Bermuda: Minister Richards examines global tax threats

Speaking at the Insurance Day 2015 Summit on 10 June 2015, Minister of Finance Bob Richards told attendees that “the more we drive home that the insurance sector in Bermuda is not a stereotypical tax haven gimmick to key onshore decision makers the less the threat from IRS and other tax authorities will be.”, reports Bernews.

In beginning his speech, the Minister said: “Good afternoon insurance colleagues. I address you as colleagues because, as Minister of Finance, I am responsible for Bermuda’s insurance and reinsurance industry.

“And as many of you know, I come from an asset management and investment background and with the convergence of the investment industry with the reinsurance industry, such as insurance linked securities, I suppose the executives of both the investment and insurance industries are now my colleagues.

“The subject of this speech chosen for me is, “The continued threat of USA Taxes on Bermuda Reinsurers – will it receive traction in the future?”

“I am taking the liberty of modifying the subject to read like this: “What is the Bermuda Government’s view of the continued global tax threats to Bermuda reinsurers? Will those threats gain traction in the future?”

“The threat to Bermuda’s business model is not merely from the US. The threat is global.

“In fact, the principal drivers of this threat come from Europe, not the US. The targets of what I call the “tax vigilantes” in Europe are mostly US multi-national corporations. Such companies have arranged their affairs, using the network of double taxation treaties, to legally minimize their overall tax exposure. Multi-nationals have been doing this for more than 70 years.

“In addition to that, there is the tax threat from the US regarding the convergence of the investment industry with the insurance industry. But the attitude of US tax authorities has to be taken within the context of what is going on globally with respect to tax.

“The line between tax avoidance and tax evasion has always been that the former was legal and the latter was illegal. But in recent years it has become politically expedient for certain high tax OECD nations to blur this line by referring to some strategies as “aggressive tax avoidance.” Public pressure, through certain NGO’s, tax officials and the media, has been applied on nations and dots on the map that have financial services industries.

“The dots on the map have been the subject of wave after wave of withering fusillades through the media, with self-proclaimed tax experts issuing streams of disinformation and innuendo, mainly on the assumption that all the dots on the map will not fight back because they are either powerless or basically guilty as charged.

“Well, I’m here to tell you today that all the dots on the maps are not created equal. Speaking for this dot, Bermuda, we are not powerless, we are not guilty as charged, and we will fight back.

“You might ask, “What is the basis of our defense?” Well, we fight back with the truth – found in two parts:

1. Bermuda complies with and cooperates with all major countries [80 in all] in the area of tax information exchange, anti-money laundering, transparency, as well as information sharing with international law enforcement. In fact, we are ahead of the FATF [Financial Action Task Force] curve in many respects.

2. Bermuda has demonstrated time and time again that it’s international business sector, in particular the insurance/reinsurance sector, provides an essential value proposition to the world economy by insuring against risks that, if not covered, would inhibit growth of the world economy.

“With respect to my first line of defense, as I have publicly declared several times, if you are a fraudster, a money launderer, a terrorist financier or a tax evader, you are not welcome in Bermuda, and you are not safe on our shores.

“A key plank in controlling the threat to Bermuda and Bermuda reinsurers from the US is for Bermuda to promptly respond to exchange of information tax treaty requests from the IRS and to be seen by the IRS to do so.

“We have over 80 tax treaty relationships for the exchange of tax information on a by-request basis with just about every country you do business with. As well, soon we will have FATCA and OECD Common Reporting Standard [CRS], automatic exchange of tax information relationships with that same network of 80 countries. Every other reputable international financial center will have the same broad network. There will be virtually nowhere for tax criminals to hide.

“If you break the civil-tax or criminal-tax laws of any of those 80 countries, they may send me a request to obtain information from you, your corporate service provider or from your bankers and I will gladly obtain it for them.

“If not, I will jeopardize Bermuda’s good name. The maintenance of Bermuda’s good name, – its brand, is critical. It’s that brand that has attracted you to our shores in the first place;

“So our responses to tax treaty requests for information will root out those very few malefactors with ill intent who attempt to use our good name as cover for their criminal tax behavior.

“The second line of defense is the incontrovertible fact that Bermuda’s insurance and reinsurance industry provides a key source of risk mitigation that allows global economic growth to move ahead in the US, UK, EU and Asia. Bermuda’s coverage of catastrophic risks, and other risks, around the world is a proven fact.

“We were there after Rita, Wilma and Katrina, paying billions of dollars in claims, on time. We were there after 911 – when many onshore insurers teetered, Bermuda paid its multi-billion-dollar claims on time. Our performance in times of crisis is real world proof that what we have in Bermuda is no tax gimmick – it is real.

“However, these are facts that constantly need to be told and reinforced in the halls of power of Washington, London and Brussels.

“We cannot hope to change the tone of the popular media or special interest NGO’s, but we can inform and persuade key decision makers.

“It is human nature to stereotype. It is through stereotyping that we humans make sense of the world. However, stereotyping dots on the map is anathema to Bermuda. Our challenge is to differentiate ourselves from the other dots.

“The more we drive home that the insurance sector in Bermuda is not a stereotypical tax haven gimmick to key onshore decision makers the less the threat from IRS and other tax authorities will be.

“Many are unaware of how we have fulfilled our responsibilities to them in times of difficulty. Many are unaware of the major role Bermuda plays in supporting hundreds of thousands of jobs in the US and hundreds of thousands in the EU. Many are unaware of just how important a business partner Bermuda is to the US.

“You might think I’m exaggerating the overall lack of awareness of Bermuda in major capitals of the world. I’m not!

“The constant stereotyping of Bermuda as a tax haven is a powerful threat to the Bermuda brand and it must be combated with precision, skill and tenacity.

“So we can mitigate the threats to Bermuda’s business model by demonstrating that Bermuda respects and plays by the rules of the international community and that we perform a key function in enabling global economic growth and communicating these attributes to the right people.

“There has been a lot of talk about BEPS. [Base Erosion & Profit Shifting] The truth is that BEPS has largely been driven by members of the EU and the targets are US multi-nationals. The danger for Bermuda is that we have become a casualty of the crossfire, and that the crossfire includes insurance, either intentionally or accidentally.

“The international double taxation system was invented in the immediate post war era when the US was the only major industrialized country with its productive capacity intact. The system was devised to enable, principally, US companies to expand trade with other countries without getting taxed multiple times.

“It is not a system that Bermuda had any hand in. It is a system governed by laws and treaties, as opposed to the blurry lines by those who are aggressive tax avoidance vigilantes.

“Quite frankly, “aggressive tax avoidance strategies” is political rhetoric, not having any real meaning in accounting or law. And taxes have to be defined in terms of accounting and law.

“As an investment guy, I’m not betting on corporate America just sitting idly by and allowing a BEPS deal, which is being negotiated between tax officials on both sides of the Atlantic, to go through to lumber them with a very large tax bill.

“One tax vigilante in Paris claims Bermuda alone, has plundered US$2 trillion in tax money from OECD countries.

“Well, I’m still looking in Bermuda for that US$2trn. It’s not in Bermuda banks, nor the Bermuda Stock Exchange. If I find it, the Government’s national debt and budget deficit would be a thing of the past.

“The fact is there are only precious few places on planet Earth that can handle funds that size. You guessed it – OECD financial capitals.

“So if it does exist [which I very much doubt] it’s in their own front yard – in their banks, in their stock markets, in their own companies’ war chests that are financing new plant and equipment, new inventions, new strategies that will move global GDP growth forward and increase global employment.

“So what would happen if the tax vigilantes were able to collect that mythical $2 trn in taxes?

“As an investment guy I have a pretty good sense what such an eventuality would do to corporate earnings and stock prices and the corresponding effect on GDP & employment worldwide. Can you spell global recession?

“Most of those fortune 500 companies are already Bermuda’s clients, so we know where our bread is buttered.

“So the IRS threat to Bermuda hedge-fund-capitalized reinsurers is wrapped up in this global controversy relating to aggressive tax avoidance and the role of tax havens in that system.

“Standing in the middle of that crossfire is the Bermuda brand. In the investment business we say: “Past performance is no guarantee of future results.” But that doesn’t mean past performance is irrelevant.

“Bermuda’s past performance in adjusting to tax and regulatory changes in the US and elsewhere has been has been pretty impressive over the decades. That performance has been the result of keeping our friends close to us and keeping our enemies closer, while being prepared to be intelligently nimble.

“But that is no reason for any of us to blithely drift along and think that if we take two aspirin and go to bed, everything will be alright in the morning. Dots on the map are easy political scapegoats and we will have to re-double our efforts to differentiate ourselves in this hostile environment.

“We all, government and private sector, need to work together to make sure that impressive Bermuda track record continues into the future, in spite of these challenging times.”