Economists: Scottish ‘yes’ vote could benefit Island
Peter Everson said: “Bermuda always prospers when other countries face uncertainty,” pointing to the US War of Independence; US Civil War, First World War and Second World War, all of which provided economic benefits to the Island, primarily in its role as a hub for Atlantic shipping.
Mr Everson said: “An independent Scotland would provide much uncertainty and instability in the initial years as it finds its way forward with both the UK and Europe.
“Headline items will include the allocation of the current national government debt; division of revenues from North Sea oil and gas; defence bases et cetera.
“How will all this impact Bermuda and its international business? In the short term it will provide any number of opportunities for Bermuda. A key asset for international business is the fact that Bermuda possesses certainty of law and the final court of appeal. Therefore Bermuda becomes a great location for all businesses looking at long-term investments in both Scotland and the UK, because whatever is the outcome of the matters covered above, the contracts entered into in Bermuda will remain inviolate.
“By locating in Bermuda no additional corporate taxes are levied. At the same time, Bermuda has an efficient and competitive legal and accounting infrastructure which allows companies to incorporate in Bermuda in a cost-effective and speedy manner. Some existing businesses owned by people from outside the current UK may look at inserting a Bermuda company into the ownership structure,” he said.
He added: “Longer term it may open up new markets for Bermuda. Would an independent Scotland value a direct air link to Bermuda?
However, he said: “The status quo is the minimum required for Bermuda to remain competitive. There are always things that can be improved upon and I am sure that the team at the (Bermuda) Development Agency (BDA) are aware of these and addressing them.”
Scotland’s First Minister Alex Salmond is pledging to cut corporate taxes to below the UK rate to create jobs and stimulate the economy in the event of a ‘yes’ vote.
The BDA’s chief executive officer Ross Webber said: “Jurisdictions all over the world, including US states and EU countries, offer ‘tax incentives’. The value proposition Bermuda offers is a combination of factors, including our regulatory environment, geographic location, pragmatic taxation and nexus of intellectual capital.
“Whatever happens regarding Scottish independence, Bermuda will seek to mitigate any risks and explore potential opportunities.
“I do not see any negatives at this time.”
As for the tax cut pledge, Mr Everson said: “This will not make much difference until such time as the EU picture becomes clear. No corporation will move their HQ or a large business unit to an independent Scotland until it is clear what the terms of trade will be with the EU and the UK.
“An independent Scotland will have to raise more money from taxes, fees and levies as it currently receives a large annual subsidy from London. Businesses will wait and see until all of these have been announced, which will be at least a couple of years.”
The corporate tax cut promise also raises the spectre of Scotland, like Ireland, competing with Bermuda for international business. Mr Everson said this may happen in the long run. “In the short term, no. Edinburgh has always had a thriving financial centre with banking, investment management and life insurance. These should prosper in the medium term but will face uncertainty during the initial period.
“A key question for business will be Scottish law. It already differs from England with respect to property. What else will change? Where will the final court of appeal be? These are vital questions for business because certainty of contract law is a prerequisite for ALL businesses.”
Calling it his “guess”, a ‘yes’ vote would also lead to uncertainty in the remainder of the UK, said Mr Everson.
“The UK — if that is what it continues to be called — is already uncertain about its future relationship with the EU and will also have to negotiate large numbers of agreements with an independent Scotland. Both of these will take some time and the outcome of each will be uncertain. This will make business hold back from large investments until the picture becomes clearer.”
Leading economist Bob Stewart, who has Scottish origins, said he generally supported the views of Mr Everson. “Although I have not lived in Scotland since I was 18, I go there quite often and am reasonably up to date on the major economic issues,” Mr Stewart said.
“Most business executives are against independence because of the huge uncertainties that arise with regard to the currency, share of national debt, payment of pensions as well as the almost certain likelihood that taxes will increase, as will the bureaucracy. I certainly agree with that. Even Paul Krugman, the Nobel Prize-winning economist, has stated that Scotland faces financial disaster if they vote yes. He is quoted as saying ‘You may think that Scotland can become another Canada, but it’s all too likely that it would end up becoming Spain without the sunshine’.”
He noted that the UK’s Labour party’s Gordon Brown, the former UK prime minister and himself a Scot, has come out strongly against a ‘yes’ vote.
Mr Stewart does not think that ordinary Scots will be better off if the nation becomes independent. “But only time will tell,” he said.
“There will undoubtedly be an increase in unemployment as firms flee across the border, and the massive English subsidies to Scotland end.”
He believes that Scottish voters will consider short-term rather than long-term implications. “One thing is reasonably certain in the short term and that is that the UK stock market will fall, as will the external value of the pound.
“Although I favour small governments, and small countries like Luxembourg and Switzerland, over large countries, I rather suspect that Scotland will be the exception to the rule. The silver lining for England is that they will no longer have to subsidise Scotland, and if I was English I would support Scottish independence — but then English voters do not have a say in the matter.”
Finance Minister Bob Richards declined to comment.
Economics expert Peter Everson explained how Bermuda can benefit from errors made by the governments of countries around the world, seeking to protect their own interests.
And that blunders will be made is almost a certainty. “Governments can be expected to make mistakes,” he said.
“These always provide opportunities for Bermuda to provide a workaround. An example from the 1980s — Ronald Reagan became populist in the US by seeking to protect the US steel industry from ‘cheap’ imports. He did this by adding a customs levy to raise the landed price in the US to a minimum of $20 per ton. The voters and the media think that this protects US steel producers and thus jobs.
“For a foreign group, it is simply an administrative barrier. If you own a plant in the US manufacturing oil and gas pipelines then raw steel is a major input cost. Ronald Regan expects you to pay the higher US price of $20 per ton.
“Instead you continue to buy from Luxembourg at $14 per ton and have it purchased by a new exempt company in Bermuda which is owned by the foreign group. The Bermuda company sells the same steel to the US plant but at $20 per ton, the steel continues by ship from Europe to the US.
“The Bermuda company pockets the $6 per ton and dividends this back to the foreign group. The net effect is that the US plant now pays less US tax because it is now paying $20 per ton for its steel; the foreign group now has $6 per ton of tax-free income from Bermuda, less the Bermuda expenses. “The foreign group now becomes more profitable because the US taxes paid are lower. Bermuda gains because the exempt company provides business to a, law firms; b, management company; c, audit firms; d, local banks; and e, increased air arrivals; hotel bed nights; restaurants; golf course and taxis, et cetera, as a result of the need for the foreign group executives to attend board meetings in Bermuda.
“All of this flies under the radar in the US because the majority of steel users are owned domestically and for them this does not work. So everyone is happy except the US people because the price of goods including steel rises and they pay more for these goods.
“Eventually, the futility of the exercise becomes apparent and the levy is scrapped and the US steel industry learns to stand on its own feet. The exempt company is liquidated and the business resumes its former pattern. In the intervening years Bermuda enjoys increased GDP.”
