BERMUDA: IMPLICATIONS OF FAILURE TO RATIFY US-UK (BERMUDA) TAX TREATY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000100180001-8
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 6
• Document Creation Date: December 27, 2016
• Document Release Date: February 21, 2012
• Sequence Number: 1
• Publication Date: April 15, 1987
• Content Type: MISC

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Declassified in Part - Sanitized Copy Approved for Release 2012/05/07: CIA-RDP90TO0114R000100180001-8
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DOC NO,4
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Central Intelligence Agency
Washington. D. C. 20505
DIRECTORATE OF INTELLIGENCE
15 April 1987
BERMUDA: IMPLICATIONS OF FAILURE TO RATIFY
US-UK (BERMUDA) TAX TREATY
Bermuda's concerns over the US-UK (Bermuda) tax treaty
reflect the importance that insurance companies have in the
island's overall economic performance. The departure of a
significant number of insurance companies would certainly result'
in sizable job and government revenue losses. To put this in
context, the US Chamber of Commerce estimates of 200 companies
leaving the island would probably translate into a 3 to 4
percentage point drop in GNP growth rates annually over the next
two years. While this probably overstates the number of firms
that might leave, it nevertheless illustrates the economic impact
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that the tax issue could have in Bermuda.
Although Bermudian Premier John Swan has threatened to
retaliate for US inaction on these issues by charging the United
States rent for its three naval bases on the island, Bermuda is
legally constrained from such action because it is a dependent
territory of the United Kingdom. A worst case economic downturn
would, however, provide strong impetus to Swan's push for
Bermudian independence from the United Kingdom, in our opinion,
and anti-US sentiments could build to the point that a referendum
on independence would be approved within the next year. We
believe the process of gaining independence would take at least
another year, however, giving the United States some breathing
space to negotiate a basing agreement with Bermudian officials.
This typescript was requested by Ford Cooper, Director, Office of
European Affairs, Department of State, in response to specific
questions about the economic fallout and possible retaliation by
Bermuda if the tax treaty is not ratified. The analysis in this
paper is based solely on information provided by the US Consulate
Middle America-Caribbean Division, Ottice
of African and Latin American Analysis. Comments and queries are
welcome and may be directed to the Chief, Middle America-
Caribbean Division
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Background
Bermuda, citing tax advantages the United States has
provided to Barbados, is pressing for US Senate ratification of
the US-UK (Bermuda) tax treaty and approval of exemptions to
recent US tx reforms for some 700 US-owned insurance firms on
the island. Since early last year, Premier Swan, in private
conversations with US officials, has threatened to charge rent
for the three US naval bases on the island to offset income from
the insurance industry lost by non-ratification of the treaty.
.employees.
The imbroglio reflects the key role the insurance companies
play in Bermuda's economy. According to the US Consulate, US-
owned firms account for the vast majority of foreign insurance
companies operating in Bermuda. Together, they contribute 40
percent of the island's GNP and 10 percent of government
revenues, according to the US Consulate. In addition, the
Consulate reports that these firms provide directly and
indirectly about 20 percent of Bermuda's jobs, including a large
number of professional and managerial positions filled by local
Economic Considerations
departure of insurance firms.
Although we believe Bermuda's concerns over the impact of
non-ratification of the treaty are overdrawn, they are not
without basis. For example, the president of the US Chamber of
Commerce in Bermuda has asserted that 200 insurance companies
would close and leave during the next two years if the treaty was
not ratified. We estimate that the departure of this number of
insurance firms could directly cost Bermuda roughly $65 million
in earnings and cause the island's economy to decline by as much
as 3 to 4 percent annually over the next two years. We believe
that this could represent a worst case scenario, however. Even
if 200 US firms did leave--and we believe the figure may be
exaggerated--Bermuda's earnings from tourism have been increasing
steadily and this would help cushion the immediate impact of the
Although Swan has threatened to charge rent for the US naval
bases in Bermuda, he cannot do so unless the island gains its
independence from the United Kingdom. As a dependent territory,
See the Annex for details on the US-UK (Bermuda) tax treaty.
the same share to the island's insurance business.
20ur calculation assumes that all of these companies contribute
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Bermuda currently is constrained legally from charging such rents
unilaterally, but the popular Premier has been pushing hard to
gain independence for many years.
US failure to extend tax benefits to US-owned insurance
companies in Bermuda, in our view, would give his independence
campaign a major boost. Swan's efforts last year to launch a
referendum on independence were rejected by his party's caucus
and the Senate, but public opinion polls at the time showed that
independence was opposed by only a small majority of Bermudians.
The US Consulate reports that many Bermudians feared that
political uncertainty associated with independence could hurt
tourism. In addition, we believe that popular concerns about the
financial cost of independence also undercut domestic support for
a break with the United Kingdom. For example, an independent
Bermuda would have to pay for diplomatic representation abroad
and its own security protection.
If anything close to this Chamber of Commerce projection
occurred, however, public anger over eroding living standards and
the prospect of charging the US rent for bases probably would
outweigh economic and political reservations about breaking with
the United Kingdom. We judge that local opposition parties,
which have only tacitly supported independence until now, would
see little choice but to back a renewed push by Swan for a break
with the United Kingdom.
Even under such circumstances, we believe the road to
independence still would be lengthy. Any move toward a Bermudian
national referendum on the issue--a prerequisite to requesting
independence--would ignite heated debate over the emotional issue
of losing dual Bermudian-British citizenship, according to US
Consular officials. We believe this debate would delay Bermudian
parliamentary approval of a national referendum. Moreover, a
Bermudian legislator estimates that, even after a referendum were
held on independence, the promulgation of a constitution would
require at least another year.
Having invested considerable political capital in his
campaign for treaty ratification and amendment of the new US tax
code, Swan would not take failure lightly. At a minimum, the
Premier probably would less readily back Washington on foreign
policy issues. For example, Swan has vigorously defended the US
military presence in Bermuda and has strongly supported the
Strategic Defense Initiative.
Non-ratification of the treaty could also have a long-term
spillover effect on bilateral US-Bermudian relations. According
to the US Consulate, Swan and leaders of the island's opposition
parties believe that Bermudian independence is inevitable. Non-
ratification of the tax treaty would almost certainly give added
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salience to basing issues in the immediate post-independence
period. At a minimum, we would expect an independent Bermuda to
demand rent for US bases. Moves to place conditions on US use of
its bases on Bermuda also could be expected. Allegations of
visits to Bermuda by US nuclear submarines have already been used
by opposition political leaders to press for closer monitoring of
US military activities on the island. Nevertheless, termination
of base rights is unlikely, in our view, if only because of
economic reasons. According to the US Consulate, the US military
presence contributes roughly $24 million in cash each year.
Washington also underwrites $15 million of the operating cost of
the island's civilian airport, which adjoins the US naval air
station.
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BERMUDA: BACKGROUND ON US-UK (BERMUDA) TAX TREATY
Bermuda, under the aegis of the United Kingdom, early last
year successfully negotiated a treaty with the United States that
would enable US-owned insurance firms registered in Bermuda to
d t
i
o
se
obtain relief from US taxes. In return, Bermuda prom
provide US officials with selected access to banking records.
Bermudian Premier Swan has been pushing the tax treaty
because several other countries had received similar US tax
concessions. Barbados in 1986, for example, negotiated a treaty
with Washington providing concessions for US-registered companies
there. Swan claimed--correctly--that the treaty caused a number
of companies in Bermuda to relocate in Barbados.
Prolonged delays in passage of the treaty, which has been
stalled in the US Senate since September 1986, have only
increased Swan's resolve to try to maximize tax concessions from
the United States. Swan now is also demanding changes in the new
US tax code, which negates many of the benefits provided by the
treaty. US Treasury officials concede that, unless the tax code
is amended, these insurance companies would face much higher
taxes even with the treaty.
The situation appears to have reached an impasse because of
political constraints on both sides. Congress has deferred
action indefinitely on the issue because of strong opposition to
giving favored treatment to a country with substantially lower
income tax rates than those in the United States. Swan, having
made ratification of the treaty a priority, now has a large
political stake in ensuring its passage.
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SUBJECT: BERMUDA: Implications of Failure to Ratify US-UK
(Bermud,a) Tax Treaty
1.5 April 1987
Orig 1 -- Mr. Ford Cooper, Office of EURA Affairs, Dept.
of State
2
D/DCI-DDCI Executive Staff
3
-- DDI
4
-- O/DDI
5
-- NIO/LA,
6
- -
EURA
7
-- NIC/Ate
8
-- FDB Staff
9
--
C/PES
10
--
DDI /CPAS/ ILS
11-15
--
CPAS/IMC/CB
16
--
D/ALA
17
--
C/MCD
18
--
C/MCD/CARIBBEAN
19-20
?--
ALA/PS
21
-- Division Files
22
-- Branch Files
DD I; ALA./MCD/CAR
(15 April 87)
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