During the last two and a half years, I have been privileged to be shown a "bird’s eye" view of the major currents and eddies (to adopt a nautical simile) tossing smaller swimmers in the offshore maelstrom. Practitioners in many offshore centres seem to be suffering from some sort of diffuse depressive malaise based on an intuitive apprehension that the "rules" of the game are changing. The changes in question, of coarse, relate to pressure being applied by a number of leading onshore jurisdictions that have noticed that many of their own residents are voting with their feet, and migrating their capital (and sometimes themselves) from relatively high tax jurisdictions. The pressure is being applied by a variety of organisations, which include the Organisation for Economic Co-operation and Dependence (OECD), the European Union (EU), and the Financial Action Task Force (FATF). It should be noted that basically the policy of these organisations is dominated by the United States. The effects of the various pronouncements and policy initiatives have been different depending on the level of sophistication of the offshore centre concerned.
Basically, in my view, the offshore world breaks down into three or four categories of players. These are:
- Premier League - Typified by UK, US and Switzerland
- First Division - Typified by Bermuda. Cayman, Isle of Man and Channel Islands
- Second Division - Typified by many smaller Caribbean jurisdictions
- New Entrants - For example, jurisdictions in Asia/Pacific region
The players in the Premier League have somehow managed to convince themselves (largely through ignorance) that their revenue raising activities take place on some entirely different plane to the activities carried out by the rest of the participants in the game. For example in the report released in April 1998 entitled "Harmful Tax Competition: An Emerging Global Issue", the OECD started out by stating that fiscal competition was beneficial to the world’s economic system until such competition becomes harmful. The major difficulty, of course, is one man’s harmful is another man’s beneficial!
The fundamental truth is that all taxation systems have a single objective and that is to maximise the revenues of the sovereign nation in question. The method of achieving this is twofold:
- By extracting as much revenue as possible (subject to domestic political constraints) from national individuals and entities, and
- By "stealing" as much revenue as possible (and hence maximising own country revenues) from individuals and entities from foreign jurisdictions.
In other words all (and I do mean all) jurisdictions seek to maximise revenue by "ring fencing" the profits/gains of local residents (often using anti-avoidance legislation) while at the same time "encouraging" foreigners to provide additional marginal income by basing some or all of their activities in the jurisdiction concerned. What offshore jurisdictions do is fundamentally no different (witness the non-domiciliary income tax rules in the UK, which allow many rich foreigners to live in the UK virtually tax free) than the regime provided by just those leading members of the OECD, who are leading the criticism of offshore centres.
As I have said in other publications, what is being attempted by the OECD/EU is to create a type of fiscal colonialism, whereby fully developed countries seek to undermine the autonomy of developing countries by dictating their domestic taxation policy. This is a very slippery slope and should only be agreed to by any of the developing countries on the basis that financial compensation will be provided by the OECD/EU. If it is right for EU farmers to be given billions of Euros to encourage them to stop growing produce the market does not want, then similarly it must be fair to compensate less developed countries from exploiting their sovereignty by offering non-residents taxation advantages. I suspect such compensation offers are not even contemplated by any OECD member! The solution, therefore, is to take the issue of fiscal colonialism to the General Assembly of the United Nations. In other words, to make the political leaders of the OECD/EU realise there will be a steep political cost in continuing to pursue their current policy.
Indeed pressure from various quarters has already been applied (partly through the World Bank) and the latest pronouncement of the OECD is that they will not be producing a definitive list of those jurisdictions which indulge in harmful tax competitions by 30th June 2000, as they initially threatened. The current position from the Secretary General’s office is that a list of those jurisdictions, which are "unhelpful" to the task of correcting harmful tax, will be produced by 30th June 2001. (It will be interesting to see how much further the OECD moves as we approach the new deadline!)
It was also interesting to note that when the Primaloo Report (on EU tax harmonisation) was presented, its main recommendations were very swiftly rejected by the governments of Luxembourg, Belgium and the Netherlands. It should also be noted that the UK government has adamantly stated that it will not under any circumstances give up its national veto on EU taxation directives. This pronouncement was followed up by the Commissioner for the Internal Market (in charge of EU policy for tax harmonisation) stating that "he did not believe that income taxation and the taxation of corporations would be harmonised during his political lifetime, because their basic principles are deeply embedded in the various cultures and societies, which comprise the community". It is reported, however, that the Commissioner does expect significant progress in the area of sales taxation. In short EU tax harmonisation seems to be pretty dead for the time being!
It is reported that there has been similar modification of the position of the FATF pronouncements on tax evasion as a defined type of money laundering. For example, it is pretty unreasonable to hold, say, a Bahamian professional at fault in assisting an Italian with his international estate plan. How is the (presumably non-Italian speaking) Bahamian to begin to even know what is the specific requirements of the Italian Tax Code (also presumably written in Italian).
In short some of the perceived serious attacks on offshore centres are, on final analysis, proving not to be so devastating (when the practicalities and small print are examined). Of far more long term impact on the offshore world will be e-commerce. There are of course a number of complex tax issues to be considered.
I was recently speaking at a conference in London on "E-Commerce and Offshore Financial Services". The conference was extremely well attended by practitioners, regulators and politicians. Indeed the Isle of Man Minister for Trade and Industry took part as well as the Bermudan Minister for Telecommunications and E-commerce as speakers. Clearly e-trading is a sunrise industry for the offshore world. For example, controlled foreign corporation and sales tax issues depending on the jurisdiction being sold into was one of the many complex taxation issues that need to be considered.
Of particular interest was the contrasting approaches of the US and the EU. Essentially to boost e-commerce, the US has decided that all Internet transactions will be deemed to be supply of services, which will therefore have a sales tax levied applicable at the rate of the State from where the supply takes place. However, the EU takes a contra approach and it will be a matter of fact whether a good or service is supplied by the transaction. If it is a service then the sales tax again ruling in the State of supply will apply but if it is the provision of a good then the sales tax in the State of receipt will apply. This will require the owners of any Internet site supplying goods into the EU possibly to register in all EU countries if they are not themselves in a EU territory.
Many interesting and varied presentations were made on the technical business issues but what struck me was that the Internet would revolutionise the offshore world in other less obvious ways. For example, offshore finance services (including Private banks) have traditionally had quite a high entry point, given the relative cost of providing the service. Most developed offshore jurisdictions have a high overhead/cost recovery ratio attached to them due to shortages of skills and resources. It is now possible for offshore providers, however, to deconstruct their cost base by outsourcing some of their non-core functions to lower cost jurisdictions.
Of course, this has been happening onshore for sometime. I recently read with interest that a very large Lloyds Insurance Broker has moved its entire back-office to Karachi in Pakistan, and that Swissair was processing all its ticket sales in Calcutta. Up to now only relatively big players have been able to set up these remote locations for back-office processing. However, in the future medium and small sized companies using standardised packages will be able to outsource back-office, statutory compliance, marketing, accounting, and technical advisory services to a location anywhere in the world. For example, an investment manager in Geneva will quite easily be able to outsource his marketing function to a service company in Cyprus or Mauritius.
This seems to me to be a possibility for a whole new wave of service activity to be generated in some of the less established jurisdictions, which could have a profound effect on their economies. Not only would the Swiss investment manager be able to outsource certain existing back–office functions but he could also radically upgrade the level of service delivered to his clients by offering them detailed monthly management analyses, reports and economic data on his client services website produced by the remote service company. This new wave of offshore activity should produce dramatically lower service costs and tremendously enhance customer/client reporting.
It would appear, therefore, that the entry point in terms of wealth under management could be dramatically reduced in future, and offshore financial service could become more widely available to the burgeoning wealth generating classes in the US, the EU and the developing world. The key issue is for business and political leaders in developing jurisdictions to recognise and seize this opportunity on a timely basis.
In summary, therefore, the continued globalisation of the whole world’s economy has stimulated a number of multi-national organisations to examine the perceived impact of the offshore centres on the world’s economy. The initial reaction to this first examination was a "knee jerk", we must do something to control this. However, on mature reflection, it is becoming more and more obvious that globalisation is just that. What one territory indulges in for revenue maximisation is wholly acceptable for other (perhaps smaller) territories to also indulge in! There is no fundamental difference in morality, just in scale. Furthermore, the coming e-commerce revolution is going to be greatly facilitated by certain offshore centres and their ability to quickly resolve legislative and fiscal ambiguity for the global net. The future for offshore is very bright and it is e-commerce shaped!
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