Roger Crombie

As Christmas approached, strenuous efforts were being made to penalize Bermuda-based companies for being Bermuda-based. The attempt to have some of the majors delisted from the S&P 500 index as a penalty for being registered offshore extended not only to companies that have relocated their headquarters to Bermuda to mitigate their U.S. tax bills, but even to some companies formed in Bermuda that have never traded in the United States.

This example of failed opportunism is merely the latest in a continuing skirmish between U.S. insurers and their Bermuda counterparts--a struggle in which, as in all combat, truth was the first casualty. We have heard with great frequency of the "flood" of hundreds or thousands of companies that have redomiciled to Bermuda.

Yet the most accurate count anyone has come up with is an estimate by CBS News--26 such companies in the past 10 years. Hardly a flood.

The U.S. tax code brings worldwide earnings into assessment, and the Bermuda tax code leaves them out. Why the number of companies that have fled the repressive U.S. regime has not been a flood can only be a matter for speculation.

Bermuda taxes all imported goods, i.e. everything other than some locally produced milk and perfume, at rates as high as 33 percent. It takes 12 percent of earnings up to $225,000 a year. It takes $45 a week for a pension it will not be able to afford to pay much longer.

Bermuda levies so many taxes that to call it "tax free" is a grave misnomer. What Bermuda does not levy is capital gains tax, corporation tax or tax on unearned income.

No one doubts that a Bermuda company has an edge, all things being equal. Yet the evidence that such an advantage is no panacea is clear from the reinsurance sector headlines that have hogged the attention throughout the second half of the year.

Failure knows no jurisdiction. It may come twice as quickly in Bermuda as it would in a jurisdiction charging corporation tax at 50 percent. A lack of corporation tax on profits means an equal lack of tax mitigation on losses.

In Bermuda, a dollar is a dollar, on the plus side or the minus side. The "dollar dollar" effect is normally felt only when expenses are counted. A $500 air ticket costs a Bermuda company $500; a profitable U.S. company paying 50 percent corporation tax on profits effectively pays only half as much.

Ditto for salaries, rent and all the other overhead, which tend to be significantly higher in Bermuda than almost anywhere else.

Even if sympathy for the high cost of operating is hard to come by when there is no corporate taxation, a tax break is all Bermuda offers. A poorly managed company will fare no better here than it would anywhere else. The proof is in the dismal list of ailing Bermuda companies this year.

For that proof, look no further than Mutual Risk Management, a former high-flyer whose stock now trades at pennies. Or Annuity & Life Holdings, Bermuda's flagship foray outside the property/casualty business, for whom 2002 has been a horrible year, even without corporation tax.

Or Commercial Risk Reinsurance, the Scor subsidiary in Bermuda that reported $100 million of unexpected losses and is a candidate for serious restructuring. Or Centre, now cutting its Bermuda operations back to their core business. Or even Max Re, although a deft rearrangement of its product mix has headed off the danger and thereby excluded it from the list of casualties.

Not for nothing do accountants user phrase "shielding profits" for those who pay less corporation tax. A shield may be a handy device, but it guarantees nothing, as gladiators discovered as they battled in the Colosseum.

The combination of a soft market, low interest rates and weak management will just as surely savage a company, no matter what its corporate tax rate or choice of jurisdiction.

Roger Crombie can be reached at crombie@northrock.bm.

COPYRIGHT 2003 Axon Group

COPYRIGHT 2003 Gale Group