Due south: Bermuda and the Canadian tax exchange agreement

The Bermudian and Canadian governments signed a bilateral tax information exchange agreement (TIEA) back in June of 2010, and since then there has been some expectation that a raft of Canadian captives will be attracted to Bermuda’s shores. However, the agreement is yet to be ratified, and following elections in Canada, its final sign-off has slipped somewhat down Ottawa’s agenda. Nevertheless, there is an expectation that the TIEA will be ratified in the coming session of the new parliament, with the agreement helping to strengthen the position of Bermuda vis-à-vis more traditional domicile choices for Canadian captives and thereby help attract new and existing captives to Bermuda’s shore.

On Canada’s white list

The agreement itself provides for the exchange of tax information between the two countries, with the aim being to foster greater transparency, cooperation and accountability in international taxation—principles that have been advocated and promulgated by the Organisation for Economic Cooperation and Development. The agreement between the two countries will help to place Bermuda on Canada’s ‘white list’ of tax-cooperative domiciles, with the signing of the agreement already prompting a marked rise in Canadian firms considering Bermuda as a new captive home. Speaking with Tom McMahon, president of the Bermuda Insurance Managers Association, he said that the pipeline of new Canadian business was healthy, with a host of possible movers awaiting the green light of ratification. After a relatively sluggish few years in terms of new formations, Bermuda will be hoping that a signed TIEA will prompt an uptick in captive arrivals.

Talking with Richard Hartley, managing director of Acumen Insurance Managers, about the details of the agreement, he said that previously Canadian companies had been obliged to “pay tax on active business income earned by foreign affiliates and subsequently on dividends received from Bermuda registered subsidiaries”. Such a situation made Bermuda unattractive to Canadian parent companies, who opted instead to domicile predominantly in Barbados—a jurisdiction with which Canada has an existing double taxation agreement. Once the TIEA between Bermuda and Canada is ratified however, this situation will change, with the accord enabling Canada to “request information from Bermuda about companies or individuals”. In this way, the TIEA will help to instil confidence in Bermuda as a captive domicile, Hartley said, placing the Island on par with Barbados in tax terms, but well positioned to compete thanks to the strength of its captive and commercial re/insurance sector. And talking with the Treaty Team of the Bermuda government, it is evident that they regard the TIEA as significant in strengthening the Island’s international standing, with the treaty extending “an important benefit to Bermuda previously conferred only to countries with which Canada has a double tax treaty”.

Beating the competition

Addressing how Bermuda can compete with more traditional Canadian offshore domiciles—in this case Barbados, which tops the Canadian list of preferred offshore jurisdictions—Hartley said that there were a number of factors that help to set the Island apart from the competition. First of these was the reputation of Bermuda-based service providers, which compares favourably with that of jurisdictions such as Barbados. Bermuda always has been something of a one-stop shop for captives—offering an enviable array of world-class service providers—and should there be any doubt cast over existing domicile choices by Canadian parent companies, one would imagine that Bermuda will be high up any alternative domicile list. Secondly, Hartley highlighted the existing bench of expertise afforded by being the leading captive domicile globally and the third largest commercial re/insurance market in the world. There are obvious and telling benefits to being located in a seat of excellence for re/insurance, captive or otherwise. Again, such levels of expertise and excellence compare favourably with the competition just about anywhere, and should Canadian firms opt to establish a captive or reconsider its domicile, the Island is in a strong position to benefit. Thirdly, Bermuda is “physically located nearer to Canada” than Barbados, with regular flights from Toronto to the Island making the Island a more convenient alternative when attending board meetings or liaising with service providers. Finally, Hartley pointed out that Bermuda has “zero corporation tacompared to 2.5 percent in Barbados”, meaning that following the ratification of the TIEA, Bermuda’s tax environment should prove attractive to Canadian firms.

Hartley said that he expected “Bermuda to attract captives already registered in Barbados to redomicile to Bermuda” as well as those Canadian corporations considering setting up a new captive. Bermuda, it would seem, is in a strong position to profit once the TIEA is ratified. In the meantime, the Island’s captive industry is gearing up to attract and accommodate Canadian captives in an already impressive captive field.

Further agreement

Bermuda’s TIEA with Canada is the latest in a long line of agreements that the Island has signed in recent years in order to strengthen its position as a trusted offshore domicile. TIEAs have helped the Island to build a network of partner countries that recognise the value and regulatory strength of Bermuda as a trusted offshore jurisdiction, both in captive terms and more generally. And it would seem that further agreements are on the cards for the Island, Hartley indicating that a TIEA was recently signed with Bahrain, an agreement that has helped to kick-start business between the two countries. Further tax agreements are on the cards as Bermuda looks to enhance further its global re/ insurance footprint, and it would seem that those characteristics that have made the Island the leading domicile for captive insurance, will ensure that each new signatory will closely consider Bermuda as a possible captive choice.