Clouds Over Bermuda's Island Tax Haven

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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.

Deprez is a reporter for BusinessWeek.

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