This year Ireland is the favoured destination. But Bermuda is not far behind and Gibraltar deserves a mention. Oleg Vukmanovic looks at the tax benefits of leaving the UK – and why many companies still choose to stay.
"People feel HM Revenue & Customs has a them-versus-us mentality; that they want to catch insurers out.”
So says an ABI spokesman, echoing many companies’ complaints about Britain’s tax regime. The ABI contrasts the “can-do” attitude of regulators in the Republic of Ireland with the Revenue’s divisive treatment of lobby groups.
But even worse, says the spokesman, is the “needless level of complexity and lack of stability in Britain’s tax system”.
The government can’t seem to make up its mind. Alistair Darling, the chancellor, scaled back plans to reform capital gains tax in the last Budget in March. In May, the government held an emergency £2.7bn mini-Budget to compensate those who had lost out from the abolition of the 10p tax band.
Last year, the Treasury had published proposals to tax companies’ foreign profits. Consultation was due in July, but mounting pressure forced the government to back down on the plans and to delay the implementation of other measures while it conducted further talks with businesses.
Legislation may now be enacted before 2010, the year by which Gordon Brown must call a general election. This puts insurers in a tricky position because they will have to hold higher capital to cope with any unexpected changes in the tax system.
Also in July, Henri de Castries, chief executive of AXA, waded into the debate when he told Insurance Times: “The things that are important for long-term investors in markets are the absolute level of taxes, but also the stability of the system. And in the UK, with the caution of an outside observer and all respect to the government there, it’s terrible.”
The ABI wants a steadfast Treasury that sticks to its strategy and no longer forces insurers to second-guess if policy will change in a few months. “This would help companies to plan and would persuade companies to stay in the UK,” says the spokesman.
The credit crunch has given the government a temporary reprieve – ministers and chief executives have bigger worries than corporation tax right now – although some experts say insurers are using this downtime to plan exit strategies. The economic conditions could also provide extra incentive for companies to re-domicile, in order to save money on tax.
Rakshit Ranjan, an analyst at Noble Group, says: “The overall incentive is that the existing UK tax rate is too high compared to what most geographies offer. Amlin, for one, may book a part of its profit in Bermuda or Ireland. If it did this, its consolidated tax rate [between the UK and Irish rate] would result in a 10% to 15% profit boost to annual company earnings.” Last year, Amlin’s pre-tax profit was estimated at £445m.
Ranjan says savings would filter through after a settling-in period of two years if the insurer opts for a dual-domicile structure.
But he believes the economic slowdown is likely to postpone such decisions, with Brit, for example, opting to delay any move to re-domicile for up to 12 months.
The high level of exposure to stock markets is another disincentive for UK insurers looking to re-domicile, he says, as investment and shareholder returns in the current volatile market are not high enough to warrant the risk. And the impact on rates after the near collapse of AIG and the 2008 hurricane season also reinforce the case for staying put.
Britain still commands a large chunk of Europe’s financial wealth, reassuring businesses with its “principles-based” regulatory regime. The FSA has greater reliance on general principles than on specific rules.
Research has shown that London continues to attract the lion’s share of corporate headquarters set up in Europe. And it is still widely believed that London’s insurance expertise is unmatched.
Ireland’s watchdog, the Irish Financial Services Regulatory Authority, is also considered to be less developed than its UK counterpart, the FSA, adding to criticism that Ireland’s light-touch regime remains largely untested and may pose an unknown level of risk.
Companies are obliged to honour their duty to shareholders by seeking out the most tax-efficient region. For some, that means continuing to lobby the UK government for tax reform; for others, that means trying Dublin, Bermuda or Gibraltar. We explore these territories ...
Zurich UK is to re-domicile there; RSA, Brit Insurance and Amlin have expressed interest. WPP, the giant marketing services group, triggered much interest when it moved across the Irish Sea early last month, following pharmaceuticals company Shire and media group United Business Media.
It’s easy to see why Ireland is so popular. The Irish government has a corporation tax rate of 12.5% – less than half the UK’s 28%. Companies domiciled there are also exempt from taxation of foreign profits. The UK levies a capital gains exit charge to penalise companies that migrate elsewhere – but Ireland does not.
The republic isn’t afraid to make its own rules either, despite the concerns from its European Union partners. It recently promised a 100% guarantee on retail saving deposits, cranking up the pressure on the UK, which plans to offer up to £50,000. It has also pledged to maintain its low corporate tax rate despite the credit crunch.
But it isn’t all smiles in Dublin. The Bank of Ireland’s Quarterly Economic Outlook, published last month, said a drop in house construction, high oil prices in the first half of the year and the credit crunch have hit the country of 4.4 million people hard, plunging it into its first recession in two decades. The report said the Irish economy would contract by 1.6% this year, with net exports providing the only good news.
A further decline in output is expected next year, with another drop in construction spending. The bank also expects unemployment to reach 7%.
But the attraction to Ireland as a tax-friendly territory remains. It’s not just a case of what the country can offer – it’s also a matter of what other countries lack.
Shrewd operators could avoid US taxes and continue to operate in Bermuda if they re-domicile to Ireland. David Arnold, insurance tax partner at Ernst & Young, says: “Ireland has tax treaties with the US that exempt individuals and companies from US tax.” And crucially, once in Ireland, insurers are free to open branches in Bermuda without the drawback of being taxed by US authorities.
Arnold explains Ireland’s advantage over Gibraltar or Bermuda: “Ireland’s tax treaty network is so important when it comes to structuring a group, as there would be a withholding tax applied to funds paid into Gibraltar or Bermuda, which doesn’t apply to Ireland. This issue would be the single most important item when choosing Ireland or Switzerland.”
Unlike Switzerland, Ireland is an EU member so companies domiciled there benefit from freedom of establishment in all member states and the stability of the EU network. This partly explains why Zurich UK opted to re-domicile to Ireland from Switzerland, pooling its reserves of regulatory capital from across Europe in one location.
The insurer says centralising its capital will free it to invest in the “most effective manner possible”. “We considered a number of locations, but Ireland best met our requirements,” the company says.
“By 2011 it is intended that Zurich Insurance Ireland Limited will be the underwriter for the majority of the EU general insurance business that Zurich writes.” It expects to finish the process by next January.
Bermuda is one of Ireland’s biggest competitors in terms of attracting re-domiciling companies from the UK. Its biggest lure is its 0% tax rate on capital held.
Unlike tax-friendly Ireland, Bermuda is considered a tax haven. The latter tend to be used purely for tax benefits, whereas tax-friendly territories are considered to have some tax benefits but also to have tougher regulation in place.
Tax-friendly countries also tend to have better international networks. For example, Ireland has a tax treaty with the US that gives it exemption from federal excise tax (FET) on insurance and reinsurance premiums directly relating to US risks, unless that risk is subsequently reinsured to a company with no treaty exemption.
Insurers and reinsurers from countries without a tax treaty with the US, such as Bermuda, are subject to the tax when covering a US risk. A 4% tax must be paid on the gross premium for property-casualty insurance and a 1% tax is mandatory for life insurance and all types of reinsurance.
Under an Internal Revenue Service ruling that took effect on 1 October, foreign companies located in countries with a treaty waiver of the tax will incur a liability for tax due on reinsurance with a non-exempt company. This is if any of the subsequent reinsurance can be related to a US-origin risk.
For companies benefiting from a qualified exemption treaty, this would result in FET being due on some or all of the first leg premium of 4% or 1%, and FET being due on some or all of the second leg premium at 1%.
US authorities have also imposed a bigger income tax burden on individual expatriates in tandem with the excise tax to discourage migrations.
David Arnold, insurance tax partner at Ernst & Young, says this could encourage expatriates in Bermuda to move to Ireland. “In the end, companies in Bermuda will move or not move based on their corporation tax position. They will ask themselves, what is the greater tax? Either it is the 12.5% corporate tax in Ireland, or it is the 1% premium tax on reinsurers, or the 4% premium tax on insurers, in Bermuda.”
Gibraltar has been busy repositioning itself as a low-tax, rather than a no-tax, jurisdiction. It used to compete with no-tax territories such as Jersey and Guernsey but is now concentrating on attracting companies from the EU.
The island is in the process of slashing its corporation tax rate for domestic companies, which is currently 33%, and raising its tax on foreign companies, currently 0%. The plan is for the taxes to meet near the middle at 10%, which would undercut Ireland.
In the latest Budget, delivered in June, Peter Caruana, Gibraltar’s head of government and chief minister, fast-tracked the reduction in corporate tax for domestic companies, dropping it by 6 points to 27% from 1 July.
Last month, however, Caruana came under fire from opposition parties over his failure to announce a fixed date for the implementation of a 10% corporation tax. The rate was expected to be introduced in the 2010/11 tax year, but Caruana has said it could be a year late.
The opposition criticism came after Aon Insurance Managers (Gibraltar) announced it would be re-domiciling part of its White Rock operation, including two protected cell companies, to Malta.
Gibraltar is eager to prove itself as tax friendly rather than as a tax haven and widely promotes its endorsement from international bodies such as the International Monetary Fund.
Its financial regulator, the Financial Services Commission, ensures compliance with EU obligations. It also implements standards of legislation and regulatory practice that match UK practice. But tiny Gibraltar, where everybody knows everybody, offers a far more accessible and friendly financial services community.