Bermuda regulator explains why it should not be blacklisted by the EU

There is a lot at stake for Bermuda. The island’s economy relies on international business, which consists primarily of reinsurance and other financial services, consistently accounting for about 85 percent of the Bermuda's gross domestic product (GDP), according to the CIA World Factbook.

In June, former finance minister Bob Richards said in a press conference that the government of Bermuda received an email from the Code of Conduct Group (CCG) in the European Union in Brussels to fill out a questionnaire.

The CCG looks at anti-abuse rules, transparency and exchange of information in the area of transfer pricing, administrative practices and the promotion of the principles of the code of conduct in non-EU countries. The code of conduct itself requires EU member states to abolish existing tax measures that constitute harmful tax competition and refrain from introducing new ones in the future.

Richards claimed that: “Bermudians should regard this Code of Conduct Group as the ‘EU Blacklist Group’. The email contained a questionnaire about the way Bermuda conducts its business internationally. The deadline for our response is July 7th. If we do not answer the questionnaire we will be deemed to be ‘non-compliant.’

“The questionnaire is designed to lead to a predetermined conclusion that Bermuda is a tax haven that is harmful to the global economy, and the EU in particular, and therefore should be placed on an economic blacklist.”

Bermuda is one of more than 90 jurisdictions that has faced reviews and surveys on tax matters from international organisations such as the Organisation for Economic Co-operation and Development (OECD) and reviews on anti-money laundering (AML/ATF) from the Financial Action Task Force on Money Laundering (FATF).

COMPLIANCE RULES

According to the OECD, one of the characteristics of tax havens is that they don’t (levy taxes) or only levy nominal taxes.

Bermuda does impose taxes – just not individual or corporate income taxes, a spokesperson for the Ministry of Finance of Bermuda explained to Intelligent Insurer.

For more than 100 years, the tax structure of Bermuda has relied on consumption and labour taxes. Bermuda collects an amount equal to 16.2 percent of its GDP in tax revenue.

“Bermuda is a low tax jurisdiction, but not where a multinational or a wealthy individual goes to hide income and avoid taxation,” the spokesperson said. “Bermuda seeks to attract quality business, principally those bringing money to work taking on insurance risk.”

Another aspect which could make Bermuda qualify as a tax haven would be a lack of effective exchange of information. But Bermuda has world standard international agreements that allow competent authorities to obtain required information on their taxable citizens and companies, the spokesperson said.

For the OECD, another characteristic of tax havens is lack of transparency in the operation of the legislative, legal or administrative provisions.

Bermuda’s legislature has one of the oldest parliaments under the Westminster system, the spokesperson said. The law of Bermuda is based on the common law legal system of England and Wales and decisions of the English Court of Appeal and House of Lords are persuasive authorities in the Bermuda Courts.

“The island is a highly respected and successful financial centre recognised for worldwide standards of compliance, regulation, transparency and infrastructure. With 91 tax treaty partners around the world, Bermuda is rated a first-class domicile by the OECD,” the spokesperson said.

The island has attracted top global service-providers, developing a workforce of experienced, internationally trained and qualified professionals, the spokesperson noted, adding that the island is the world’s largest captive domicile and a leading re/insurance centre.

The EU has not outlined any exact potential repercussions if Bermuda was placed on an economic blacklist. However, any number of penalties could affect cross border re/insurance trade. Any restrictions would likely increase costs, decrease risk diversification, and create concentration risks of concern to regulators, the spokesperson warned.

WHAT COULD HAPPEN

Potential restrictions on the current pooling of risk would seriously increase the cost of buying insurance in the EU, the spokesperson noted.

Recent studies conducted by Lars Powell of the University of Alabama in conjunction with the R Street Institute and the Brattle Group have found that regulatory or tax restrictions that limit the use of cross border reinsurance will lead to a need for 40 percent more capital (an additional $70 billion) just to support the existing global natural disaster catastrophe exposures. Another economic study by Florida Tax Watch found that tax proposals which restrict cross border trade in reinsurance could increase Florida home insurance prices by 30 percent.

Bermuda can document that its economy is based on its re/insurance market which has major economic substance in Bermuda and contributes to competitive insurance markets globally, the spokesperson said.

The most recent figures show Bermuda’s 1,224 re/insurers wrote $130.8 billion in gross premiums, held $200.8 billion in capital and had total assets of $631.7 billion.

Bermuda re/insurers play a major role in underwriting US property catastrophe risk, but also underwrite 20 percent of the broker-placed European property catastrophe reinsurance. The Bermuda market for example paid for 50 percent of the reported losses for the 2012 Costa Concordia cruise liner sinking and 37 percent of the reported liabilities for Europe’s 2010 Windstorm Xynthia.

The Association of Bermuda Insurers and Reinsurers (ABIR) has shown that the cost of insurance could increase as much as 40 percent, as insurers are forced to raise additional capital to cover probable maximum losses for major catastrophic events.

To avoid such an outcome, Bermuda continues to commit itself to all international tax disclosure and cooperation rules as written by the OECD, and is at the forefront of information sharing. Bermuda also continues to upgrade its beneficial ownership regime which is expected to result in further improvements to the detection and deterrence of serious financial crimes.

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) published on Aug. 21 revealed that Bermuda were rated “Largely Compliant” after reviewing the exchange of information practices.

Commenting on the result, premier and minister of finance David Burt, said: "This is tremendous news and excellent for Bermuda. My thanks to all involved in securing this important outcome.

"This result is a testament to the hard work of the team in the Ministry of Finance.

"With an impending European Union blacklist on the horizon, this was one of the important tests that Bermuda had to pass.

"It is good news for local industry, boosting confidence in Bermuda as an international business centre. A bad rating would have most certainly guaranteed Bermuda to be blacklisted by the EU, and it is through Bermuda's commitment to compliance that we can avoid such a result."

But Bermuda needs to be deemed compliant according to the OECD assessment, the European Union’s Code of Conduct Group rules, and the Financial Action Task Force rules, some experts believe. Otherwise, they warn, reinsurance companies based on the island, which are listed on the New York Stock Exchange, are likely to move away from the jurisdiction.

The 2017 OECD report recommends that Bermuda ensures that beneficial ownership information is available for all relevant entities and arrangements, in particular the ones that have no relationship with an anti-money laundering (AML) obligated person in Bermuda. The island should also improve its oversight of the compliance with the obligations to update ownership information pursuant to the exchange control regulations and take enforcement measures in cases of non-compliance. In addition, it should implement supervision of corporate service providers.

Richards has pointed out that the OECD and the FATF had previously concluded that Bermuda is not “harmful” in its conduct or in the application of its laws in the global economy and that an earlier attempt in 2015 by the CCG to blacklist Bermuda in 2015 had been repudiated by the OECD and was dropped.

“Bermuda has spent a great deal of time and money adjusting its laws, regulations and business practices to stay ahead of, or on the leading edge of, the curve as it relates to international taxation and information sharing. We have been early adopters of all the initiatives coming out of agencies that set international standards. Yet there are those out there that choose, for their own reasons, to ignore our record.”