The Bermuda government recently released a detailed outline of its proposed 15% corporate income tax regime as part of a second public consultation that is open for comment through Monday, 30 October.

Executive summary

On 8 August 2023, the Government of Bermuda began its first public consultation on a proposal to introduce a corporate income tax (CIT) that would apply to Bermuda businesses that are part of multinational enterprise (MNE) Groups with annual revenue of €750m or more (First Public Consultation). Following the conclusion of the First Public Consultation on 8 September, the Bermuda government announced on 5 October the commencement of its second public consultation (Second Public Consultation). As part of the Second Public Consultation, the government released a detailed outline of the Bermuda CIT being considered (Second Consultation Paper) that builds upon the framework presented in the First Public Consultation (First Consultation Paper). The Second Consultation Paper contains a detailed outline on scoping determinations, the computation of taxable income, the availability of various elections, confirmation that a 15% CIT rate is intended, uses of losses (including losses arising prior to the effective date), foreign tax credits, and an affirmed commitment to develop credits that would constitute qualified refundable tax credits (QRTCs) under the Organisation for Economic Co-operation and Development (OECD) Pillar Two Global Anti-Base Erosion (GloBE) Rules.¹, ²

The Bermuda government intends to enact a CIT prior to 31 December 2023, with an effective date for tax years beginning on or after 1 January 2025. Following the period for public comment on the Second Consultation Paper (ending 30 October 2023) a third public consultation, including full draft legislation, is expected to be released on or about 10 November 2023, with a comment period ending on 24 November 2023.

The consideration of a Bermuda CIT has significant implications for multinational groups with a presence in Bermuda generally, and for multinational insurance and reinsurance groups with a presence in Bermuda in particular. Multinational groups with a Bermuda presence should study the Second Consultation Paper carefully and consider the potential impact to their structures, including the impact on determinations under the GloBE Rules. With a fast-approaching intended enactment date by 31 December 2023, multinational groups with a Bermuda presence should consider the impact of enactment on their deferred tax accounting, and the interaction with the enactment date and deferred tax accounting, GloBE determinations, and the impact of any CIT elections.

The purpose of this Alert is to summarize the clarifications and additional details contained in the Second Consultation Paper. For an overview of the First Consultation Paper, see EY Global Tax Alert, Bermuda's consideration of adopting a corporate income tax has significant implications for insurance industry, dated 27 August 2023.

Detailed discussion

Scope of the CIT

In Scope MNE Group

The Second Consultation Paper clarifies that the CIT would only apply to an "In Scope MNE Group," which is an MNE Group with consolidated revenue of at least €750m in at least two of the four Fiscal Years immediately preceding the Fiscal Year in question.

Bermuda Constituent Entities — general rule

Unless an exception applies (described in more detail below), the CIT would apply to each Tax Resident Entity and Bermuda permanent establishment (PE) (both terms carrying their same definitions as provided in the First Consultation Paper)³ that is a Constituent Entity of an In Scope MNE Group (defined in the Second Consultation Paper as "Bermuda Constituent Entities"). The Second Consultation Paper clarifies that Entities that are tax resident in Bermuda but also subject to tax in another jurisdiction will be subject to tax in Bermuda as Bermuda Constituent Entities, but will be allowed a foreign tax credit (FTC) for foreign taxes on income borne by the Entity.

EY observes: The confirmation that an Entity tax resident in Bermuda that is also subject to tax in another jurisdiction (but not also resident there) will be a Bermuda Constituent Entity but be allowed an FTC is a welcome clarification consistent with the framework outlined in the First Consultation Paper.

Exception to Bermuda Constituent Entity status for exempt and Excluded Entities

As outlined in the First Consultation Paper, an exclusion from the CIT would be provided for three types of Entities:

1. Excluded Entities (as defined in Article 1.5 of the GloBE Rules, e.g., Governmental Entities, Non-profit Organizations, Pension Funds, an Investment Fund that is an Ultimate Parent Entity (UPE))
2. Entities and PEs that are Constituent Entities of an MNE Group that are less than 80% owned (by value), directly or indirectly, by the UPE (Exclusion for Partially-Owned Entities)
3. Entities and PEs that are Constituent Entities of an MNE Group meeting the requirements of Article 9.3.2 of the GloBE Rules (Exclusion for Groups with Limited International Presence)

The Second Consultation Paper states that the Exclusion for Partially-Owned Entities is intended to prevent an MNE Group from owing more tax than would otherwise be owed under the GloBE Rules when such a group owns a Bermuda entity together with one or more minority owners with a substantive ownership interest. An election would be made available to disapply the Exclusion for Partially-Owned Entities (and thus subject the Bermuda entity to CIT as a Bermuda Constituent Entity).

EY observes: The incorporation of an election out of the Exclusion for Partially-Owned Entities should bring welcome flexibility to MNE Groups that desire better alignment between the composition of Entities subject to Bermuda CIT and Entities included in the Bermuda jurisdictional effective tax rate (ETR) under the GloBE Rules. MNE Groups should continue to monitor the parameters of this exception when further details are provided in a subsequent public consultation or other guidance, such as details concerning when the 80%-ownership requirement would be considered satisfied (e.g., whether less-than-80% ownership is required throughout the Fiscal Year), and administrative parameters for making the election.

The Exclusion for Groups with Limited International Presence would apply for purposes of the CIT for the same potential five-year period as it does under the GloBE Rules (i.e., generally, the exclusion would apply for periods up to the first Fiscal Year ending on or after 31 December 2029 for MNE Groups that are In Scope MNE Groups as of the effective date of the CIT). The five-year period would be continuous and not be suspended if a group falls below the revenue threshold to be an In Scope MNE Group. The Second Consultation Paper notes that the government will continue to monitor the implementation of the GloBE Rules by enacting jurisdictions to determine whether any adjustment to the applicability period for the Exclusion for Groups with Limited International Presence is warranted.

Bermuda Constituent Entity Groups

Consistent with the principles outlined in the First Consultation Paper, generally the CIT liability would be computed by aggregating the taxable income/loss of Bermuda Constituent Entities that are Constituent Entity members of an In Scope MNE Group (the Bermuda Constituent Entities so aggregated now defined as a "Bermuda Constituent Entity Group"). Under the default rules, certain Bermuda Constituent Entities would be included in separate Bermuda Constituent Entity Groups, meaning an In Scope MNE Group may include more than one Bermuda Constituent Entity Group:

• Each Bermuda Constituent Entity that is a Flow-through Entity, but is not the UPE of the In Scope MNE Group, would be treated as a separate and distinct Bermuda Constituent Entity Group.
• A distinct and separate Bermuda Constituent Entity Group would be comprised of all Bermuda Constituent Entities that are Constituent Entities of an In Scope MNE Group and that (i) are Investment Entities or Insurance Investment Entities; (ii) are not Tax Transparent Entities; and (iii) are not subject to an Investment Entity Tax Transparency election or Taxable Distribution Method election (as provided for under Articles 7.5 and 7.6 of the GloBE Rules, respectively).
• All remaining Bermuda Constituent Entities that are Constituent Entities of an In Scope MNE Group would be combined in a single Bermuda Constituent Entity Group.

As an alternative to the default grouping rules above, and at the election of the Entity filing the CIT return for a Bermuda Constituent Entity Group (Filing Bermuda Constituent Entity), one or more Bermuda Constituent Entities that would otherwise be included in a single Bermuda Constituent Entity Group may elect to apply alternative groupings in determining the composition of a Bermuda Constituent Entity Group.

EY observes: The default grouping rules appear to align the grouping of Bermuda Constituent Entities for CIT purposes to the grouping of Bermuda Entities for purposes of determining the GloBE ETR (taking into account the treatment of certain Flow-through Entities and the treatment of certain Investment Entities and Insurance Investment Entities). The option to elect alternative groupings of an In Scope MNE Group's Bermuda Constituent Entity Group(s) should bring welcome flexibility to In Scope MNE Groups.

Entity classification

As stated in the First Consultation Paper, the CIT regime would adopt key foundational definitions in the GloBE Rules, including the term "Flow-through Entity" and special types of Flow-through Entities such as Tax Transparent Entity and Reverse Hybrid Entity. Status of an Entity as a Flow-through Entity for CIT purposes would have implications for which entities it is grouped with in determining the Bermuda Constituent Entity Group, how its income is determined and potentially allocated to other Entities, among other determinations. The GloBE Rules generally define a Flow-through Entity by reference to whether it is treated as fiscally transparent under the laws in the jurisdiction where it was created.⁴ The Second Consultation Paper states that the government will provide a list indicating the default classifications of different Bermuda legal entity forms. For non-Bermuda Entities, the determination would generally be determined by reference to the treatment of the entity under the entity's local law, but a separate list would be provided to show general default classifications for entities created under jurisdictions that do not address classification (e.g., because they impose no CIT).

As an alternative to the default classifications, an Entity, whether or not Bermudian, would be allowed to elect to be treated as fiscally transparent or non-fiscally transparent for CIT purposes.

EY observes: The commitment by the Bermuda government to provide clarity on whether Bermuda entities will be treated as Flow-through Entities will bring helpful clarity to MNE Groups for purposes of many CIT determinations and also, presumably, for purposes of applying the GloBE Rules. MNE Groups should consider the impact of making (or not making) entity classification elections, including the timing of those elections in 2023.

Calculation of Taxable Income or Loss

Starting point: Financial Accounting Net Income or Loss (FANIL)

Under the default rule, the computation of taxable income or loss for CIT purposes (Taxable Income or Loss) would begin at each Bermuda Constituent Entity's FANIL as determined under the accounting standard adopted by the UPE in preparing its Consolidated Financial Statements.

An election would be available to permit a Bermuda Constituent Entity to instead base its Taxable Income or Loss computation on an "Approved Financial Accounting Standard," An Approved Financial Accounting Standard would include all Acceptable Financial Accounting Standards (as defined in the GloBE Rules), Bermuda statutory accounting principles, and statutory accounting principles set forth by the United States National Association of Insurance Commissioners. If the use of an Approved Financial Accounting Standard would result in permanent differences in excess of €1m compared to the result under the default rules, an adjustment to the treatment of relevant items under the Approved Financial Accounting Standard is required.

The treatment of adjustments attributable to purchase accounting for an acquired business would generally follow the treatment of such items in the GloBE Rules. Also consistent with the GloBE Rules, items of income and expense not attributable to purchase accounting that are reflected in the consolidated accounts of the MNE Group but not the separate accounts of the Bermuda Constituent Entity may be taken into account in determining FANIL only to the extent they can be reliably and consistently traced to the Bermuda Constituent Entity.

Annual adjustments to FANIL to determine Taxable Income or Loss

Expanding upon the framework described in the First Consultation Paper, the Second Consultation Paper specifies the following required adjustments to FANIL to determine Taxable Income or Loss:

• Adjustments - consistent with those required under Article 3 of the GloBE Rules - for Accrued Pension Expense, Asymmetrical Foreign Currency Gains or Losses, Excluded Dividends, Excluded Equity Gain or Loss, Included Revaluation Method Gain or Loss, International Shipping Income, Net Taxes Expense, Policy Disallowed Expenses, transfer pricing and intra-group transfers (to the extent not already reflected consistent with the Arm's-Length Principle), and certain amounts charged to policyholders for Taxes paid by an insurance company in respect of returns to policyholders
• Adjustments for Prior Period Adjustments and Changes of Accounting Principle

EY observes: The required adjustments to FANIL are broadly consistent with those required under Article 3 of the GloBE Rules and the stated CIT policy objectives of simplifying the CIT regime and supporting consistent, predictable and manageable tax outcomes on profits earned in Bermuda.

Several elective adjustments to FANIL would also be made available:

• The Branch Exemption Election would allocate the FANIL of a Tax Resident Entity that is attributable to that Entity's non-Bermuda PE to the non-Bermuda PE (and thus, out of the CIT base). Absent the election, a Tax Resident Entity is subject to tax on its worldwide income.
• The elective Economic Transition Adjustment would cause a Bermuda Constituent Entity to recognize an adjustment with respect to all its assets and liabilities (with the exception of goodwill) held as of 30 September 2023 (Basis Adjustment Valuation Date). For each asset and liability subject to the adjustment, the amount of the adjustment would generally be the difference, as of the Basis Adjustment Date, between each asset/liability's fair market value and the carrying value of the item in the Consolidated Financial Statements. How the Economic Transition Adjustment would be reflected in determining Taxable Income or Loss depends on the nature of the assets and liabilities subject to the adjustment.
• Adjustments related to identifiable intangible assets (i.e., excluding goodwill) would generally be deducted equally over a 10-year period.
• For all other assets and liabilities subject to the adjustment, the adjustment would be taken into account by reference to the new tax basis (i.e., rather than the carrying value recognized in the financial statements) and would be amortized after the Basis Adjustment Valuation Date consistent with how the asset or liability runs off or is settled under the relevant financial account principles underlying FANIL.

The amount of the Economic Transition Adjustment that can be deducted in a given Fiscal Year would be limited to 80% of the Taxable Income of the Bermuda Constituent Entity Group before applying Tax Loss Carryforwards (discussed below). Any excess Economic Transition Adjustment would be carried forward in future periods as a Tax Loss Carryforward.

• The Realization Basis Election would treat assets and/or liabilities on a realization basis for CIT purposes. The election would be available in relation to a particular entity, or particular assets within an entity. The Second Consultation Paper states that the CIT rules will make clear that the election will be available to reinsurers in relation to funds withheld and modified co-insurance contracts.
• The Matching Election would match the carrying values of assets and liabilities of a Bermuda Constituent Entity to enable the electing entity to record its assets and liabilities on a consistent basis for CIT purposes. The Second Public Consultation states that it is intended that the election be made available for a particular group of assets and associated liabilities of an entity that could create a mismatch.
• The International Financial Reporting Standards (IFRS) 17/ Long Duration Targeted Improvements (LDTI) Adjustment Election would cause insurance entities to amortize over 10 Fiscal Years amounts accounted for in retained earnings with respect to adopting IFRS 17 and U.S. Generally Accepted Accounting Principles (GAAP) LDTI that have yet to reverse as of the effective date of the CIT.
• The Stock-Based Compensation Election would substitute the amount of Stock-Based Compensation in the financial accounts with an alternative deductible amount computed with respect to Stock-Based Compensation that has an exercise date during the Fiscal Year, equal to the excess of the fair market value on exercise over the value of any consideration received for the stock.

EY observes: Some of the proposed elective adjustments are consistent with those available under the GloBE Rules, and generally the elections should bring welcome flexibility to MNE Groups with Bermuda Constituent Entities that desire to align their outcomes under the CIT regime with those under the GloBE Rules. The Realization Basis Election, Matching Election, and IFRS 17/LDTI Adjustment Election should be welcome by multinational insurance groups with Bermuda Constituent Entities. These elections, generally, can potentially prevent inappropriate CIT outcomes and volatility (including being taxed in excess of an insurance company's economic income) caused by mismatches in the accounting treatment of assets and liabilities specific to the insurance industry or by the adoption of new accounting standards for insurance companies. These mismatches can frequently arise in the insurance context under funds withheld or modified co-insurance arrangements where the assets are accounted for at fair market value as an embedded derivative and liabilities are accounted for at book value.

The elective Economic Transition Adjustment appears consistent with its stated policy objective to bring a Bermuda Constituent Entity into the CIT regime on a basis more consistent with its economic position prior to the application of the CIT. The Economic Transition Adjustment appears to be an "all or nothing" election, in that all assets (excluding goodwill) and liabilities would be subject to the adjustment if the election is made. It appears that for an MNE Group that becomes an In Scope MNE Group later in time (e.g., 2028), the Basis Adjustment Valuation Date of 30 September 2023 would remain fixed. MNE Groups with Bermuda Constituent Entities should carefully consider the impact of making the election to apply the Economic Transition Adjustment, including the impact to deferred tax accounting and interaction with determinations under the GloBE Rules.

The Second Consultation Paper states that the Bermuda government is considering whether insurers and reinsurers would further be required to discount insurance reserves to account for the time value of money. In this regard, the paper states that consideration of the nature of particular reserves, whether they are currently discounted in the financial statements (or not), and related factors, will be required. Additional adjustments for the treatment of reorganizations, Restricted Tier One Capital, or other items addressed in the GloBE Rules, may be incorporated into the CIT regime.

EY observes: A requirement to further discount insurance reserves (i.e., beyond what is already incorporated into FANIL) appears to be a deviation from the GloBE Rules. MNE Groups should consider the impact of a potential requirement to further discount reserves on their Bermuda CIT determinations and GloBE determinations.

Allocation of Taxable Income or Loss

Once the above adjustments to FANIL are performed, the CIT rules would follow the provisions in the GloBE Rules for allocating income under Articles 3.4, 3.5, 7.1, and 7.4. These provisions will provide for the allocation of Taxable Income or Loss to Permanent Establishments, non-Constituent Entity Owners of Flow-through Entities and Constituent Entity Owners of Tax Transparent Entities, as well as between Bermuda Constituent Entities and their owners, to the extent the Bermuda Constituent Entity is a Flow-through Entity that is also the UPE of the MNE Group, an Investment Entity or an Insurance Investment Entity.

Calculation of CIT Liability

After determining each Bermuda Constituent Entity's Taxable Income or Loss (including applying the allocation of Taxable Income or Loss rules discussed immediately above), the Taxable Income or Loss of each member of a Bermuda Constituent Entity Group would be aggregated to arrive at the pre-Tax Loss Carryforward Taxable Income (or Loss) of the group.

Tax Loss Carryforward deduction

The deduction for prior losses (Tax Loss Carryforward) would be determined on a Bermuda Constituent Entity Group basis. No loss carry-back would be allowed. An election would be made available to allow for a lesser amount of Tax Loss Carryforward to be applied against Taxable Income in a given Fiscal Year.

A Bermuda Constituent Entity Group would be allowed to deduct losses occurring prior to the Effective Date of the CIT (Opening Tax Loss Carryforward), but only with respect to the prior five Fiscal Years preceding the Effective Date, and determined in the same manner as if the group had been subject to the CIT in the five pre-Effective Date Fiscal Years.

Tax Loss Carryforwards would not expire; however, the amount of Tax Loss Carryforward that may be used against Taxable Income in a given Fiscal year is limited to 80% of the Taxable Income determined prior to the Tax Loss Carryforward deduction. The Second Consultation Paper states this limitation is aimed at allowing for a reliable source of government revenue "at least in the early years transitioning into the CIT system."⁵ An exception to the 80% limitation (80% Limitation Exemption) would be provided in the case of groups that are subject to certain requirements under Solvency II⁶ or equivalent regimes and receive capital benefits resulting from certain loss events (a "shock loss") that the group can show would produce losses that can be used against other income for tax purposes.

EY observes: The confirmation that there will be an allowed Opening Tax Loss Carryforward is welcome, and consistent with the stated policy objective of preventing taxation in excess of economic income. MNE Groups should consider the impact of an Opening Tax Loss Carryforward on their deferred tax accounting, including interactions with the determinations under the GloBE Rules.

Tentative CIT liability of the Bermuda Constituent Entity Group

Based upon the feedback received during the First Public Consultation, the Second Consultation Paper states that the Bermuda government intends to adopt a 15% CIT rate that would be assessed against Net Taxable Income or Loss of each Bermuda Constituent Entity Group (i.e., Taxable Income or Loss reduced by allowed Tax Loss Carryforwards) to produce the tentative CIT liability of the group prior to reduction by FTCs and QRTCs.

FTC

The amount of the FTC for a Fiscal Year would be the lesser of (i) the tentative CIT liability of the Bermuda Constituent Entity Group; or (ii) the sum of the Adjusted Creditable Foreign Taxes (defined below) for all members of the Bermuda Constituent Entity Group. The Second Consultation Paper clarifies that FTCs should be determined before considering any FTC a foreign jurisdiction might allow for CIT incurred by a Bermuda Constituent Entity.

EY observes: The clarification that FTCs for Bermuda CIT purposes should be determined before considering any FTC a foreign jurisdiction might allow for the Bermuda CIT should reduce uncertainty faced by MNE Groups in determining how to coordinate the mathematical interdependencies arising between the FTC rules in Bermuda and other jurisdictions (sometimes referred to colloquially as the "circularity problem").⁷

• Creditable Foreign Taxes

The types of foreign taxes for which a FTC would be allowed (Creditable Foreign Taxes) include those specified in the First Consultation Paper, as well as: (i) non-Bermuda taxes levied by reference to retained earnings and corporate equity, including a tax on multiple components based on income and equity; (ii) non-Bermuda withholding taxes imposed on income (other than dividends from another Constituent Entity) earned by a Bermuda Constituent Entity; and (iii) non-Bermuda withholding taxes imposed on dividends paid by Bermuda Constituent Entities.

The Second Consultation Paper clarifies that Creditable Foreign Taxes would not include: (i) Top-Up Tax incurred in respect of a Bermuda Constituent Entity (pursuant to the application of an Income Inclusion Rule (IIR) or Undertaxed Payments Rule (UTPR)); (ii) Disqualified Refundable Imputation Tax (as defined under the GloBE Rules); and taxes paid by an insurance company in respect of returns to policyholders.

EY observes: The additional types of Creditable Foreign Taxes included in the Second Consultation Paper improve alignment with the types of Covered Taxes that a Bermuda Constituent Entity may take into account under the GloBE Rules, which is consistent with the Bermuda government's policy objective to not impose an overall ETR on Bermuda profits exceeding 15%.

• Adjusted Creditable Foreign Taxes

Adjusted Creditable Foreign Taxes would be determined by taking current tax expense accrued in the FANIL of the Bermuda Constituent Entity with respect to Creditable Foreign Taxes in the Fiscal Year, adjusted for deferred taxes determined in a manner consistent with Article 4.4 of the GloBE Rules, including limiting deferred taxes to a maximum applicable rate of 15%.

Additions to Adjusted Creditable Foreign Taxes would be made to account for: (i) Creditable Foreign Taxes accrued as part of pre-tax income; (ii) credits/refunds with respect to QRTCs that are recorded as a reduction in current tax expense in the FANIL with respect to Creditable Foreign Tax for the Fiscal Year; (iii) non-Bermuda withholding taxes imposed on dividends paid by the Bermuda Constituent Entity; and (iv) Creditable Foreign Taxes paid during the Fiscal Year related to an uncertain tax position where the amount of Creditable Foreign Taxes was previously subtracted in determining Adjusted Creditable Foreign Taxes.

Subtractions from Adjusted Creditable Foreign Taxes would be made to account for: (i) current tax expense for Creditable Foreign Taxes not expected to be paid within three years of the last date of the Fiscal Year; (ii) any credit or refund with respect to non-QRTCs that is not recorded as a reduction to current tax expense in the FANIL with respect to Creditable Foreign Tax for the Fiscal Year; (iii) current tax expense relating to income otherwise permanently excluded from the computation of Taxable Income; (iv) any amount of Creditable Foreign Taxes refunded or credited (other than QRTCs) that were not treated as adjustments to current tax expense; and (v) current tax expense related to uncertain tax positions.

Finally, an addition or subtraction (whatever is appropriate) would be made to Creditable Foreign Taxes recorded in equity or Other Comprehensive Income relating to amounts included in the computation of Taxable Income or Loss.

EY observes: The computation of Adjusted Creditable Foreign Taxes is broadly consistent with the GloBE Rules. Incorporating the provisions of Article 4.4 of the GloBE Rules (including limiting the maximum applicable rate for deferred taxes to 15%) should, generally, reduce the likelihood that Top-Up Tax might arise and be collected through the imposition of an IIR or UTPR.

• Allocation of Adjusted Creditable Foreign Taxes

Adjusted Creditable Foreign Taxes would be allocated:

• From a Bermuda Constituent Entity to a non-Bermuda PE in the case of Adjusted Creditable Foreign Taxes of a Bermuda Constituent Entity with respect to the Taxable Income or Loss of the non-Bermuda PE and for which a Branch Exemption Election has been made
• From a non-Bermuda Main Entity to a Bermuda PE in the case of Adjusted Creditable Foreign Taxes of a non-Bermuda Main Entity with respect to the Taxable Income or Loss allocated to a Bermuda PE
• From a Tax Transparent Entity to its Constituent Entity Owner in the case of Adjusted Creditable Foreign Taxes of a Tax-Transparent Entity with respect to the Taxable Income or Loss allocated to the Constituent Entity Owner
• From a Constituent Entity Owner to a Hybrid Entity in the case of Adjusted Creditable Foreign Taxes of a Constituent Entity Owner on income of the Hybrid Entity
• From a Constituent Entity Owner to a Constituent Entity in the case of Adjusted Creditable Foreign Taxes accrued in the financial accounts of the Constituent Entity's direct Constituent Entity Owner on distributions from the Constituent Entity during the Fiscal Year

Finally, as outlined in the First Consultation Paper, Adjusted Creditable Foreign Taxes included in the financial accounts of a Bermuda Constituent Entity's Owners under a controlled foreign company (CFC) regime would be allocated to the Bermuda Constituent Entity. No specific allocation methodology has been provided in either the First Consultation Paper or Second Consultation Paper. The Second Consultation Paper notes that the Bermuda government is considering developing potential allocation mechanisms and ordering rules, as well as possible simplification measures, such as an exclusion for the portion of the Bermuda Constituent Entity's Taxable Income or Loss that is subject to the CFC inclusion.

EY observes: The provisions allocating Adjusted Creditable Foreign Taxes are broadly consistent with the provisions in Article 4 of the GloBE Rules concerning the allocation of Covered Taxes, which should help improve the consistency between Entities' taking the taxes into account for CIT and GloBE purposes.

QRTC

The Second Consultation Paper reaffirms the Bermuda government's commitment to developing QRTCs with the aim of reducing the cost of doing business in Bermuda, promoting job creation, promoting investments in infrastructure, and enhancing green initiatives, among other objectives. The Bermuda government intends to introduce QRTC proposals in 2024 and have QRTCs in place before the effective date of the CIT.

Tax administration

The Second Consultation Paper states that the CIT law will include provisions relating to returns and assessment, general provisions on interpretation, appeals and relief for mistakes, collections and repayments and revenue powers. A commitment is also made to announce details of the format and manner of various elections and the process by which they can be filed, noting that certain elections may need to be made by 31 December 2023.

EY observes: MNE Groups with Bermuda Constituent Entities should carefully consider the various elections that would be made available for CIT purposes and whether those elections should be made in 2023 in conjunction with the enactment of the CIT. As part of this consideration, MNE Groups should consider the interaction of making (or not making) an election with deferred tax accounting and determinations under the GloBE Rules.

Implications

The Second Consultation Paper presents a robust outline of the proposed Bermuda CIT regime and gives MNE Groups a detailed framework upon which to evaluate the impact of the proposed Bermuda CIT on their Bermuda Constituent Entities and determinations under the GloBE Rules. The proposed regime would introduce numerous elections that, though generally welcome for MNE Groups, present an acute need to assess the impact of making or not making such elections and possible interactions between different elections. The Consultation Paper also acknowledged that certain elections may interact with one another and indicated that further guidance will be provided on coordination to avoid unintended consequences if making multiple elections. As such, MNE Groups should monitor the release of additional details concerning the elections, such as the administrative process for making elections, their duration, or whether or not the elections are revocable.

The commitment by the Bermuda government to enact the CIT prior to 31 December 2023 will have implications for MNE Groups under the GloBE Rules, such as how they will recognize deferred tax assets associated with Opening Tax Loss Carryforwards for GloBE purposes.

MNE Groups with a Bermuda presence are strongly recommended to study the Second Consultation Paper carefully and consider the potential impact to their structures generally and GloBE determinations in particular. The Second Consultation Paper outlines seven high-level questions for which specific input from the public is invited.⁸ MNE Groups are encouraged to provide comments to the Bermuda government, by the 30 October 2023 deadline, on issues presented in the Second Consultation Paper or other issues not mentioned in the paper, but which are of importance.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), Financial Services Organization

• Chris Ocasal, ITTS, Washington | chris.ocasal@ey.com
• John Owsley, ITTS, Washington | john.owsley@ey.com
• Mike Shields, Insurance, Philadelphia | michael.shields02@ey.com

Ernst & Young Bermuda Ltd

• James Dockeray, Global Compliance & Reporting, Hamilton | james.dockeray@bm.ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

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ENDNOTES

¹ See EY Global Tax Alert, OECD releases Model Rules on the Pillar Two Global Minimum Tax: Detailed review, dated 22 December 2021.

² Capitalized terms not otherwise defined in this Alert carry the same meaning as in the GloBE Rules.

³ See the Second Consultation Paper, p. 7. A Tax Resident Entity is an Entity created or organized in Bermuda, unless the Entity provides sufficient evidence that it is tax resident in another jurisdiction based on the location of its management and control. A Bermuda PE is defined as a permanent establishment, as such term is defined in Article 5 of the OECD Model Tax Convention, located in Bermuda.

⁴ See Article 10.2.1 of the GloBE Rules.

⁵ Second Consultation Paper, p. 23.

⁶ Solvency II is a European Union Directive that sets out a single set of requirements around capital, governance, and risk management for almost all European insurance and reinsurance companies.

⁷ For example, suppose that a Tax Resident Entity that is treated as a US corporation pursuant to an election under IRC Section 953(d) earns $100 of taxable income for both Bermuda CIT and US CIT purposes. The pre-FTC CIT liability in Bermuda and the US is $15 and $21, respectively. Because both the US and Bermuda allow a FTC for income taxes paid to the other jurisdiction, absent the clarification in the Second Consultation Paper it would be unclear how to coordinate the CIT/FTC determinations due to the interdependency of each jurisdiction's CIT/FTC rules. Based on the Second Consultation Paper, the Tax Resident Entity would determine its FTC for Bermuda CIT purposes first, taking into account its US CIT liability prior to considering any FTC for Bermuda CIT. The FTC for Bermuda CIT purposes would be limited to $15, which is the lesser of the entity's pre-FTC Bermuda CIT liability and its pre-FTC US CIT liability of $21. Consequently, the entity's Bermuda CIT liability is $0, resulting in a US CIT liability of $21.

⁸ See page 30 of the Second Consultation Paper.