Bermuda CIT Draft Legislation

Introduction of a Corporate Income Tax (“CIT”) in Bermuda – Draft legislation release

The much anticipated draft CIT legislation has now been released ahead of enactment before the end of 2023, but what do effected Groups need to do now?

On November 17, 2023, the Finance Ministry released their third consultation as part of the introduction of a CIT in Bermuda project. Broadly, the consultation elaborates on the key features under the regime, which we set out in our previous article (linked below). The consultation release included the publication of the draft CIT legislation, however there are still many unanswered questions, which we expect to be clarified in the next consultation phase focusing on the administrative issues.

Background to the CIT and interaction with Pillar 2 GloBE

On August 8, 2023, the Premier announced Bermuda’s intention to implement a CIT for periods commencing on or after January 1, 2025. The decision to implement the CIT comes in response to the OECD’s Pillar 2 initiative to ensure large multinationals (>€750m consolidated group revenue) are paying a minimum of 15% tax in each jurisdiction in which they operate.  Bermuda CIT should only apply to entities falling within the Pillar 2 regime, with some further exclusions.

The proposed CIT regime is not set to be a QDMTT for Pillar 2 GloBE purposes, on the basis that it includes a number of more generous features than the OECD model rules. This does, however, mean that Bermuda Constituent Entities will need to consider accounting for deferred tax on Bermuda CIT timing differences.  We expect Bermuda CIT to be considered a ‘covered tax’ under the Pillar 2 GloBE IIR and UTPR calculations.

On the basis that the Bermuda Government intend to legislate before the end of 2023, it is critical that affected entities review the rules to establish the impact on accounts disclosures for 2023 accounts, particularly in relation to deferred tax.

Key announcements in the Third Consultation

The third consultation sets out the proposed legislation for the regime, which is predominantly in line with the previous consultations, but includes a few clarifications:

1. Grouping and entity classifications – these elections will need to be made before December 31, 2023, however the method for doing this is not yet clear.
2. Economic transfer adjustment (“ETA”) – the ETA will now be the default position, however there is an option to elect to disapply this adjustment and for OTLC to apply (see below)
3. Opening Tax Loss Carryforward (“OTLC”) – the OTLC will not be available for periods before October 1, 2023, unless entities elect to disapply the ETA. All companies apply OTLC from October 1, 2023 to January 1, 2025.
4. Matching adjustments – similarly, matching adjustments elections contributing to the calculation of the OTLC will not be available for periods prior to October 1, 2023, unless the entity has elected out of the ETA.
5. Loss utilisation – Utilisation of brought forward losses will be restricted to 80% of taxable profit in a period.
6. ETA, LDIT, IFRS 17 – any unutilised deductions under these rules are converted into the OTLC on commencement of the regime (January 1, 2025), and subject to the loss utilisation restriction.
7. Segregated cell companies – elections will be available to determine the treatment of segregated cell companies, however how these will be made is not currently clear. We expect additional guidance on this in the next consultation.

Accounting for Bermuda CIT

With many December 31 year ends approaching, the key question we are asked is whether there is a requirement to recognised deferred tax in respect of temporary differences under the proposed Bermuda CIT regime.

On the basis that the legislation is due to be enacted prior to the balance sheet date, we expect there to be a requirement to disclose deferred tax amounts even if the calculations are not yet final.