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.
These are among the kinds of firms the U.S. government is targeting as it searches for revenues amid recession. A study by the U.S. Government Accountability Office of 2007 tax payments found that 83 of the 100 largest publicly traded U.S. corporations have subsidiaries in jurisdictions deemed tax havens or financial privacy jurisdictions, including Bermuda. Facing declining proceeds, both the Obama Administration and some congressional Democrats have revived efforts to limit corporate tax evasion, including cracking down on the deferral of tax payments on overseas profits.
A bill introduced by Representative Richard Neal (D-Mass.) in July to limit tax deductions by overseas reinsurance affiliates would hurt Bermuda most acutely, says Bradley Kading, president of the Association of Bermuda Insurers and Reinsurers. He calls the bill "discriminatory," saying it could lead to a rise in consumer insurance rates. The "draconian" proposed excise tax on affiliated reinsurance practices, he says, could "lead to a trade war." Bermudian Premier Brown also warned of a "potential trade war" during a June summit.
Brown: "A Friend to the White House" No doubt, further corporate defections from Bermuda would strike a blow to the archipelago's finance-dependent economy. Companies that have located there are considering whether or not they should leave, says Altshuler of the Urban-Brookings Institute, while companies headquartered in the U.S. may now think twice about moving their operations to Bermuda.
Brown's efforts to cozy up to the U.S. may not be enough to stem the tide. The timing of his decision to accept the four Guantánamo prisoners raised particular suspicions among members of the Bermuda Parliament and Britain's Foreign Office, neither of which he consulted. "The inference is that a friend to the White House can expect to have a friend in the White House," says one high-ranking official who wished to remain anonymous due to his close dealings with the Premier.
For his part, Brown insists there was no quid pro quo in the deal. "[I have] supreme confidence that Bermuda's relationship with the United States…is better today than it was one week ago, one month ago, one year ago," he said before a summit in June. "That can only mean good things for the continued success of the country and the continued success of [its] companies."
Given Washington's other concerns, the tax-haven legislation may not go anywhere for a while. "I think all [of the proposed regulations] have some potential to impact upon Bermuda," says Finance Secretary Scott. "But the Neal bill isn't likely to gain more traction until 2010. If it takes root…and looks like it could go to the floor of the House, of course we would take more active interest in it."
In the meantime, Bermuda's government intends to stay focused on diversifying the economy. That could include expanding the telecommunications industry and trying to exploit the surrounding seabed for minerals. With so many threats in the air to its dominant economic sectors, diversification may be just what Bermuda needs.
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