In a previous newsletter, we explored key features and implications of Pillar Two of the much-hyped OECD initiative against base erosion and profit shifting. In a nutshell, Pillar Two aims to introduce a global minimum tax of 15%, ostensibly to provide an even playing field for all countries around the globe, by combating the effects of so-called ‘tax havens’ and low-tax jurisdictions. The plan is that if all subsidiaries don’t pay at least 15% tax in their countries of operation, then the parent country can levy a top-up tax to bring the effective tax to 15%. The idea is that this will obviate the benefit of tax havens, as any tax saved there will just be levied up the chain. As the world thus comes to grips with Pillar Two, we are seeing two types of tax change – firstly high tax rate countries are starting to bring in their own “top up tax” regimes and low- or no-tax rate countries are introducing or increasing corporate tax. A big caveat is that Pillar Two generally only applies to massive groups, those with turnover in excess of EUR 750m.
So we’ve seen various formerly low-tax countries either increase or introduce corporate tax and today we look at the latest country to bring in corporate tax: Bermuda.
Bermuda’s tax regime to date
First let’s recap on Bermuda’s overall tax regime to date. Bermuda has traditionally imposed corporate income tax at 0% which has made it a very attractive offshore jurisdiction. NB distinction here: Bermuda does levy a 7% corporate service tax on exempted companies and partnerships who provide corporate services as defined. Further, Bermuda levies no value added tax (“VAT”) and no withholding taxes, and also no capital gains tax or donations tax (sounding quite idyllic so far!)
So what taxes are levied by Bermuda? Previously, employers were responsible for imposing payroll taxes (and could then recover some of it from their employees). However, from April 2017, Bermuda revamped this system and now both the employee and employer are responsible for payroll taxes, although the payment obligation remains with the employer. The most significant tax in Bermuda is arguably customs duties which is levied on the import of goods into the island, usually levied at 25%.
On another note, Bermuda also passed The Economic Substance Act 2018 which took effect from 1 March 2019, and requires certain business carrying on “relevant activities” to adhere to certain substance requirements (no surprises here in the context of international tax.)
Well on 8 August 2023, Bermuda announced that it will soon be implementing corporate income tax in line with Pillar Two. This is quite a change! The public consultation paper released by the Government of Bermuda, addresses numerous technical aspects of the corporate tax. One noteworthy mention is that the corporate tax would apply to companies who are part of Multinational Enterprise Groups (“MNE’s”) with an annual revenue of €750M or more, i.e. those within the ambit of BEPS Pillar Two.
If given the go-ahead by all parties (including the legislators), this will take effect from tax years beginning on or after 1 January 2025. Further, Bermuda will still announce exactly what percentage the new corporate tax will be, but it is proposed that it would range between 9% and 15%.
So what else is happening with Pillar Two?
Well Canada has mentioned that it will be implementing a qualified domestic minimum top-up tax in line with Pillar Two on MNE’s that meet the threshold requirements, coming into effect for fiscal years of MNE’s that begin after 30 December 2023.
Similarly, Australia’s government has proposed a domestic minimum tax of 15% which will apply to income tax years starting on or after 1 January 2024. The idea is that the Australia is able to tax MNE’s operating in Australia (who meet the threshold), and thereby tax profits they have been missing out on.
We expect a lot more countries to start implementing and commenting on the various facets of Pillar Two so watch this space.
As you can imagine, many international Group structures often have subsidiaries in low-tax or no tax jurisdictions. However that ship is slowly sailing with increasing emphasis placed on Pillar Two by governments across the world (although the United States is still not keen due to the economic impact on businesses, amongst a whole lot of other reasons).
Not only will this global minimum tax impact the ultimate shareholders and companies of international Group structures, but it also leads to countries reconsidering and reinvigorating their entire tax regimes (which Bermuda have also mentioned on their to-do list).
Due to Pillar Two’s far-reaching implications it has becomes vital to regularly conduct a health check of all structures, as what worked a few years ago may not be fit for purpose today. Regan van Rooy are passionate about all cross-border issues, and we encourage you to contact us today for a no-obligations initial consultation, in which we can advise you on your structure in today’s rapidly changing tax landscape!