Tax havens could lose 30% of tax base under GMT
So-called tax havens — or investment hubs — will lose about 30 per cent of their tax base due to reduced profit shifting when the global minimum tax takes effect, according to the head of tax at the Organisation for Economic Co-operation and Development.
The Government has passed the Corporate Income Tax Act which will implement a 15 per cent tax on the profits of multinational enterprises with more than €750 million (about $808 million) of revenue annually.
David Burt, the Premier, has promised to use the revenue to cut payroll and customs tax to help cut the cost of living and the cost of doing business in Bermuda.
Asked in an e-mail interview with The Royal Gazette, whether the GMT was actually rewarding jurisdictions for being tax havens Manal Corwin, the Director of the OECD Centre for Tax Policy and Administration, denied that was the case.
“By implementing the GMT, a jurisdiction can claim the minimum tax on profit in that jurisdiction. MNEs book a large amount of profit in investment hubs.
“By introducing the GMT, investment hubs are therefore likely to raise revenue in the short term.
“However, a big part of the reason that so much profit is located in investment hubs, is that there is a strong tax incentive to locate the profit in low tax jurisdictions.
“The GMT substantially weakens this incentive and therefore we expect less profit to booked in investment hubs over time.
“We estimate that investment hubs will lose about 30 per cent of their tax base due to reduced profit shifting.”
The OECD, which oversaw negotiations on the tax reforms, defines investment hubs as jurisdictions where inward foreign direct investment accounts for more than 150 per cent of gross domestic product.
The Financial Times reported that these include jurisdictions such as Bermuda, the British Virgin Islands, Ireland, Jersey, Guernsey, Luxembourg, Netherlands, Switzerland and Singapore.
Last November, researchers of the EU tax observatory warned that by “structuring their tax policy slightly differently than in the past — offering generous tax credits as opposed to generous statutory tax rates – the governments of tax havens will be able to keep providing multinationals with very low effective tax rates, while avoiding the global minimum tax”.
As part of the new tax regime, the Government is developing a package of qualified refundable tax credits.
Asked in the email interview if this represented a loophole, Ms Corwin said: “Refundable tax credits are effectively subsidies and are better viewed as government expenditure rather than tax reductions.
“This is how they are treated in financial accounts and the GMT has followed this approach. As a result, refundable tax credits are treated differently to non-refundable tax credits under the GMT.
“While both are taken into account, non-refundable credits are treated as a reduction in the taxes paid by the MNE, whereas refundable credits are treated as income of the MNE.”
She added: “Many countries provide subsidies in the form of refundable tax credits because it is easier from an administrative perspective and reduces compliance costs for both taxpayers and governments.
“The GMT rules are designed to look to the economic substance of the subsidy/tax reduction rather than how it is administered. This is not a ‘loophole’.
“The GMT will raise revenue for jurisdictions and jurisdictions will make their own sovereign decisions about how to use those revenues.
“This could, for example, include funding public services, financing broader tax reforms or reducing public debt.
“It will be up to each jurisdiction to decide whether new subsidies will be the best use of those increased tax revenues or whether there are other public purposes to which they should apply these revenues.”
Ms Corwin said: “Importantly, the GMT rules contain integrity measures that serve to prevent abuse and ensure that any subsidy or other benefit provided to taxpayers (including refundable tax credits) cannot be used simply to return the taxes collected under the GMT to taxpayers.”
Bermuda enacted the Corporate Income Tax Act 2023 on December 27, 2023. The CIT Act is designed to be responsive to the new standard in international taxation, developed by the OECD, known as Pillar 2 or the Global Anti-Base Erosion Model Rules.
In passing the CIT Act, the Bermuda Government stressed that it remains committed to Bermuda’s competitiveness as a jurisdiction.
One of the stated policy aims of the CIT Act is that it not lead to any incremental taxes beyond those that multinational groups would otherwise face under Pillar 2.
A key component of the CIT Act means that its application is restricted to the Bermuda members of multinational groups with consolidated revenues of at least €750 million in at least two of the last four fiscal years.
Such restriction means that in practice, only the larger Bermuda public companies will be impacted by the CIT Act.
Beyond the revenue threshold mentioned above, the CIT Act has numerous other provisions that may minimise or eliminate a Bermuda public company’s Bermuda tax liability. Certain types of income are effectively excluded from tax under the CIT Act.
Certain transitional provisions of the CIT Act, designed to cushion the impact of Bermuda’s new tax regime, may be advantageous to Bermuda public companies.
For example, consistent with Pillar 2, Bermuda public companies that are over the revenue threshold but have a presence in six or fewer jurisdictions may benefit from a five year exemption from tax under the CIT Act.
In the future, taxpayers under the CIT Act are also expected to benefit from the introduction by the Bermuda Government of a robust system of qualified refundable tax credits.
• For the full e-mail interview, see Related Media
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