Liz Truss last week became Britain’s fourth prime minister in six years, sparking a cabinet reshuffle that saw Kwasi Kwarteng appointed Chancellor of the Exchequer – the role previously held by his leadership rival Rishi Sunak.
While in the role, Sunak was a champion of the OECD’s global tax initiative and had urged the UK to speed up its implementation via the Finance Bill due next month.
But the deal – which consists of a digital tax and a minimum 15% levy on corporate profits – is struggling to make progress domestically despite 136 countries committing in October 2021. This includes the two main drivers: the United States and the EU. President Biden’s room to maneuver is being shackled at the Senate level as Hungary threatens to veto the deal within the EU. If these two countries fail to implement the agreement, it is effectively dead in the water.
In the recent UK leadership election, prominent Truss supporters also spoke out against the deal, which aims to implement a new global minimum corporate tax rate of 15% for large companies.
Bermuda – the home of cat reinsurance and the largest provider of capital to the Lloyd’s market – would be particularly hard hit as it does not tax corporate profits. Shortly after the deal was unveiled in October 2021, Ireland – a popular European base for (re)insurance centers – announced plans to raise its corporation tax from 12.5% to 15 % to take into account the OECD agreement.
But with Sunak now relegated to the backbenches, the UK government is being urged to slow down its fast-track adoption strategy. Among pro-Brexit Truss supporters, concerns have been raised that the deal forfeits the UK’s fiscal sovereignty and therefore the ability to introduce fiscal stimulus policies. “If we want to be competitive, pro-growth and pro-investment, we must leave this agreement and be free to set our own corporate taxes as we wish, starting with canceling the next corporate tax increase. of Sunak,” said prominent Conservative politician Jacob Rees. -Mogg got into a fight last month.
The UK’s influential trade body, the Association of British Insurers (ABI), also urges caution.
“Reforms have always been intended to be a global deal, so by definition they need global consensus,” commented Mervyn Skeet, ABI Deputy Director and Head of Tax.
“Rather than rushing in and being the first to implement these changes, the UK government should instead focus its efforts on completing and approving the work at the OECD, and making reforms feasible at Only if countries implement the same changes together can reforms achieve their primary goal.
He added that if the UK were to implement different rules than other jurisdictions, it 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 that there are other flaws.
“The agreement is silent on how it should be audited, but that is crucial. It is also silent on how to take into account different accounting policies. This is clearly essential for the insurance industry where the profit or loss is determined by provisioning strategies.
“It’s disappointing because all like-minded people recognize that there is a problem with multinational tech giants minimizing their tax liabilities by exporting global profits,” he added.
Catlin played an important role in the development of the (re)insurance market in Bermuda, making the island the headquarters of Catlin Insurance Group, which he launched at Lloyd’s in 1984 with a capital of £25,000 and is become a specialized global (re)insurer. before XL Group acquired the company for $4.1 billion in 2015. Its 2019 start-up Convex also adopted a similar Bermuda-London strategy.
As a member of the OECD, Bermuda has committed to implementing the framework, but that hasn’t stopped concerns being voiced on the island. These include former finance minister Bob Richards, who recently pointed out that if Bermuda levied a 15% corporation tax, it could potentially make public finances dependent on volatile (re)insurance markets. rather than more stable sales and payroll taxes.
Given Bermuda’s position as the largest cat reinsurance market in the world, if a major cat event were to occur, it could mean that there would be no (re)insurance profits and therefore a reduction in government revenue.
“With red bottom lines, insurance companies may pay no income tax for consecutive quarters – if the government is dependent on corporation tax revenue, 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 equivalence, talent and a respected legal system – but the taxation in is also part.
In a commentary on the OECD deal, Fitch predicted: “The overall benefits of maintaining a domicile and operating in the Bermuda market are likely to persist, but the net profitability gap between companies incorporated in the Bermuda and not Bermuda should shrink over time.”
Bermuda is a British Overseas Territory but is administered independently with full fiscal sovereignty. The sustainability of its economy has been tested with Trump’s tax reforms that lowered the US corporate tax rate from 35% to 21% and established base erosion and anti-abuse tax. It has passed that test and no doubt will if the OECD agreement is ratified globally, but there are possible consequences.
The cost of cat reinsurance and other lines could rise further to account for the new tax impact and its intertwined relationship with Lloyd’s and the London market could also be affected. Members of the Association of Insurers and Reinsurers of Bermuda (ABIR) provide around 42% of the underwriting capital of Lloyd’s, the world’s largest (re)insurance market, for example. Earlier this year, ABIR estimated Bermuda reinsurers wrote 20% of European cat business traded and 60% of Florida and Texas cat accounts in 2021 (see chart).
ABIR has not commented on the OECD deal recently, but it and its members will closely monitor political developments in the UK to see if its new political administration will revitalize the global deal by proceeding with implementation plans. accelerated implementation this fall or if it hit the pause button…