Despite no rise in general payroll tax in this year’s Budget, companies face an ever-increasing payroll tax burden because of salary increases and the need to employ more staff, according to business leaders.

For some relief comes by taking a portion of their operation overseas, or even starting out with a percentage of staff located in places other than Bermuda.

As welcome as the Island’s booming economy might be, a drawback is the high cost of having locally-based staff. That’s one of the reasons why some businesses have either out-sourced work overseas or set up business units in lower-cost jurisdictions.

“Businesses are going to pay more in payroll tax. The amount they pay is going up even though the (tax) rate has not changed. That is because salaries have risen and the number of employees are going up,” said Peter Everson, president of the Chamber of Commerce.

“So international business looks to see where it makes the most sense to locate their people. Is it better to have new recruits in other countries?” he said.

“The more it makes more sense to have them somewhere other than Bermuda the more Bermuda will suffer. And these young people (who are employed) end up not having any allegiance to Bermuda one way or the other.”

One company that saw economic sense in having some of its operations based outside Bermuda is Flagstone Re. Set up in December 2005 in the wake of the devastation of hurricanes Wilma, Rita and Katrina on the US, Flagstone employs 95 people globally, of which around one-third work at its Church Street offices.

The others are spread out, mostly in Canada and India, but also at small offices in London and Switzerland.

Flagstone made a deliberate decision at inception to have multiple operations in different countries. So it was not a case of it relocating staff overseas at a later date.

Explaining why it had not brought all its people to Bermuda from day one, president and CEO David Brown said: “We realised, having worked in Bermuda for a long time, that certain jobs it is hard to get the locals to do the work because of limited availability, so rather than try to have those jobs in Bermuda where you have to get the people through immigration and there is the high costs, we decided to have them from the very beginning somewhere else.

“So what we have is access to lots of big talent pools and no immigration problems because they are working in their own country.”

Flagstone has accountancy, legal claims, and IT support and networking based in Halifax, Nova Scotia, while in Hyderabad, India, it has a catastrophe modelling team, development operation and research and development group.

While Flagstone had its overseas teams from the outset, other Bermuda businesses have been branching overseas with Nova Scotia a particular favourite with Olympia Capital and Butterfield Bank opting to open operations there.

Does Mr. Brown think others in Bermuda might follow suit?

“I think they will. It’s a global, competitive business. If you want to be competitive you have to look at those options, I think you will see it more and more,” he observed.

“We did not move the jobs abroad because the jobs were never in Bermuda in the first place. It’s a little more difficult if you have people established in the job and you want to replace them with somebody in another country.

“The cost of bringing someone in (to Bermuda) is very high. It’s hard for them to make a career move because they can’t stay here forever, so it’s much easier to employ someone in their own country with lower cost base where there is no issue about them getting a job and they can stay with us as long as they want.”

“Payroll tax does increase the cost of doing business here and is one of the factors that people look at when they are doing business. It costs a lot for lots of good reasons; it’s a small Island with limited resources and limited labour pool and that tends to drive up prices. I’m not complaining about, it’s just a fact. The higher those costs get the more people will start looking for alternatives like we chose.”

Chamber of Commerce president Mr. Everson views this year’s Budget as “neutral” but warns there does not appear to be any setting aside of revenue during the current boom to tide the Island during leaner economic times.

Businesses look abroad