CIT in Bermuda - Frequently Asked Questions (“FAQs”), assent, elections and 2023 financial statements reporting.

Introduction of a Corporate Income Tax (“CIT”) in Bermuda – Frequently Asked Questions (“FAQs”), assent, elections and 2023 financial statements reporting.

On December 18, 2023, the Finance Ministry released a useful FAQ document, updated on December 22, the document adds some much needed clarity as part of the project to introduce a modern, attractive mid-shore CIT in Bermuda. The aim of the FAQ document is to shed greater light on the key aspects of the regime regarding the elections available to companies with the scope of the CIT, this was an area which had been underdeveloped as part of the three consultations provided by the Finance Ministry and so was an area of significant uncertainty for companies likely to be within the scope of CIT. The FAQ document has been followed by the passing of the CIT legislation of 27 December 2023 and the issue of a new form (Form CT-ELP) enabling elections to be made prior to tax return submission, along with instructions for its use.

The enactment of the legislation brings deferred tax reporting requirements for periods ended December 31, 2023 and the ability to make key elections provides some certainty in the calculation of appropriate deferred tax balances. We explain the requirements and optionality further below.

Background to the CIT and interaction with Pillar 2 GloBE

As discussed in our previous articles on the CIT (linked below), on August 8, 2023, the Premier announced that a CIT will be implemented in Bermuda for periods commencing on or after January 1, 2025. This is directly as a result of the OECD’s Pillar 2 initiative which aims to ensure that large multinationals (>€750 million consolidated group revenue) are paying a minimum of 15% tax in each jurisdiction in which they operate.

In the months following the announcement of the tax, the Finance Ministry released three Consultations to provide details on the function and aspects of the CIT. A key component of the Consultations was the ability of key stakeholders, such as employees of major companies on the Island and advisors, to provide feedback to the Finance Ministry on areas where they felt that more clarity was needed.

Broadly, more clarity was provided with each Consultation, however, an area that remained relatively light on information was any detail in relation to how the elections that would be available under the CIT could be made, how long the elections would last and also when the elections would need to be made. This would have been particularly concerning should elections have been required prior to 31 December 2023, due to the lack of time that companies would have had to prepare for this. Also key was whether the legislation would be enacted before December 31, 2023 and it is now clear that it has been.

Reporting implications of the enactment of the Bermuda Corporate Income Tax Act 2023

The main area of focus for both consolidated accounts (where material) and entity accounts, is the requirement to provide deferred tax on timing differences that arise between the tax and accounting base.

A significant timing difference may arise for in-scope entities either:

• in relation to accumulated losses from January 1, 2020 to September 30, 2023 (the initial Opening Loss Tax Carryforward “OTLC” amount); orthe Economic Transition Adjustment, calculated as the difference between the book value and the fair market value of assets less liabilities as at September 30, 2023.

Entities will need to calculate both balances, if material, and if the OTLC is more favorable indicate intent to file, or actually file an election, prior to finalising the relevant financial statements in order to ensure that the appropriate balance is included.

It will then be necessary to consider to what extent any deferred tax asset is capable of being recognised.

Some of the elections available can be utilised in calculating the OTLC amount, if this is likely to be the selected option then consideration will need to be given to the most appropriate elections to be made in respect of each period of the initial OTLC period.

Next steps

While the Finance Ministry confirmed that no elections need to be made prior to 31 December 2023, companies who expect to be within the scope of the CIT will need to consider a number of different areas imminently, including:

1. Conducting an initial impact assessment in relation to the commencement of the regime.
2. Calculating deferred tax balances for the FY23 financial statements by deciding:
   • whether to utilise the ETA or the initial OTLC;
   • which other elections should be made for the purpose of the initial OTLC periods; and,
   • Whether to submit the optional CT-ELP form in respect of the elections.
   • Reviewing internal systems and processes to ensure readiness for 2025 implementation.

Key announcements in the FAQ document

The FAQ document provides further clarity on the following areas:

1. Elections available under the CIT and the timings on which each need to be made – Elections are split into three different categories:
   • annual elections (i.e. the realisations basis election, the branch exemption election, matching election and deminimis exemption);
   • five-year elections (i.e. treatment of excluded entity as Bermuda Constituent Entity and treatment of <80% owned entity as Bermuda Constituent Entity); and
   • “Other” elections, broadly one-off elections (i.e. reduction in tax loss carryforward deduction, adjustments to taxable income or loss attributable to implementation of IFRS 17 or LDTI and election to forego economic transition adjustment).
2. Method for making elections – elections can primarily be made as part of the first yearly CIT Return for the year to which the election relates. Alternatively, a new form (Form CT-ELP) may be sumitted prior to the CIT Return with details of any elections that are intended to be made, this will help give some certainty over the tax treatment, and deferred tax effect of elements of the regime prior to the filing deadline (and is useful when calculating deferred tax balances).  
3. Election length – once an election has been made, the election will apply for the entire length legislated, elections cannot be applied for part of a period i.e. 4 years for a 5 year election.
4. Opening Tax Loss Carryforward – further clarity was provided on how the opening tax loss position is calculated confirming that the loss will be calculated in respect of the five years prior to an entity becoming subject to the CIT with specific examples of how to calculate the opening tax loss position. A key point that was raised in the opening loss position is that the losses incurred in the five-year period must be offset by any profits that are made by the Bermuda Constituent Entity Group in this period subsequent to any loss, giving in effect an aggregate loss position. The FAQ document also confirmed the tax losses cannot be carried back but can be carried forward indefinitely until they have been utilised.
5. A number of elections can be used within the five-year opening loss tax carryforward period to arrive at the opening position. These include the branch exemption election, deminimis exclusion, exclusion of certain partially owned entities, adjustments to taxable income or loss attributable to implementation of IFRS 17 or LDTI and the election to apply a different GAAP to the consolidated financial statements GAAP.
6. Economic Transition Adjustment – requirement of adjustment to the 2025 CIT profit or loss by the difference between the carrying value and fair value of all assets and liabilities as at September 30, 2023 rather than being applied to particular assets or liabilities. A key point raise was what constitutes fair value which had been a point of contention to many. The Finance Ministry confirmed that fair value is in line with the US GAAP and IFRS definition being “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. We expect that many companies will seek to use the Economic Balance Sheet values, adjusted as appropriate.
7. Prior period errors – where the election to disapply the economic transition adjustment is not made, prior period errors and changes in accounting principles occurring prior to 1 October 2023 are not taken into account for the purpose of determining the opening tax loss carryforward.