Money laundering, private jets and empty offices with just a name on the door. This is the stuff of John Grisham novels, not the reality for most offshore insurance centres.
The anti-tax haven sentiment surrounding the April G20 meetings in London has been applauded in some quarters and ridiculed in others. Some see it as a necessary clampdown on the stashing away of ill-gotten gains in opaque domiciles where tax evasion and secrecy are a part of life. Others think world leaders, including Barack Obama, Gordon Brown, Nicholas Sarkozy and Angela Merkel are just looking to raise additional revenue for their treasuries in the tough economic climate.
Whatever your opinion, the reality is that low tax jurisdictions are under a great deal of scrutiny. And many are home to the captive and (re)insurance industry. Some are worried that the political and media reflection of such centres could perpetuate outmoded stereotypes and confusion on how the insurance sector operates.
“The so-called tax havens have been pretty easy targets for politicians and people in the media,” says Derek Patience, chairman of the Manx Insurance Managers Association and senior vice president at Marsh. “A very easy target against which to score points by making allegations almost regardless of whether those allegations are accurate or not.”
The Organization for Economic Cooperation and Development’s (OECD) “progress report” of financial centres, which forms the basis of its crackdown on tax havens, places a number of insurance domiciles in its “grey list”. These are “jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented”.
So is it the OECD’s intention to push for more information and transparency from tax havens. Or is it against low tax domiciles in general? With the Isle of Man proudly listed on the OECD’s “white list”, Patience thinks it is the former. “There was a lot of worry in the business community before the G20 to see whether we would get recognition for all the work that’s been done,” he says. “It’s great the G20 has classified the Isle of Man the way it has.” The Isle of Man has signed 14 tax information exchange agreements (TIEAs), 12 of which are with OECD countries.
A jurisdiction’s placing in the progress report could affect its competitiveness. Insurance and reinsurance companies consider numerous factors when choosing an offshore domicile, but a negative OECD placing could tip the balance, warns Patience. “If you line up two domiciles side by side and they’ve got a similar profile, but one is on the white list and the other is on the black list, then that in itself creates a differentiating factor that might swing the balance.”
Insurers battle ignorance
Another offshore insurance centre that has signed numerous TIEAs is Bermuda. Unlike the Isle of Man it is on the grey list, but hopes to upgrade by the end of the year. “Based on our understanding that the OECD standard was very recently set at 12 treaties, Bermuda will have met the standard before the close of 2009 and most probably ahead of the next G20 Summit Meeting which is scheduled for later in the year,” said Paula Cox, Bermuda’s deputy premier and minister of finance in a statement. “Though the G20 were adamant that there is no blacklist and more a progress report, I would anticipate that once we have signed 12 TIEAs, then we will be in the top tier.”
Behind the diplomatic language and support for the OECD’s requirements, many feel the anti-tax haven campaign has unfairly targeted transparent and well-regulated jurisdictions. There is also concern that insurance companies based in low-tax locales could be seen as tax evaders. “In most instances the fact that a captive is liable for tax at a zero rate here in the Isle of Man is almost an irrelevancy,” explains Patience. “The profit that organisation brings to a group will be taxed at home base.”
“So-called tax havens have been pretty easy targets for politicians.
Bermuda advocates feel there is a similar
misunderstanding attached to the Bermuda market. During his presidential campaign, Barack Obama accused Senator John McCain of supporting tax breaks for Bermuda companies. “McCain went to Bermuda . . . and while he was there pledged to protect tax breaks for American corporations that hide their profits offshore,” said Obama in a TV advert. “And grateful insurance company executives and their lobbyists who benefit from the tax scheme gave McCain $50,000.”
Bradley Kading, president of the Association of Bermuda Insurers and Reinsurers says he has 23 member companies. “Fourteen of them have US subsidiary corporations and 17 have European subsidiary corporations. And those subsidiaries are paying tax according to the rules of the domiciles where they’re established. With the United States there is also federal excise tax imposed on any transaction between a US client and Bermuda – so certainly in the United States our sense is that we’re paying an equivalent tax rate to a wholly-owned US competitor with regard to our US sourced business.” And Bermuda itself isn’t a tax free zone, he adds. There is a consumption-based tax system equivalent to around 17% of GDP.
Crucial economic role
Clearly, Bermuda is still a low-tax environment to operate in. But is this a bad thing? Before the financial crisis and the start of the anti-tax haven campaign, domiciles offering lower tax were considered competitive. In Europe, many insurance and reinsurance companies were questioning why they should pay 28% corporate tax in the UK or 30% in Germany, when they could pay 12% in Dublin or even less in Bermuda. A lot of companies chose to redomicile – not just for a favourable tax regime, but it certainly played a part.
Bermuda and the Isle of Man’s qualities as insurance centres go beyond their low tax rate. For captives, both offer less regulatory red tape and legislation specifically designed for captive insurers and wholesale reinsurers. These centres have attracted insurance and reinsurance companies because they offer a number of competitive advantages. Those companies may pay lower tax, or they may be taxed according to the rules of another domicile.
Undoubtedly many reinsurance companies have opted for Bermuda’s low tax regime. The market is responsible for much of the US reinsurance capacity and there are very few US-based reinsurers today compared to ten or 20 years ago. But what the US loses in tax revenue it gains in insurance capacity, argues Kading. “We provide 40% of the European property catastrophe reinsurance and 40% of the US property catastrophe reinsurance,” he says.
“The environment here, for a variety of reasons has allowed specialty classes of business to be here. In last eight years we have supplied $30bn in claims payments for catastrophe claims in the US alone. It’s an enormous economic benefit to the United States.”
When the hype surrounding tax havens dies down and the grey list domiciles progress with their disclosure obligations it will be back to business as usual. For the insurance industry, there were more pressing concerns in the run-up to the G20 than how it would treat tax havens. That the industry should not be lumped together with the banking sector in regulatory decisions was a matter for some tough lobbying. But for those operating in low tax centres, there is less concern for now.