Offshore
OPINION OF THE WEEK: Guernsey's Defence Of Its IFC Deserves Applause

The production of a report about Guernsey and its contribution to the UK economy might be self-serving in a way, but it makes an important point about IFCs and jurisdictional variety and competition.
It appears that offshore financial centres are doing more
these days to remind observers what they bring to the “onshore”
world. In fact, it’s reaching the point where the terms need to
be junked.
In late January, Guernsey
Finance – using the research of Frontier Economics
– issued data showing that Guernsey-based funds hold UK
assets worth £57 billion ($71.7 billion). These funds’ capital
investment into UK assets has increased by 14 per cent per annum
since 2020. Considering that total foreign direct investment
(FDI) into the UK has been falling, this is significant. UK fund
managers also, so the data shows, generate about £2 billion of
fees from funds registered in Guernsey. That’s a decent chunk of
tax revenue. Additionally, UK FTSE 100 companies may
collectively save almost £100 million per annum by using Guernsey
captive insurance structures, the report said.
On the captives side, this leads to insurance business flowing
through London’s wholesale insurance markets which might
have gone elsewhere in Europe, or to places such as Bermuda, the
Cayman Islands and the US had it not been for Guernsey.
Guernsey’s move in proving its added value for the UK comes after
Jersey
Finance issued a report in 2022 about the island’s
contributions to global value chains. Jersey Finance worked with
the Centre for Economics and Business Research. It said Jersey
supported £170.3 billion ($222.9 billion) of global gross
domestic product each year during a four-year period between 2017
and 2020. To convey a sense of how large this is, New Zealand’s
direct contribution to global GDP was £172 billion.
In fact, after a period when these international financial
centres were pressured to weed out bad actors and become more
transparent, it might have been all too easy for these centres to
relax. But there appears to be a realisation that unless
they prove a genuine “value-add,” it will be too easy for
governments of large countries, and various "tax justice"
campaigners, to assert that they only drain revenues
away.
What that sort of assertion ignores is the benefits of clusters.
While they may not have started out that way, many offshore
centres, such as the Channel Islands, Caymans, BVI, Isle of Man,
Monaco, Gibraltar and others have created ecosystems of
expertise. These places exist inside countries too – think
of the states of New Hampshire, Delaware, South Dakota and Alaska
in the US. Clusters, such as Silicon Valley, to take a
tech example, build a momentum all of their own. They become
greater than a sum of the parts. So much so that it makes sense
for “onshore” countries to tap into the expertise and dynamism of
these places, rather than try to shut them down and reinvent
them.
These IFCs grease the wheels of finance when capital is mobile,
double-taxation is a potential problem and the
internationally-mobile population need to have a coherent single
point of financial life. And while it isn’t popular to state
this, such places put onshore jurisdictions under healthy
competitive pressure. A government of whatever political hue that
is thinking of levying yet higher taxes and greater spending
might think twice if it knows that this will trigger capital
flight. Competition is a positive thing in general. Monopolies
invite complacency and shoddy standards. That surely applies to
jurisdictions, even democratic ones.
I can see some objections to this. Some claim that the
existence of offshore centres might encourage firms to park
profits offshore for a period rather than pay more dividends to
their beneficial owners. Here again, it is worth asking whether
the countries in which the owners live might want to streamline
and cut taxes to encourage firms to repatriate those profits.
That’s one of the measures that the Trump administration
undertook in 2017 when it slashed US corporate taxes – among
the world’s highest at the time – to encourage corporates to
return money home. When UK taxes on income were slashed in
the 1980s, it helped stem the “brain drain” that had become a
staple subject of commentary in the 1970s. Ireland’s low rates
during the 1980s and 90s helped change impressions of that
country – entirely for the better. Examples multiply.
So I applaud these efforts, by Guernsey, Jersey and others, to
prove their value. They are not, I expect, likely to convince
hardened anti-capitalists. But these moves can persuade those
willing to be persuaded. And considering how many significant
acts of financial wrongdoing (such as money laundering) have
taken place in the supposedly regular, onshore world, it is
timely that places such as the Channel Islands are standing up
for themselves and making a case.