Tax transparency has been an evolving focal point for the world’s economies as governments look to satisfy rigorous global compliance standards and shore up their tax revenues. Western media have focused on international financial centres following recent years’ cyber breaches that led to sensationalistic reporting about offshore investments, stoking a public appetite for revelations on high-net-worth financial matters, including taxes.
The standard argument one often hears is ‘why should companies avoid paying taxes in their home domicile?’ The question certainly has merit, but those posing the question need to take the time to hear the answer – the reality is far more complex and nuanced.
What often tends to get overlooked is how a jurisdiction fits within an organisation’s global structure – how does that company operate on a global scale, across numerous markets, catering for a variety of customer and investor needs?
These global structures are not for nefarious purposes, but are designed to allow the efficient deployment of capital to operate, strategise and grow a business and its offerings in the jurisdictions where there is demand.
As PwC’s Global CEO Survey 2018 found, regulation and tax changes are asset management CEOs’ greatest worries. For some asset managers, new tax rules are challenging historic tax structures. More generally, the US Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS), the rules for sharing of tax information about individuals between countries places the burden of reporting on financial institutions.
In addition, the US recently enacted comprehensive tax reform, which has caused a review of how US-based businesses and US-owned foreign businesses are structured and operate.
Scott Watson-Brown (pictured) is a Partner and asset management leader at PwC Bermuda. He says that it is easier to make sense of things when looking at the complete picture, a view that reflects PwC’s depth of experience with multi-national structures.
“A particular country might complain a large corporation has moved capital from one place to another but it is unhelpful to look at isolated transactions. We get to see the full picture and understand our clients’ operations and strategic initiatives as they develop their global corporate structure to achieve efficient operations and maximise benefits to customers and investors,” says Watson-Brown.
Whilst Bermuda remains a jurisdiction with no income tax (Bermuda maintains a consumption based tax regime), questions over how corporations and fund management groups use the jurisdiction will likely remain. What Bermuda does and will continue to do is provide transparency to other jurisdictions’ government departments and maintain its regulatory standards, which are aligned, as a minimum, with global best practices.
In the investment management sector, Bermuda has been at the forefront of transparency. It was one of the early adopters of the OECD’s Common Reporting Standard, says Scott Slater, Tax Partner, PwC. “Bermuda has also signed up to a large number of Tax Information Exchange Agreements (TIEAs) and it was an early adopter of country-by-country reporting (“CbCR”) under the Base Erosion and Profit Shifting (BEPS) initiative.”
The announcement last year that Bermuda was enhancing its beneficial ownership regime is a further example of its efforts to ramp up transparency.
The Bermuda Monetary Authority has done a good job of explaining what processes are in place to capture certain key information in the jurisdiction with respect to beneficial ownership. “Bermuda has been collecting information on the beneficial ownership of companies for over 70 years,” says Watson-Brown.
“The recent amendments to UBO definitions ensures alignment with AML and ATF regulations; this will ensure that there’s no gap between what information is necessary to effect the prevention or detection of money laundering or financing of terrorism and that which is collected. We also entered into an agreement about 18 months ago with the UK to exchange UBO data so that it gets into the hands of the people who actually need it for legitimate reasons,” explains Watson-Brown.
Amendments to the regime will ensure that information about the ownership of entities is updated with relevant information, which is accessible on a timely basis by those with a legitimate interest. With the strengthening of the collection of data, Bermuda continues to show its commitment to the detection and deterrence of serious crimes, including money laundering.
Last year, the UK implemented changes to its beneficial ownership register regime, including the requirement for UK-incorporated companies to make their beneficial ownership registers open to the public.
The Bermuda Government and the BMA understand they have a responsibility to lead the way in how the jurisdiction operates and to date, they’ve done a good job.
“We’ve seen the Ministry of Finance and the BMA increase their efforts and headcount to keep pace with local regulatory developments and with global standards. Reputationally, it is paramount that Bermuda maintains its current position for embracing the constant change in global regulations,” adds Slater.
Both the Bermuda Government and the BMA are very clear in their expectations they set on how people do the business.
In line with global best practices, entities and their service providers are expected to adhere to Anti-Money Laundering (AML) and Anti-Terrorist Financing (ATF) rules in accordance with Proceeds of Crime Regulations 2008. Moreover, entities will now be required to conduct beneficial ownership record keeping on an ongoing basis. As Watson-Brown states: “The BMA is always very consistent in its approach.
“For companies considering something new, whether it be the next alternative asset class or the creation of a bespoke structure to deliver on investor needs, the BMA is open to listening to what you want to achieve and at PwC, we can help in the achievement of your goals.
“The BMA enjoys having that dialogue because they want to understand what risks you pose to your investors and to the jurisdiction. Through open dialogue, the BMA can determine an effective framework to regulate your business and the associated risks. As a pragmatic regulator, we have seen the BMA develop exempt status for funds and their managers who are subject to scrutiny in home jurisdictions (e.g. the SEC) through to pending legislation to gain equivalence recognition under the AIFMD requirements in Europe.”
In Slater’s view, Bermuda is a progressive jurisdiction that embraces industry developments from a global compliance standpoint. The BMA’s mindset is to embrace “sensible regulation and reporting requirements, ensuring that they are fit for purpose”. He believes that there always needs to be a healthy push/pull in terms of what needs to be implemented.
“The jurisdiction is, I believe, at the right point on the curve in terms of staying current and engaging in dialogue with global regulators in the US and Europe around regulatory developments. That engagement is key,” states Slater.
Watson-Brown agrees: “The collective approach taken by the Bermudan authorities can be summarised as follows: ‘Let’s understand who is coming here, what business they are doing, where the risks lie and how to regulate them; and let’s be consistent in our application of that regulation’.”
For any incoming investor into a Bermuda fund structure, or individual or group looking to establish a platform for their business, that willingness of all parties in Bermuda to engage in dialogue should see Bermuda fare well over the coming years, as offshore jurisdictions continue to be put under the microscope.
