Stop Tax Haven Abuse Act
London & Bermuda Newsletter
In the face of early suggestions that the Obama administration would have too much on its plate (such as preventing the economic downturn from turning into a depression) to make headway with the Stop Tax Haven Abuse Act, the administration has recently demonstrated that it is capable of multitasking. During the first week of March, Senator Carl Levin reintroduced a revamped version of his 2007 bill which is intended to launch an all-out attack on what he categorizes as “Offshore Secrecy Jurisdictions”, stating:
“If offshore jurisdictions make a decision to enact secrecy laws and support industry practices furthering corporate, financial, and tax secrecy, that’s their business. But when U.S. taxpayers start using those offshore secrecy laws and practices to evade U.S. taxes to the tune of $100 billion per year, that’s our business. We have a right to enforce our tax laws and to expect that other countries will not help U.S. tax cheats achieve their ends.”
The original 2007 bill, which was co-sponsored by then-Senator Barack Obama, failed to garner sufficient support to become law. However, given the comfortable majorities enjoyed by the Democrats in both the House and Senate, and the fact that the bill is endorsed by not only the president but also by other political heavyweights such as the Treasury secretary, there may be sufficient support and impetus to guarantee a different outcome this time around.
Although observers in Bermuda were pleased to see no mention of the Island in Senator Levin’s 18-page statement introducing the Act (with Switzerland and the Cayman Islands attracting the most attention), if passed in its current form the Act is nevertheless expected to identify Bermuda and 33 other financial centres (including such established centres as Hong Kong and Singapore) as “Offshore Secrecy Jurisdictions”, purportedly on the basis that they unreasonably restrict the ability of the United States to obtain information relevant to US tax matters. Of note, the Act will if passed:
create a rebuttable presumption that a US taxpayer who “formed, transferred assets to, was a beneficiary of, or received money or property” from an offshore company or trust is in control of that entity for tax purposes;
automatically treat any benefit received by a US person from an offshore company or trust as unreported income;
automatically require that details of any account held offshore be reported to the IRS;
prescribe penalties for failing to disclose offshore holdings;
set a deadline by which time hedge funds and private equity firms will need to establish anti-money laundering programs; and
seek to strengthen summonses used in connection with Offshore Secrecy Jurisdictions.
Bermuda’s Minister of Finance and industry organisations, such as the Association of Bermuda Insurers and Reinsurers (ABIR), are aggressively making the case in Washington that Bermuda cannot credibly be included in a list of Offshore Secrecy Jurisdictions. They point to the fact that Bermuda has a longstanding commitment to transparency and the effective exchange of information in relation to tax matters. Moreover, they are also seeking to sway US opinion by highlighting the fact that Bermuda has not adjusted its tax base to attract mobile capital from other jurisdictions and emphasizing the role that the Bermuda insurance industry has played in providing coverage for US-based disasters such as Hurricane Katrina and the World Trade Center after the September 11, 2001, terrorist attacks. Of course, most of Bermuda’s largest insurers are publicly traded companies and, as such, already provide considerable transparency concerning their finances.
The Minister and industry groups remain keen to emphasize that, key to Bermuda’s success as an offshore centre, is the fact that its insurance and reinsurance market supports global economic stability through the efficient spread and diversification of insurance risks. Unlike some other offshore jurisdictions, Bermuda’s success is neither based nor dependent upon national secrecy laws but instead upon the fact that it is home to an efficient and competitive insurance and reinsurance market.
Although Senator Levin’s statement to the US Congress focused on tax shelters and bank secrecy rather than the insurance industry, the Stop Tax Haven Abuse Act will no doubt present the Bermuda insurance market with several challenges. The areas most likely to come under scrutiny include the captive insurance industry and the use of internal reinsurance by Bermuda (re)insurers with US subsidiaries. Outside the insurance sector, Bermuda’s trust and hedge fund industries are also likely to be impacted.
However, Bermuda has a history of responding and adapting to challenges and there is every reason to suppose that it will respond to this latest challenge in a manner that promotes the Island’s long-term viability as a financial centre. It is perhaps worth noting that it is not the objective of the Stop the Tax Haven Abuse Act to interfere with the right of a self-governing nation to establish its own tax regime, but to prevent the “abuses” that are prevalent in many other offshore jurisdictions. Bermuda, with a deserved reputation as a responsible offshore jurisdiction, should have little to fear from this and, indeed, may benefit from a “flight to quality” as businesses relocate to Bermuda from other less responsible and less transparent jurisdictions.