Offshore

Paper Defending IFCs Draws Jersey Praise

Tom Burroughes, Group Editor, 7 June 2018

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The UK think tank's blunt defence of IFCs has drawn praise from Jersey at a time when such centres continue to come in for political criticism.

The agency promoting Jersey’s financial services industry has applauded a report by a UK-based free market think tank defending international financial centres.

The paper, by the Institute of Economic Affairs and written by Diego Zuluaga, a US-based academic and policy analyst at the CATO Institute, claims that that IFCs are being targeted by revenue-hungry politicians and ideologically motivated campaigners seeking to stop globalisation.

“When it comes to cross-border financial services, there is still a considerable amount of misunderstanding and misrepresentation. We think it is vital to form judgments based on facts,” Geoff Cook, chief executive of Jersey Finance, said of the IEA report.

The 32-page document says the term “tax haven” is a misnomer because IFCs, on average, have taxes that are 27.9 per cent of gross domestic product, not much below the average of countries in the Organisation of Economic Co-operation and Development group of industrialised powers, at 33.9 per cent. IFCs tend to be more reliant on indirect tax than is the case with other countries, and their taxes are also simpler in certain respects.

The vast majority of money sent to IFCS, or offshore centres, is invested elsewhere, so attacking these places will damage investment and economic growth as a whole, the report continued.

“An ominous alliance of revenue-greedy politicians, ideological campaigners and rent-seekers has emerged in recent years,” the IEA paper said. “Gradually, but relentlessly, they aim to dismantle the liberal financial order of which free capital movement is a fundamental component. Tax evasion and  avoidance - conveniently conflated to inflate figures of what the public is led to believe is unambiguously bad - are just useful narratives in which to wrap the alliance’s real goal: to eliminate tax competition and constrain the movement of capital in order to bring it under their control,” it continued. “The consequences of this effort would be long-standing and go far beyond a few tiny offshore financial centres.”

"Offshore jurisdictions facilitate investment that, at the margin, would be unprofitable without their existence. They enable owners of capital to protect their assets from corrupt and dictatorial governments. They act as reliable and low-tax locations for the intangible capital of firms,” it continued.

A number of groups, such as the Tax Justice Network and Oxfam, have condemned IFCs, calling for increasingly draconian measures to close such places down or limit their activities. Separately, political controversy over public figures’ use of such centres has been fuelled by a series of massive “leaks” from hubs such as Panama, British Virgin Islands and Bahamas. (The Panama Papers and Paradise Papers for example.)

Governments such as those of the UK have pushed for public registers of beneficial owners of companies and trusts, concerned that the existence of little-known structures for holding firms and personal wealth is a political hot-button issue. The arrival of the Common Reporting Standard, a network of agreements by dozens of countries to exchange data to hunt down alleged tax evaders, is a further major step to squeeze dirty money. The US is not signed up to that system, but its FATCA rules have clamped down on expat Americans’ financial lives.

Debate over such centres often sees charges of hypocrisy. The US, which has chased after Swiss bank accounts, for example, arguably has tax havens within its borders in the states of Delaware and New Hampshire, for example, and with arguably less reporting transparency than among certain IFCs. The UK, with its non-domiciled residency system and tax breaks for foreign investors, is also a sort of haven, although the non-dom rules have been tightened and taxes have risen. Dozens of countries operate “golden visa” citizenship-by-investment schemes, enabling high net worth persons to buy passports.

(Editor’s note: Even without bank secrecy and other practices no longer deemed acceptable, the globalised business world and existence of millions of expat professionals means there will be a need for IFCs, as they offer clusters of expertise, and avoid double-taxation problems. So long as they are transparent, it is hard to see how the world economy is harmed by their existence. And to the extent that they remain a problem, the logical step for governments in major countries is cutting and simplifying their own taxes. The examples of Singapore and Hong Kong are instructive: low marginal tax rates, but strong economies with revenue to pay for public services. Alas, it is easier to lash out at "tax havens" than to get one’s own house in order.)

 

 

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