Introduction of Corporate Income Tax (CIT) in Bermuda

On 8 August 2023, the Premier announced Bermuda's intention to implement a corporate income tax (CIT) for periods commencing on or after 1 January 2025. The decision to implement the CIT comes in response to the OECD’s Pillar 2 initiative to ensure large multinationals (>€750m consolidated group revenue) are paying a minimum of 15% tax in each jurisdiction in which they operate, and on this basis should only apply to entities falling within the Pillar 2 regime.

The implementation process has involved a number of consultation stages, the second of which closed on 30 October 2023. The second consultation included a high-level overview of the regime, such as the scope of the regime and several unique elective tax adjustments.

We are expecting the draft legislation and third consultation to commence on 10 November 2023, with submissions due by 24 November 2023. The Finance Ministry has stated its intention to pass this legislation ahead of 31 December 2023.

The introduction of the CIT regime is set to override the existing tax assurance certificates that have sheltered many entities from the charge of a corporate income tax. That being said, Bermudian entities will need to analyse whether they are within the scope of the CIT regime, particularly Bermuda Protected Cell Companies, entities with minimal overseas activities and <80% owned entities of multinational groups.

On the basis that the Government intend to legislate before the end of 2023, it is critical that affected entities review the rules to establish the impact on accounts disclosures for 2023 accounts, particularly in relation to deferred tax. There are a number of elections that may need to be made before 31 December 2023, in order to be able to appropriately recognise the deferred tax position in the 2023 year-end financial statements. 

Key elections

The second consultation included high-level details of 12 elections available under the regime. These have been summarised in Appendix I.

It is not currently clear whether there will be a deadline to make these elections, whether they will be annual or whether they will be irrevocable.

For entities with parents in 2024 IIR jurisdictions, such as the UK, EU, Canada, Australia, New Zealand etc, it could be preferential to make a number of these elections in order to be able to recognise an appropriate amount of deferred tax in the 2023 balance sheet date, essentially as an opening balance for the purpose of Pillar 2 – GloBE.

The three main elements that need to be considered for the purpose of deferred tax recognition in YE2023 accounts are: 

1. Economic transition adjustment (“ETA”)

The ETA election allows for an adjustment equal to the difference between the fair market value of assets and liabilities as at the Basis Adjustment Valuation Date (30 September 2023) and the carrying value of those assets and liabilities as at that date.

In relation to intangible assets (excluding goodwill), the transitional adjustment will be deducted over a 10-year spreading period.

The amount of the economic transition adjustment shall be restricted to 80% of the positive taxable income for the Bermudian constituent entity before applying loss carry forwards. Any unutilised transitional adjustment amounts can be carried forward indefinitely and offset against future profits.

2. IFRS 17 and US GAAP Long Duration Targeted Improvements (“LDTI”)

A specific elective rule will be introduced to deal with the implementation of IFRS 17 (which took effect on 1 January 2023) and the US GAAP equivalent, LDTI (due in 2025). The election would look to spread the unamortised proportion of the IFRS 17 transition which has not unwound as at the implementation date of the CIT over a straight line 10-year period or later adjustments such as LDTI, also over 10 years.

3. Opening tax loss carry forward

The regime allows for the inclusion of an opening tax loss carry-forward calculated based on the taxable losses that would have been incurred in the five years prior to the commencement of the regime (2020 – 2025). An election to ensure losses are utilised only when it is helpful to do so is expected.

Determining deferred tax balances for YE2023 and YE2024 is no small exercise especially if a group elects for Bermuda tax GAAP to be different to the financial statements GAAP. An approach will need to be agreed upon with statutory auditors ahead of year-end and consideration given to whether any elections need to have been made, or at least Board approved, in order to recognise the deferred tax balances in those financial statements.

Key features of the regime

Whilst the regime broadly follows the Pillar 2 – GloBE rules, there are several unique and useful flexible elements, which we have set out below:

Matching election

An election will be available to match the carrying value of assets and liabilities predominantly for use where there are accounting mismatches under the accounting standard which could result in inappropriate volatility of the tax base. The election is intended to be flexible and can be made over groups of assets and associated liabilities. There will be provisions to ensure there is no double tax or relief if the election covers assets and liabilities also covered by the economic transition adjustment election.

Realisation basis

An election can be made to treat assets and/or liabilities on a realisation basis for tax purposes. The election can be made on an entity basis, or for particular assets or liabilities within the company and reinsurers will be able to use the election for funds withheld and modified co-insurance contracts.

Use of alternative GAAP

Computations should be completed under the GAAP used for consolidated accounts; however the rules will allow for an election to use an alternative GAAP provided the permanent differences arising are not in excess of $1m (or are adjusted). We expect most differences to be timing differences, so any adjustments would be minimal, and this flexibility may be worth considering.

Constituent entity groups

The tax returns should be calculated on a group basis, however a separate constituent entity group will be formed for:

  • Flow-through entities which are not ultimate parent entities.
  • All Investment or Insurance Investment entities, which are neither Tax Transparent Entities nor subject to an Investment Entity Tax Transparency or Taxable Distribution Method Election are combined in a separate Bermuda Constituent Entity Group.
  • All other entities form a single group.

There is an election to apply alternative groupings which may be necessary before 31 December 2023, in order to finalise the deferred tax position.