13 June 2019Analysis

Nerves are natural on economic substance but Bermuda can win long term

The new EU Economic Substance Act represents a paradigm shift for the captives industry but is also an opportunity for Bermuda, despite many in the captives sector being understandably nervous about its implications.

That was the thrust of a panel discussion held yesterday (Tuesday June 11) at the Bermuda Captive Conference, analysing this issue.

Moderated by James Ferris, head of the advisory team at PwC in Bermuda, the panel also featured: Shelby Weldon, senior vice president, Marsh Captive Solutions; James Dockeray, US tax partner at Deloitte in Bermuda; and Michael Frith, independent director and a former partner at Conyers and who worked with Bermuda Government on its response to the Economic Substance Act.

Ferris acknowledged the concern in the market, but stressed Bermuda can benefit. “There is some concern but there is also a great opportunity here. We have great service providers and a great footprint in Bermuda; if we can start shaping those services to deliver what captives need to perform their activities on the island then this industry will continue to grow,” he said.

The impetus for the EU legislation came from the OECD’s base erosion and profit shifting initiative, said Frith. The EU then initiated its own process and developed legislation, resulting in the EU Economic Substance Act. The implications of the act will be profound, he added.

“It is as much a paradigm shift as I have ever seen in my career,” he said. “It is a new regime, it is universal, it applies to any jurisdiction offshore - and many onshore. And broadly speaking its principles will be applied equally. It will represent a change in how we do business, but Bermuda is probably as well positioned as any jurisdiction to meet this challenge, get its legislative framework right and then take advantage of opportunities this will present.”

Frith said that notwithstanding the “brief hiccup” of Bermuda being briefly blacklisted by the EU earlier this year, the domicile has prepared well. The next phase will be an assessment of its legislation designed to deal with this in the coming months. “But this remains a developing topic,” he said.

He outlined some of the criteria companies will need to consider as a result of the act, including where the board members are based, what a company outsources and where and to who, and its physical footprint and expenditure in a domicile. Companies will be required to submit an economic substance declaration form on an annual, which will be assessed by Bermuda’s Registrar of Companies.

The criteria and assessment are subjective, he said. “Every entity will have different facts and paint a different picture. The key will be ensuring enough is on the right side of the balance. There is no bright line test for this and my personal view is that is a good thing since it would always been too high or too low for companies. Therefore this will remain a subjective assessment,” said Frith.

The Registrar of Companies will have a “monumental task” on its hands, added Frith.

Bermuda’s Insurance Act has elements concerning substance built into it, and the panel debated the implications of this.

Bermuda will ultimately overcome any resulting challenges and thrive, said Weldon at Marsh Captive Solutions. “This is just the latest challenge faced by the captive space in recent years but the intellectual capital is here to face these challenges,” he said. “I have full confidence in the regulator and the government that in three to five years Bermuda will still be thriving as a significant global player in the captive space.”

The move can be seen as part of a much bigger global drive towards information sharing and common tax standard, said Dockeray. While this presents challenges for Bermuda, the island is well placed to solve these challenges and find opportunities long term, he added.

Firth compared the act to the Code of Conduct introduced in Bermuda in 2010, which also created concerns in the market. On that occasion service providers rallied around to provide clarity and helped the market adjust, he said. “I recall the anxiety then but Bermuda is well positioned to offer the guidance needed and demonstrate its strength. This should be a positive long term.”