Global Minimum Tax Rate Would Have Limited Impact on Bermuda Market

An anticipated 15 percent global minimum tax rate would marginally reduce Bermuda's advantageous tax status for the (re)insurance industry, according to Fitch Ratings.

The 15 percent global minimum tax rate would be enacted with the expected passage of a recent multilateral agreement to establish the tax under Pillar Two of the Organization for Economic Co-operation and Development's (OECD's) Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

"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," Fitch Ratings said.

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

"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 U.S.," a Fitch statement said.

The rating agency noted that 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.

Fitch cited Bermuda's ability to withstand the US Tax Cuts and Jobs Act of 2017 (TCJA) that lowered the US corporate tax rate to 21 percent from 35 percent and established the base erosion and anti-abuse tax. 

"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 percent global minimum tax rate," Fitch said. "The 15 percent 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."

Bermuda-based insurers and reinsurers have benefitted from a low effective tax rate due to Bermuda's lack of a corporate income tax, Fitch said, though Bermuda companies pay taxes to other jurisdictions given the international, diversified nature of their operations. They also pay US excise tax on premium payments from the United States to offshore affiliates, Fitch noted.

"Bermuda (re)insurers should have time to make necessary adjustments before the 15 percent global minimum tax is finally implemented, which is likely to serve as a catalyst for price increases to help offset added costs," Fitch said. "However, we view the current 2023 target effective date as aggressive, given the large number of countries that have to pass legislation."