“While there is a view that tax avoidance are laws of nature the reality is different. Nothing inherent in globalisation prevents governments from taxing profits at a high rate is they so wish. Instead of competition, governments can choose co-ordination. Instead of letting companies book earnings in tax havens governments can choose to tax offshore profits” — EU Tax Observatory

On Friday, June 11, 2021 in Cornwall, England, the G7 group of nations comprising the richest and most powerful Western nations got one defining step closer to reaching a game-changing agreement on the long-overdue implementation of a global minimum corporate tax rate specifically designed to rein in tax havens — especially those with a 0 per cent corporate tax rate such as Bermuda.

In fact, Bermuda has become the poster child of tax havens, and it is routinely cited globally in this regard far more now than just about any other similar jurisdiction.

The above was followed on July 1 by the signing-on by 130 nations to the framework overseen by the Organisation for Economic Co-operation and Development. These nations included Russia, India and China two of the Asian heavyweights who now join traditional Western powers such as the United States in putting down a marker against what has been the Wild, Wild West globally in terms of tax avoidance and even tax evasion over the past four decades.

These steps along with the G20’s (finance ministers) consideration of the now agreed-upon conceptual framework of the deal last week in Venice, Italy, along with the meeting of the respective heads of governments of the organisation in October, clearly indicates there is no going back. The momentum would seem to suggest that the first global accord on taxation in roughly a century is likely at hand.

There was some opposition expressed to the deal by some tax havens such as Ireland, Barbados, Hungary, St Vincent & the Grenadines and a few others who refused to sign on to the accord. Bermuda was not among them, nor the other British colonies because frankly they did not have a choice or a real voice here.

Britain has backed this strongly and as the sovereign power, contrary to the comments of the finance minister two weeks ago on this issue — in essence signed on our behalf. Some conveniently forget that as a colony of Britain, Bermuda’s foreign affairs are still ultimately their sole responsibility. The reality is that there is simply too much power arrayed against these mostly smaller, recalcitrant countries for them to prevail in blocking this deal or changing it substantially. Although there is a lot that could go wrong between now and the date of implementation.

The US administration, for example as reported by The New York Times, will push for serious financial penalties to those companies headquartered in the holdout countries but which do business in the US; a major market for most Fortune 500 countries. One thing was conspicuous by its absence on the local level, though, and that was the change to the finance minister and David Burt’s bellicose tone of late. Finally, after so many years, Bermuda’s delusionally tough talk on this and related issues has gone mute. Perhaps it’s the degree of real politique arrayed against them that has finally caused them to stand down.

The aim of this accord? As Janet Yellin recently said, it is to “halt the race to the bottom on corporate taxation”. But, make no mistake about this, this global initiative is aimed squarely at the so-called tax havens.

No one, except a few saw this coming so soon. Yes, this has been in the works for years, especially on the other side of the Atlantic. However, if Donald Trump had won the election, we would not be having this discussion at all. Beyond that, it has been the further erosion of the fiscal health of nations globally as a consequence of the pandemic that has accelerated the movement that we have seen on this issue since the administration of US president Joe Biden took over in January.

The US also knows that its ability to enact a once-in-a-generation change in its corporate tax regime domestically will be powerfully undermined by the present world order that facilitates or sanctions tax avoidance and the companies and havens that benefit from it.

What does it mean for Bermuda?

While it seems that everyone here is consumed by wacky, anti-vaxxer conspiracy theories of late, a far more insidious threat — an authentic conspiracy — has been unleashed against Bermuda; a tax haven on steroids if there ever was one.

The key points of the OECD accord:

• First, what is called Pillar One will, according to the Financial Times, “redistribute profits made by the largest 100 companies to domiciles where they make their sales”. As opposed to being taxed where they are located, as is the case now. These so-called taxing rights will apply to 20 per cent of profit, exceeding a 10 per cent margin on the largest companies, which find themselves in the top tier of profitability

• Second, they have recommended in what is termed Pillar Two the establishment of an effective 15 per cent corporate tax rate globally — although the language “at least” is featured in the text because the US and a few others are still seeking to have that rate modestly increased. It is intended that this tax will be applied on a country-by-country basis

It is Pillar Two that most credible observers say poses the most risk to the so-called tax havens on steroids such as Bermuda who will lose out the most because the deal allows countries to levy a top-up tax on companies that have not paid the minimum rate in each jurisdiction that they operate in. Acording to the Financial Times, this will result in “…wiping out the advantages gained from channelling revenues through low-tax jurisdictions”.

The New York Times quoted economist Gabriel Zucman’s response to the agreement as saying that it “severely undermines (and ultimately destroys)” the tax haven ecosystem that has been allowed to flourish since the 1980s. There is still some way to go before this becomes a reality. The accord seeks to have this new global regime on taxation implemented in 2023, which does seems ambitious. The Financial Times in a recent article also noted that the nations in question will need to pass the enabling legislation through their national parliaments and the US Congress no later than next year in order to make that deadline.

Even that process will be fraught with landmines everywhere. Zucman and others have stated that, for the minimum 15 per cent rate to be effective, it must be applied on a country-by-country basis or as he states “most firms will offset low taxes in havens with a 15 per cent tax elsewhere”.

By way of contrast, both Arun Adviani and Lucie Gadenne, assistant professors of economics at the University of Warwick, writing in The Guardian, stated that, “the tax havens that have for so long relied on providing ‛professional services’ to the companies that nominally locate there will lose out: Bermuda and the Channel Islands will seem a lot less attractive to companies once their low tax rates are no longer available”.

As noted in previous op-eds, the view that Bermuda is a tax haven has now become concretised. That is who we are in the eyes of the world, and not without ample evidence to support that view — not the least of which is our aforementioned 0 per cent corporate tax rate. US economist Jeffrey Sachs recently stated that there is more than $1 trillion of US assets in Bermuda alone. How much in eurozone assets and beyond are domiciled here? Yet, it is a major irony of epic proportions that our government is mired in annual deficits and mounting debt of close to $2 billion. Ponder that.

One startling statistic should graphically illustrate the potential peril facing a country that derives 42 per cent of its payroll tax revenues from international business alone. If, for argument’s sake, even if half of those so-called IB sector companies depart Bermuda as a consequence of the successful implementation of a global minimum corporate tax rate — and it could be higher — that will set off a chain reaction that could result in a significant shrinking of our gross domestic product.

Not to mention a sharp reduction in the government employment and services footprint. Unemployment in the private sector, of course, will be also pronounced and that is just for a start. It will not be a pretty picture at all. That is the absolute worst-case scenario. Is that a given at this stage? No, but this is what is at stake.

On the “glass half-full” side of the equation, Bermuda’s insurance industry is hoping that its vaunted lobbying machine will be able to make a last stand in Washington a successful one — although unlike Custer’s. They will be joined by scores of other global players who are determined to radically change this accord in a way that reflects their self-interest as masters of the present economic status quo.

Millions are being employed right now, as we speak, to achieve exactly that and to ensure that the necessary role that the US Congress will play in approving significant parts of any final deal will result in its rejection. It is widely reported that global accounting firms EY and Accenture are the ones that advised Ireland to not support the accord, for example. Ireland’s present stance is viewed as quixotic, though, and is not expected to last for long.

Upon such whims our hopes depend.

But I believe in Bermuda and its people. We have a very mature international business sector and tourism is showing renewed signs of life. More importantly, it is to be hoped that this perceived challenge will be the catalyst to begin the long-overdue re-engineering of our economy — a subject I will return to in Part 2.

• Rolfe Commissiong was the Progressive Labour Party MP for Pembroke South East (Constituency 21) between December 2012 and August 2020, and the former chairman of the joint select committee considering the establishment of a living wage