A Bermuda corporation tax will need to take into account the fact that reinsurance companies’ profits can be extremely volatile, says a leading banker.

In a video interview with Bermuda:Re+ILS, Butterfield Bank Bermuda managing director Michael Neff says the tax would see Bermuda move from a primarily consumption tax-based system to one in which corporate profits were taxed for the first time.

The Bermuda government launched a consultation in August on the global minimum tax, which is being pushed by the Organisation for Economic Co-operation and Development. Under the proposal, companies with revenues of more than €750 million, whose profits were not taxed in one country, could see them collected by another country, leaving Bermuda with little choice but to introduce the tax.

“It’s a significant change in the tax regime of Bermuda,” Neff says. “Today there is no income tax nor capital gains tax and that’s been a very big selling point for the reinsurance companies who are managing billions of dollars of portfolios.

“You need to be very careful about how you do that, because it is one of the primary reasons that we have the insurance business here on the Island.

“That’s a pretty short runway for everything that has to be done.”

“The challenge is that in the insurance business you have very good years but, if you’re a property-casualty insurer and there is a hurricane or an earthquake, you have to pay out. When you do that, there is a very bad effect on your P&L, which means in that year there is less to be taxed.

“You’re now talking about not only an income tax, but an income tax that has a fair amount of volatility, so you have to figure out how to balance that.”

Neff says the other challenge for Bermuda is implementing any such tax.

“If you think about the regime today that does not exist to collect income tax, that’s a huge shift in the capabilities the government has to have. It’s not only collecting the tax, but the compliance, the tax systems you need—the execution of it will be a big challenge.”

Neff adds that the government has indicated it plans to pass legislation in January 2024 with a goal of implementing the tax in January 2025.

“That’s a pretty short runway for everything that has to be done,” he concludes.