Clouds Over Bermuda's Island Tax Haven

As Washington moves to crack down on overseas corporate tax shelters, Bermuda is losing some of the financial-services companies that provide 40% of its GDP

By Esmé E. Deprez

Bermuda's creamy sands and pastel colors have long attracted visitors from around the world, whether clad in bikinis or business suits. In the past two decades, the island nation 600 miles off the coast of North Carolina has become a hub for international business, thanks to hundreds of companies that have relocated there to take advantage of low corporate tax rates.

But clouds are starting to gather over Bermuda's economy—and they may not part any time soon. The tourism industry, which accounts for about 6% of gross domestic product, has been whacked by the global economic downturn, with visitors down 12% last year and tourism spending in early 2009 off by nearly half. Of even greater concern for the country's long-term economic health is pending anti-tax-haven legislation in Washington that could limit the ability of U.S. companies incorporated in Bermuda to shelter overseas profits.

The mere prospect of such a change has already provoked a mini-exodus of corporations. In the past three months, companies such as Tyco (TYC), Accenture (ACN), Ingersoll-Rand (IR), and Cooper Industries (CBE), have moved—or made plans to move—their incorporation from Bermuda to other locales such as Ireland and Switzerland. "These firms are facing a lot of uncertainty and are very worried about the legislation that may come out of Washington," says Rosanne Altshuler, co-director of the Urban-Brookings Tax Policy Center.

Officially an overseas territory of the United Kingdom but largely self-governing, Bermuda has so far remained sanguine in the face of the challenges. "Bermuda is one spoke in a platform that has many hubs around the world," says Donald Scott, the country's Financial Secretary. "Companies come and go—that's the nature of the business."

A Premier Insurance Jurisdiction

Bermuda may be trying to stave off harsh U.S. action by currying favor in Washington. In June, Premier Ewart F. Brown agreed to accept four released detainees from the U.S. prison in Guantánamo Bay, Cuba—a move that angered some British and local politicians who claim he acted autonomously. Brown contends it was an immigration matter within his jurisdiction and done solely with "humanitarian" goals in mind.

Home to some 68,000 residents scattered among more than 130 islands in an area about one-third the size of the District of Columbia, Bermuda now sees 40% of its GDP come from financial services. The international insurance and reinsurance markets represent the largest segment, followed by trust, investment, and funds administration. All told, these businesses generated more than 70% of Bermuda's total tax revenue over the past 12 years, according to the Association of Bermuda International Companies. The group calls Bermuda "one of the top three premier insurance jurisdictions in the world," home to the headquarters of 11 of the top 35 global reinsurance companies.

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