Bermuda has less than five months remaining to honour its pledge to the European Union to enact new laws to address concerns over international tax avoidance.

The Bermuda Government has developed a strategic plan to make the necessary changes, a government spokesman said yesterday, without adding further detail.

The European Council’s Code of Conduct Group intends to make it more difficult for multinational companies to book profits in low-tax jurisdictions when their source of earnings and main economic activities are elsewhere.

Bermuda is one of 41 jurisdictions to have committed to make changes to address these concerns, which will involve identifying entities that lack “economic substance”. Failure to follow through risks the island being placed on the EU’s list of noncooperative jurisdictions.

Guidance issued in a “scoping paper” by the Code of Conduct Group suggests that jurisdictions should also take enforcement action, going as far as “striking off the register” entities that do not meet the substance standard.

David Burt, the Premier, sent a letter of commitment to the European Council’s Code of Conduct Group last November, in which he stated: “I commit the Government of Bermuda to address the Code of Conduct Group’s concerns relating to a de facto lack of substance for entities doing business in or through Bermuda ... We will pass legislation to implement any appropriate changes by December 31, 2018.”

With the clock ticking down, the Government has yet to make public any details of what form the legislation might take.

However, a Bermuda Government spokesperson said yesterday in response to our questions: “The Government is keenly aware of these issues and has developed a strategic plan to address them.”

Jersey and Guernsey, other island economies to have made similar commitments to the EU, both announced public consultations this week on proposals to introduce a “substance requirement” for companies in certain sectors to be able to claim tax residency on the islands.

The economic activities in question outlined by both Channel Islands are banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles and holding companies that generate income from any of these activities — in line with the Code of Conduct Group guidance.

The scoping paper states that jurisdictions including Bermuda should identify these relevant economic activities, impose substance requirements and ensure there are enforcement provisions in place.

Relevant companies would need to file information on business type; amount and type of gross income, assets and expenses; the number of employees and details of premises.

The paper adds that each entity must also be prepared to show evidence of core income-generating activities within the jurisdiction.

The scoping paper states: “The consequences where an entity fails the substance requirements should include rigorous, effective and dissuasive regulatory penalties and enhanced spontaneous exchange with jurisdictions of residence (eg, of a party making a deductible payment to such a company) and ultimately, where other sanctions produce no results, this should lead to the striking off the register of such an entity.

“This should be complemented by a commitment by the 2.2 jurisdiction [such as Bermuda] to continue enforcement efforts and remedy any shortcomings in the enforcement process.”

The paper goes on to propose enhanced transparency requirements, including that “ownership information is available and accessible in a timely, accurate and electronically searchable manner” with ownership registries being made available to relevant authorities.

Different substance requirements would be applied to different sectors, taking into account, for example, whether the business is labour or capital intensive.

As of the end of last year, there were 16,329 companies registered in Bermuda, of which 12,946 were described as international.

Of the economic activities the EU wants to focus on, any threat to Bermuda’s flagship international insurance and reinsurance industry would be of most concern.

The paper suggests that core income-generating activities that would be expected to be done on island by an insurance company could include “predicting and calculating risk, insuring or re-insuring against risk, and providing client services”.

Other areas that would come under scrutiny include the island’s fund management industry and the large number of shipping companies and holding companies based here.

Certainly in the EU crosshairs would be subsidiaries of technology and pharmaceutical corporations, which hold intellectual property that was developed elsewhere. Such companies are sometimes used to license patents or trademarks to other subsidiaries within the group and collect royalties, effectively channelling profits from where their products are sold to the zero-tax jurisdiction.

According to the scoping paper, substance requirements for such companies could include that research and development, branding, marketing, or distribution activities take place within the jurisdiction, with the necessary level of staff, premises and equipment.

“Therefore, it would require more than local staff passively holding intangible assets whose creation and exploitation is a function of decisions made and activities performed outside of the jurisdiction,” the document states.

The scoping paper also outlines a proposal for an ongoing annual monitoring of jurisdictions “to ensure that the legislative and enforcement provisions were being adequately administered” at a systemic level.

• A copy of the Code of Conduct Group scoping paper appears on this webpage under the heading, Related Media