Offshore jurisdictions are under assault from revenue-hungry countries desperate to halt tax leakage but these so-called tax havens will not fade from the financial arena, industry figures say.
Last week, the
Organisation for Economic Co-Operation and Development, made
up of leading developed and emerging market nations such as the
US, Germany and China, vowed to crack down on so-called tax
havens, drawing up a “blacklist” of nations it says do not
co-operate in exposing tax cheats and saying that sanctions – as
yet undefined – may be used against transgressors. These nations
Uruguay. The OECD has also compiled a larger list of states that have, or are just starting to co-operate with countries battling tax evasion, such as
Switzerland, the Cayman Islands and
Monaco. Interestingly, the OECD gave a totally clean bill of health to such places as Hong Kong, a low-tax special administrative region of
It is premature to pronounce the end of offshore financial centres, however, since there are strong reasons why they will thrive even if some jurisdictions erode bank secrecy and make it harder for tax-evaders to hide, industry figures said.
Offshore locations are increasingly transparent and professional in how they handle financial affairs; they are also highly convenient for a more mobile global workforce to use as their single point of banking rather than constantly changing their banks as they move about the world, he said.
Joe Field, senior international partner at Withers, the international law firm, agrees. Mr Field points out that those offshore centres that are most likely to endure are jurisdictions that have established a market-leading speciality, such as Bermuda, which is a key domicile for insurance and reinsurance firms, or the Cayman Islands, home to more than 80 per cent of the world's hedge funds.
"I think that places like the Cayman Islands, Channel Islands, Bermuda and British Virgin Islands have a fairly rosy future in the medium term," Mr Field said.
PwC's Mr Whiting says tax havens will also thrive because unless there is eventually a world government with a single tax code, countries will set their own tax rates and seek to attract inward investment and inflows of wealthy people by lowering their tax rates.
And new tax havens are always a possibility, given the still-large benefits of attracting money inflows, Mr Whiting said. “Despite the recent turmoil, the financial market is a very significant way of getting money and wealth into a country. There is plenty of scope for other countries to think that they will try to set up and do something [as a tax haven],” he said.
The stakes are high. According to Oliver Wyman Group, these centres held up to $8 trillion in assets, based on data for 2008, although it is possible that figure has been eroded sharply by the credit crunch.
Cato Institute, a
US think tank, predicts these locations will continue to thrive because people will want to escape what it calls “bad tax policy” – in other words, flee from high-tax regimes. Daniel Mitchell, senior fellow at the Washington-based organisation, says tax havens create beneficial, not harmful competition by putting governments under pressure to cut taxes, thereby boosting economic growth. For example, low corporate taxes in countries such as
Ireland - which ironically is not classed as a tax haven by the OECD - have encouraged other European nations to cut taxes to stem an exodus of business, Mr Mitchell has argued in a recent book.
“The offshore world will continue, largely because high-tax nations will continue with bad tax policy. But the politicians from those nations will make it more difficult and risky for taxpayers to benefit from low-tax jurisdictions. In effect, the OECD and the politicians from high-tax nations are trying to impose fiscal protectionism,” Mr Mitchell told WealthBriefing.
Asked how tax havens might reinvent themselves, Mr Mitchell continued: “This is a fight or die situation. In the long run, the politicians from high-tax nations will never be satisfied. Demands today for information in specific cases will be replaced by demands for automatic information tomorrow. Then the campaign will shift to more explicit forms of tax harmonization.”
Mr Mitchell reckons that the tax havens that are most likely to prevail are “big and powerful nations” that have independent sources of wealth such as oil, giving them the ability to ignore OECD pressure.
One driver of offshore centres’ success, which has nothing to do
with tax, is how they provide a convenient hub in which
expatriate workers and businesspeople can base their financial
affairs as they move around the world, said PwC’s Mr Whiting.
Although exact figures are hard to pin down, there are millions
of such expatriates. In the
UK alone, it estimated that there are hundreds of thousands of expatriate
A report by Mercer, the consultants, said many firms are increasing expat recruitment, often working on relatively short-term contracts. It is therefore highly convenient for such workers to bank offshore than have to constantly change their banking arrangements with each move, said PwC’s Mr Whiting.
“This is definitely a trend I have noted over the last 10 years
in terms of international employees and entrepreneurs. They need
their business somewhere and somewhere like, say,
Jersey is sensible because it is neutral,” he said.
Even so, that offshore centres might have cause to be worried is
not surprising. Even before the G20 summit last week,
jurisdictions such as
Liechtenstein and the
Cayman Islands had been under relentless rhetorical and legal assault. The centuries-old tradition of bank secrecy in
Switzerland – a key driver of that country’s banking industry prowess – is under particularly fierce attack. UBS, the world’s largest wealth manager, recently paid a $780 million fine to settle criminal charges of helping US citizens evade tax; UBS no longer provides offshore banking in the
US. The stakes for
Switzerland in defending its bank secrecy traditions are high: Swiss banks account for about 12 per cent of that nation’s gross domestic product.
Switzerland accounts for about a third of the total of all offshore assets, according to various estimates.
If existing centres feel the pinch from any OECD pressure, then
there are countries in Asia and the former
Soviet Union, for example, that might pick up the slack, Mr Whiting said. “It is getting more difficult [to be an offshore centre] but there will be territories springing up and deciding that they want to have a go,” he said.
Commentators like Mr Whiting argue that such locations have
mostly worked hard to raise their reputations for openness in
recent years, which will help protect them against hostile
pressure from other nations. According to the Economist
magazine recently, a political scientist at
University proved that the worst examples of bank secrecy, money laundering and fraud happened not in
Islands or Alpine principalities, but in the world’s largest economies.
Although G20 leaders may find it awkward to say so, the current financial crisis did not originate in tax havens but on their home turf. That is a point that offshore jurisdictions are likely to highlight in the months ahead.