The group executive chairman of the investor services group defends what he calls "investment hubs", which he said should not be put in the same bracket as "tax havens".
Just in case one thought there were enough terms to use about wealth management, along comes another: “investment hub”. These describe places that while they are friendly towards investors, such as around tax and regulation, are not deserving of the dreaded adjective “offshore”. A number of jurisdictions deserve the moniker “investment hub” and do not deserve the ire of so-called tax justice campaigners, so the author of the following article says.
The writer here is Serge Krancenblum, group executive chairman of IQ-EQ, the investor services group recently renamed from SGG Group. He writes about what he says is a misconceived resemblance of such hubs to tax havens. As ever, the editors of this news service don’t necessarily share all views of guest writers, but we are grateful to add them to debate and invite readers to respond. Email the editors at firstname.lastname@example.org and email@example.com
As critical catalysts of foreign direct investment (FDI) into both developed and developing economies, investment hubs play an essential role in the global economy. Yet they are threatened by shifting public perception and increasingly restrictive regulation.
While investment hubs are often dismissively referred to as tax havens, it is essential to distinguish between them. Undeniably, the fight against tax abuse through tax havens is crucial and justified. Painting investment hubs with the same brush, however, does a major disservice to developing countries that benefit from the FDI flows facilitated by these key intermediaries through the structuring of safe and secure investments into otherwise challenging destinations.
Indeed, the Investment Facilitation Forum report released in May 2018 made it clear that the five investment hubs surveyed - Ireland, Luxembourg, Mauritius, the Netherlands, and Singapore - act as significant drivers of investment into developed and developing countries alike.
While Ireland, Luxembourg and the Netherlands count most of their FDI inflows and outflows as from and towards developed economies, Mauritius and Singapore accommodate a significant share of FDI into developing countries, and over a third of FDI into the world’s least developed countries (LDCs) as well. To elaborate, Mauritius directs 79 per cent of its outward FDI towards developing countries and LDCs (with a particular focus on Africa), while Singapore holds 69 per cent of outward FDI stocks in developing economies and LDCs in Southeast Asia.
When it comes to developing economies, investors typically do not have a direct line of sight on the potential investee. They rely on the investment hub - with its stable legal and political environment, sound financial infrastructure and highly professional ecosystem - to facilitate the flow of international funds. If such an investor can no longer use Mauritius to safely structure an investment into Africa, for example, they may choose to withdraw this investment from the market altogether. Not only does this mean investors lose a profitable investment opportunity, but the planned recipient country loses out on the gains associated with FDI as well.
So crucial is the role played by investment hubs that, should investors no longer be able to use those jurisdictions, total global FDI is likely to decrease significantly, hampering global economic development.
Tax erosion, policy and public perception
Of course, tax erosion can also have serious economic consequences on public funds, so global regulators are right in seeking to tighten the noose around actual tax havens. The OECD, hand-in-hand with the G20, introduced the BEPS initiative to curb tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to lower tax jurisdictions. The Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) have also been implemented to increase tax transparency.
While the aim of these measures is commendable, it cannot be denied that, together with media reports such as the Panama Papers, the Paradise Papers and the recent Mauritius Leaks, such initiatives have enhanced negative public perceptions of legitimate investment hubs.
Perhaps public perception and global regulation could instead be informed by an active and vigilant participant in the investment community? A “catch-all” approach hardly amounts to a win-win proposition for either the investor or the economy, but governments, global regulatory authorities and the wider public clearly need to be assured that any attempt at tax evasion is being closely monitored and strictly guarded against.
It is here that the role of the investor services firm cannot be emphasised enough. By providing services to structure investments in a fair and transparent manner - from company formation and implementation, through regulatory and tax compliance, to financial accounting and reporting - service providers act as vital gatekeepers ensuring investment flows comply with global regulations.
Towards a balanced approach
It is important to understand that hubs also provide economies of scale in collecting and evaluating information on investment opportunities. This in turn improves resource allocation, making sure that productive capital flows via CSPs and other providers of investor services to locations where it can do the greatest good. When we consider that the Netherlands and Luxembourg, for example, only represent 1.1 per cent of the world’s GDP yet account for 25 per cent of inward FDI and 31 per cent of outward FDI, it is clear that the role of investment hubs is tantamount to moving FDI mountains.
Hence, policymakers and the public are urged to adopt a balanced view of this particular hot topic, where the lines between tax havens and investment hubs appear worryingly blurred. By trusting reputable investor services firms as gatekeepers, basing regulation on a more nuanced understanding of the differences between havens and hubs, and shaping public perception with the right information rather than sensationalist news, the investment landscape can truly be transformed to achieve global economic development at scale.