The new UK government is being urged to pause its fast-track adoption of the landmark OECD global minimum tax agreement which – if implemented – could have a significant impact on offshore markets such as Bermuda and the wider P&C industry.
Last week Liz Truss became the fourth UK prime minister in six years, triggering a cabinet reshuffle that saw Kwasi Kwarteng named chancellor of the exchequer – the role formerly held by her leadership rival Rishi Sunak.
While in the role Sunak was a champion of the OECD global tax initiative and had committed the UK to fast-tracking its implementation via the planned Finance Bill next month.
But the deal – which consists of a digital tax and a minimum 15 percent levy on corporate profits – is struggling to make progress at a domestic level despite 136 nations committing to it in October 2021. This includes the two prime movers: the US and the EU. President Biden’s room to manoeuvre is hampered at a Senate level while Hungary is threatening to veto the deal within the EU. If these two countries fail to implement the agreement then it is effectively dead in the water.
During the recent UK leadership election, high-profile Truss supporters also spoke out against the agreement, which seeks to implement a new global minimum company tax rate of 15 percent for larger companies.
Bermuda – the home of cat reinsurance and largest provider of capital to the Lloyd’s market – would be particularly affected because it does not tax company profits. Shortly after the agreement was unveiled in October 2021, Ireland – a popular European base for (re)insurer hubs – announced plans to raise its corporation tax from 12.5 percent to 15 percent to accommodate the OECD deal.
But with Sunak now relegated to the backbenches, the UK government is being urged to slow down its fast-track adoption strategy. Among Truss’ Brexit-leaning supporters, concerns have been expressed that the deal would sign away UK tax sovereignty and as a consequence the ability to introduce fiscal stimulus policies. “If we want to be competitive, pro-growth and pro-investment, we need to leave this deal and be free to set our own corporation taxes as we wish, starting with reversing Sunak’s forthcoming corporation tax increase,” prominent Conservative politician Jacob Rees-Mogg argued last month.
Influential UK trade body the Association of British Insurers (ABI) is also urging caution.
“The reforms have always intended to be a global agreement, so by definition need global consensus,” commented Mervyn Skeet, ABI assistant director and head of taxation.
“Rather than rushing ahead and being the first to implement these changes, the UK government should instead focus its efforts on ensuring work at the OECD is completed and agreed, and the reforms are workable on a global level. Only if countries implement the same changes together can the reforms achieve their core purpose.”
He added that if the UK were to implement rules that differed from other jurisdictions, this would increase the administrative burden and therefore impact the competitiveness of UK businesses.
Industry entrepreneur Stephen Catlin – the founder of Bermuda/London (re)insurer Convex Group – echoes these concerns and points out there are other flaws.
“The agreement is silent on how it is to be policed yet this is crucial. It is also silent on how to take account of different accounting policies. This is clearly critical to the insurance industry where profit or loss is determined by reserving strategies.
“It is disappointing because all like-minded people recognise there is an issue with the multinational technology giants minimising their tax obligations by exporting global profits,” he added.
Catlin has played a significant role in the development of the Bermuda (re)insurance market, making the island the home for Catlin Insurance Group, which he started in Lloyd’s in 1984 with £25,000 of capital and grew into a global specialty (re)insurer before XL Group acquired the business for $4.1bn in 2015. His 2019 start-up Convex has also adopted a similar Bermuda-London strategy.
As a member of the OECD, Bermuda has committed to implementing the framework but this hasn’t prevented concerns being voiced on the island. These include former finance minister Bob Richards, who recently pointed out that if Bermuda levied a 15 percent corporate tax, it might eventually make the public finances dependent on volatile (re)insurance markets rather than the more stable sales and payroll taxes.
Given Bermuda’s position as the world’s largest cat reinsurance market, if a major cat event occurred it might mean no (re)insurance profits and therefore reduced government income.
“With red bottom lines, insurance companies may pay no income tax for consecutive quarters – if the government is dependent on revenue from corporate taxes, this creates a highly volatile and unpredictable revenue stream that would make government budgeting virtually impossible,” Richards warned.
Fitch Ratings points out that there are many reasons why (re)insurers choose Bermuda – including the reputation of the Bermuda Monetary Authority, Solvency II equivalency, talent and a respected legal system – but tax is also one of them.
In a commentary on the OECD agreement, Fitch predicted: “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.”
Bermuda is a British Overseas Territory but is administered independently with full tax sovereignty. The durability of its economy was tested with the Trump tax reforms that lowered the US corporate tax rate from 35 percent to 21 percent and established the base erosion and anti-abuse tax. It passed that test and will no doubt do so if the OECD agreement is globally ratified but there are possible consequences.
The cost of cat reinsurance and other lines might rise further to accommodate the new tax impact and its entwined relationship with Lloyd’s and the London market may also be affected. Association of Bermuda Insurers and Reinsurers (ABIR) members provide an estimated 42 percent of underwriting capital at Lloyd’s, the world’s largest (re)insurance market, for example.
Earlier this year, ABIR estimated Bermuda reinsurers wrote 20 percent of brokered European cat business and 60 percent of Florida and Texas cat accounts in 2021 (see graphic).
John Huff, president and CEO of ABIR, said the association continues to monitor the prospects of the OECD tax proposals being implemented around the world, particularly with US Congressional Democrats recently deciding to not take up the models in their reconciliation bill and the new leadership in the UK.
“With the economic situation resulting from the Russia-Ukraine conflict, energy concerns, and generational inflation there seem to be legitimate questions of the impact of raising taxes at this time that would ultimately be borne by consumers,” he said.