Trump’s tax plan targets offshore business

Tax cuts: US President Donald Trump



Bermuda international business executives and tax experts were yesterday poring over the proposals in the framework for US tax reform unveiled by President Donald Trump.

While the Unified Framework for Fixing Our Broken Tax Code, produced by Mr Trump and Republican leaders, faces considerable hurdles before it can become law, some parts of it were generating discussion on the island.

The plan proposed cutting corporate tax from 35 per cent to 20 per cent. It would also replace the tax on worldwide profits that led many US multinationals to stockpile cash offshore and replaces it with a territorial taxation approach to encourage corporations to repatriate earnings and invest them in the US.

The US Congresss Joint Committee on Taxation estimates US companies are holding $2.6 trillion of untaxed profits offshore.

Another line of interest for Bermuda comes in the final paragraph of the nine-page plan.

To prevent companies from shifting profits to tax havens, the framework includes rules to protect the US tax base by taxing at a reduced rate and on a global basis the foreign profits of US multinational corporations, the plan states.

The committees will incorporate rules to level the playing field between US-headquartered parent companies and foreign-headquartered parent companies.

Under the heading of Tax rules affecting specific industries comes a paragraph that may touch on the insurance industry.

Special tax regimes exist to govern the tax treatment of certain industries and sectors, the plan states.

The framework will modernise these rules to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.

One international business source who spoke with The Royal Gazette yesterday felt some aspects of the plan could signal an intention to introduce an affiliate tax, similar to what was envisaged by the Neal bill and in several Budget proposals tabled by former US President Barack Obama.

These proposals aimed to limit tax deductions for insurers that cede a portion of their US premiums to non-US affiliates  for example, a reinsurer based in Bermuda. Such a move would impact Bermudian-based insurance groups with US subsidiaries, such as XL Group and Arch Capital.

However, there was no mention of a border-adjustment tax that was initially proposed by Mr Trump and which could have been a greater threat to the islands economy, had it included financial services in its targeted imports.

A study by the Brattle Group found that, if BAT were applied to reinsurance, US consumers would have to pay between $8.4 billion and $37.4 billion more to keep the insurance coverage they have today.

The Neal bill-type approach would also make insurance more expensive for Americans by making it more expensive for their insurers to buy reinsurance from overseas markets like Bermuda.

For many lawmakers in catastrophe-prone states, where home insurance premiums are already so high they are a political issue, such tax policy is unlikely to be popular. This could make insurance an issue during the political horse-trading that will take place in the coming weeks as tax legislation is thrashed out.

The change to a territorial system and reduction in corporate tax would erode Bermudas tax advantage over the US  and may even persuade some island companies to move onshore, according to a credit-rating agency.

In a report in February, S&P Ratings said: Although most US re/insurers already pay effective tax rates below the current rate, a lower US tax rate would further compress the spread between onshore and offshore effective tax rates.

As a result, depending on the geographic footprint and risk profile of their business, some Bermudians may consider reassessing their tax domicile.

American expatriates on the island, who are liable for US income tax on their Bermuda earnings, will be disappointed they will not get the same treatment as multinational companies, whose overseas earnings would not be taxed by the US under the proposed territorial system, as our columnist Jim Sabo points out in his US Tax Issues column today.

Final legislation that a majority can agree on is likely to look very different from the plan, since the most difficult decisions  such as how the tax giveaway will be paid for  have been passed onto the congressional tax-writing committees.