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David Jessop | Collateral damage for offshore markets in tax chase

Published:Sunday | October 18, 2015 | 10:05 AMDavid Jessop

A little over a week ago, British parliamentarian Sir Eric Pickles - a cabinet member until May of this year and a former chairman of the Conservative Party - told the London Guardian that British Prime Minister David Cameron was determined to have the British Virgin Islands (BVI) and the Cayman Islands adopt public registers of beneficial ownership either "through legislation, guidance or naked pressure".

His characteristically direct remarks followed a recent message sent from London to both Cayman and the BVI instructing their governments to present an implementation plan by November.

What the United Kingdom wants is for its overseas territories to develop a central public register of names of those who have the controlling interest of companies and trusts registered in the islands.

The UK's aim is to try to curtail tax evasion, money laundering and other activities by individuals, criminals and those who pose a threat to international security. The theory is that this will enable the discovery of the beneficial owners of offshore companies: information that the BVI and others say is already accessible under existing arrangements.

In a response, BVI Premier Dr Orlando Smith made clear to the local media that he would not be rushed. The country's approach would be "deliberate". While consideration will be given to the recommendations of the British government, Dr Smith said that the concerns of the industry, the BVI, "and the wider industry in Hong Kong, and other parts of the world where BVI companies are used," will also be taken into account.

He also observed that financial services contribute about 60 per cent of his country's GDP. Far from being the 'notorious tax haven' that had been suggested by international pressure groups, the BVI, he said, was listed as one of the best in the world, and was well regulated and run, with all activities well within the laws of the countries the islands work with.

"This is why we sign tax information arrangements with every country that we do business in," he said

 

ERRONEOUS LABEL

Premier Smith's remarks were little different, other than in context, from those made recently by the prime ministers of Barbados and Antigua and ministers from other Caribbean nations that also find their valuable offshore financial services industries under attack, and like the BVI and Cayman, have been erroneously labelled as 'tax havens' by the European Union and by a number of states of the US.

Barbados' prime minister, Freundel Stuart, was particularly strong in his response, recently condemning what he described as the " unjustified attacks of powerful nations that change the rules at will to satisfy the demands of their own onshore interest groups and constituents".

That said, the claim that the BVI, Cayman, and others are, in popular parlance 'tax havens', reflects concern among many governments and electorates that most of the world's multi-nationals are diminishing their tax liability by taking their profits in no-tax offshore financial centres.

While what they and the offshore centres involved are doing is perfectly legal, the observations of two US think tanks, Citizens for Tax Justice and the US Public Interest Research Group, are concerning. The two organisations reported that US multinational companies were holding over US$2.1 trillion in accumulated profits in 'tax havens', that 56 Fortune 500 companies would appear to be paying on average just 6.3 per cent in taxes, and that this was enabling them to take 'a free ride at the expense of taxpayers'.

In this respect, the G20 group of major economies unveiled on October 5 a 15-point package of measures drawn up by the Organisation for Economic Co-operation and Development (OECD). These aim to change rules dating back decades on how cross-border commerce is taxed by increasing transparency, closing loopholes and restricting the use of offshore financial centres by taxing economic activities where they take place and where value is created.

The OECD believes that the amount of untaxed money moved annually into offshore centres is in the US$100 billion to US$240 billion range, and such profit concentration is resulting in significant losses in tax revenues.

 

POLITICAL ISSUE

But beyond this, the process of what is formally known as 'base erosion and profit shifting' has become so political an issue that the response to corporate tax avoidance is likely to figure increasingly in elections in many parts of the world, including the US and Europe.

As the European Economic Affairs Commissioner, Pierre Moscovici, recently observed, 'electorates cannot stand anymore paying their fair share of taxes and contributing to fiscal consoli-dation while companies, especially multinationals, avoid tax'.

Whether what is now being proposed comes to pass remains to be seen as it will be up to each G20 government to eschew excessive tax competition and develop and implement the necessary legislation and regulations, which are even then only likely to be as strong as in the weakest jurisdiction.

The independent Caribbean and the overseas territories have observably prospered from offshore financial services. They have expanded and diversified their products and outreach - for instance, in the BVI's case into China though a Hong Kong office - and have been at the forefront of a process that Barbados' former Prime Minister Owen Arthur recently described as 'reimagining' the Caribbean economy.

Notwithstanding, the problem for the Caribbean is that it is faced with deploying factual and pragmatic arguments about its own development against those in much larger nations who, with some justification, are emotionally and philosophically engaged in a national debate about taxation, social equity and domestic politics.

Ultimately this makes the issue one of sovereignty; and who has the right to manage a world in which legal jurisdictions no longer have much relevance to fungible international capital, and in which companies and individuals are able legally to take advantage of even the slightest global variations in tax and other rules?

It is also about the political implications of the growing social inequality that has emerged in developed and advanced developing nations, largely because economic globalisation has primarily benefited those with access to capital and markets through vehicles such as hedge funds, high-frequency trading, dedicated communications, tax arbitrage and switching citizenship.

The Caribbean, unfortunately, stands at the crossroads of these unresolved conflicts, actual and philosophical. As with commodities and freer trade before, the region again seems likely to be about to suffer collateral damage in the global process of rebalancing.

 

David Jessop is a consultant to the Caribbean Council.

david.jessop@caribbean-council.org