantive asset base, such as financial capital.  

“Further, the tax figures used in the assessment of effective rates include deferred taxes on timing differences arising from asset depreciation and cost recovery, but it is not clear to what extent they will address the timing differences inherent in long term insurance business and investment returns,” he said.

Other concerns highlighted by the EY executive include the use of a country-by-country approach to determine effective rates as opposed to a globally blended rate such as the US GILTI and the settlement upon a minimum rate of 15 percent versus the 12.5 percent initially contemplated.

Not all OECD countries signed onto the statement. 

For example, Ireland did not join the new OECD statement establishing the framework. The country said it agrees with Pillar 1 and broadly supports Pillar 2 but noted “reservation about the proposal for a global minimum effective tax rate of ‘at least 15 percent’”.

When announcing it had joined the OECD statement Bermuda said it was doing so as a jurisdiction “committed to transparency, cooperation and high levels of compliance with international standards”. The island has consistently argued that it should retain sovereignty over its own tax system.

When asked why Bermuda would sign on to the statement when others such as Ireland did not, Moncrieff commented “Bermuda has a strong history of commitment to transparency, co-operation and compliance with global standards”. 

He added: “This is reflected in the government joining the Statement on the new framework and a commitment to continue ongoing technical discussions leading up to the G20 Finance Ministers meeting in October of this year.”