January 30, 2013 at 5:54 p.m.
The Budget's 'income tax' will scare away international business
With International Business [include legal, accountancy and financial services] now the source of 90c out of every dollar earned from abroad (in 2009 tourism brought in a little over a dime), the International Business 'cap issue' is critically important.
Here's why. IB can pay Payroll Tax on a 'notional' basis. That means that an IB firm can declare that everybody in their company earns a notional salary per year. It's legislated, and a key part of the package of reasons that attracts IB to Bermuda.
A typical example. BigCapRe has 12 employees, seven of whom are Bermudian. Their pay range is from $60k (the Bermudian receptionist) to $1.5m for the non-Bermudian CEO.
Total annual payroll is actually $5,000,000. BigCapRe does not deduct Payroll tax from their employee pay cheques. Instead, BigCapRe picks up the full tab for all Pension, Social Insurance, and Health Insurance. BigCapRe pays a net salary that shows no pay deductions.
Under existing national tax legislation, BigCapRe pays on notional tax. Using the notional tax method, BigCapRe says that everybody - including the lowest paid person who is only paid $60k per year - gets paid $350,000 per year.
Annual cheque
BigCapRe thus declares an annual Payroll of (12 x $350k) $4,200,000 and pays 14 per cent Payroll Tax on that. So BigCapRe writes an annual tax cheque for $588,000. That is how it works right now.
The change in the Budget means that if BigCapRe continues to use the notional tax method, it must now say that everybody - including the lowest paid person - is paid $750,000 per year.
BigCapRe must now show a notional annual payroll of $9,000,000 per year. On this higher notional payroll, BigCapRe must now pay 16 per cent. So Government now expects a bigger tax cheque for $1,440,000.
Old tax - $588,000. New tax - $1,440,000. Huge difference. BigCapRe has decisions to make.
Decision One: Do we continue to pay on a notional basis, or do we pay on actual?
Decision Two: Do we put up with this kind of tax treatment or do we move to Cayman (or Ireland, or Guernsey...)?
Back to decision one. BigCapRe scrutinize their payroll. They see that their actual payroll is $5,000,000 a year. This is higher than the $4.2m that they are currently declaring.
Under the new system they should declare a notional payroll of $9,000,000 and will have to pay 16 per cent on $9m.
The obvious financial decision is to pay the new 16 per cent tax rate on their actual payroll [$5m]. This is lower than their new notional payroll [$9m].
The outcome is that instead of paying $1,440,000 (16 per cent on $9m), BigCapRe will pay the lower amount of $800,000 (16 per cent on $5m).
By changing their method, BigCapRe still pays more tax, but nowhere near the maximum tax that they could have paid. The other result is that Government gets less than it thought it might get from BigCapRe.
Overall, the switch from paying a notional tax on a notional basis is really a switch into paying a true Income Tax. No matter how many polysyllabic words are conscripted into service, this 16 per cent Payroll Tax payment has become a Tax on Income. Income Tax.
BigCapRe's decision two? Do we now start making deductions from our employees pay; and, looking into the future, what will happen with these promised "periodic reviews"?
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