Taxing the profits of Bermuda's investment community has never been popular with government island leaders in the past. In fact, international companies all have written guarantees from the finance minister that they will not be subject to corporate taxes prior to 2015. And even after that, it looks as if it's going to stay that way, according to a new report.
Bermuda leaders are terrified that further taxing corporate profits will alienate the international business community. They are also keenly sensitive to losing companies to other domiciles offshore and onshore. At least that's what they let on in a draft report on the future of Bermuda's development.
"At the moment, increased taxation directly on profits would be unlikely to send the right message as this might precipitate a leakage of business to other jurisdictions and an increase in the costs of local services as the taxation is passed on to the consumer," the authors of the report write.
The report, "Charting Our Course: Sustaining Bermuda," was released over the summer and is meant to serve as a blueprint for discussion about the future needs of Bermudians and how to meet them.
It was developed in the wake of a 2002 United Nations meeting during which delegates resolved to begin implementing sustainable-development strategies by 2005.
News that the government has no intention of further dipping into the corporate cookie jar should come as a relief to insurance company executives, captive insurance managers and owners, and reinsurance titans.
They say that while the island provides some of the best financial services expertise to be found anywhere, doing business in Bermuda is already expensive, according to a survey by Risk & Insurance®conducted last spring.
Of this there is no doubt: Living in Bermuda is less genteel than it once was. There is some traffic, where once there was little. The cost of living has skyrocketed. Rents are preposterously high: A $20,000-a-month three-bedroom house is not unheard of.
In two generations, Bermuda has gone from a sleepy fishing village to a bustling business center. Residents in 2004 enjoyed a median household income of $84,350, much of it tax free. There's no unemployment to speak of, and citizens are even governed by leaders who are capable of balancing their books.
But this rapid speed of change underpins the sense that this kind of development might not be sustainable.
Indeed, a vocal minority, alienated by waves of well-heeled foreigners arriving to manage the island's growing insurance industry, believe the citizens would be better off if the government charted an opposite course aimed at reducing or stopping development altogether.
One particularly vocal critic of the sustainable-development initiative, an economist, has dismissed it out of hand as "social engineering."
Fueling the island's high standard of living and social services are the fees and taxes levied, in part, on the business community. In 2000, for example, international companies spent $967.3 million in Bermuda. Of that, $45.2 million was in the form of business fees.
Some companies don't even have offices or personnel on the island, and pay a fee just to be registered there.
Premier W. Alexander Scott does not want to "send the message that the island is closed to new business," according to the report, with new taxes on corporate profits.
Instead, the plan calls on the international business community to maintain "high voluntary standards of corporate responsibility," though even government leaders also acknowledge that such standards are difficult to enforce.
"Many companies in Bermuda already invest millions of dollars in the Bermudian community in terms of charitable donations, sponsorship of cultural and sporting events, sports clubs and education initiatives," the authors of the report write. "However, there are few mechanisms to ensure that these acts are effective, based on society's needs and mutually reinforcing."
As a result, one of the government's proposals is to reform its Corporate Responsibility Program to raise fees using a point system.
Companies that follow a "good corporate checklist" and score highest would see no increase in work permit fees. Average performers would be given an economic incentive to improve. Poor performers would be penalized.
These expectations would be made of businesses large and small, as well as the government, the report says. Suggested items on this checklist include:
* Encouraging mentoring or voluntary work in the workplace by linking these activities to performance bonuses for employees, including them in forward job plans or allowing time off for these activities.
* Developing clear standards for corporate giving. This could be further strengthened into proposing that businesses donate a standard percentage of their annual profits or give "in kind" support to philanthropic causes such as affordable housing, youth schemes or environmental cleanup.
* Having in place sustainable transport plans to encourage workers to car-share or use public transport
* Succession planning and work-shadowing for Bermudians, in addition to effective training and mentoring schemes to increase diversity in the workplace, including, in the case of global businesses, sending staff overseas to sister organizations for training and development.
* Conducting environmental audits for energy and water usage and waste production, and developing programs for reducing energy and water use, using renewable energy sources and minimizing waste. This not only offers small-business opportunities in this field, but could be used to raise awareness amongst employees through the creation of "green teams."
But almost before the ink had dried on the report, critics raised questions about the government's commitment to its own blueprint.
At the end of August, not long after the report was published, the biggest economic decision that any Bermuda government has ever taken was made public, and appeared to fly in the face of the word and spirit of the sustainable-development initiative.
Bermuda has two government-funded hospitals, one a mental wellness institute, which are run as quasigovernmental organizations. The main hospital, which provides medical care at a standard comparable to its larger North American counterparts, is old and needs replacing.
Without public debate, and to the dismay of almost everyone, the government decided to build a new hospital in a large public park next door to the existing hospital. The multiyear development project, which carried an initial cost estimate of $500 million, will destroy one of Bermuda's favorite public spaces.
The decision flew in the face of the report's recommendation that the island, just 21 square miles, use previously developed land instead of open space.
The immediate outcome was a cabinet reshuffle, occasioned when the minister responsible for announcing the new development hinted at her disappointment in the proposal. Her reward was a posting to education, the poisoned chalice of Bermudian politics.
As Bermuda wrestles with its swift spiral of success, the sustainable-development initiative is bringing form to an otherwise ragged debate. But whether the initiative itself is sustainable over the long run remains to be seen.
CYRIL TUOHY is managing editor of
Risk & Insurance®.
ROGER CROMBIE is a columnist for the magazine.
October 1, 2006
Copyright 2006© LRP Publications