Hong Kong: The Future State Of The Offshore Industry

Offshore Incorporations Limited Group (OIL) has been conducting the Offshore 2020 annual market research since 2010. This has created a platform to facilitate dialogue and debate surrounding the key trends and issues facing the offshore industry.

This time 12 months ago, the industry was facing perhaps its greatest threat in decades – an existential threat you could say. The ICIJ had published the so called offshore data leaks, a handful of international banks were making it increasingly difficult to open bank accounts using key offshore jurisdictions, the moral debated raged about successful multinationals not paying their "fair share" of tax regardless of the legal soundness of their approach, and the issue of tax transparency and public registries of beneficial ownership were debated at the highest levels at the G8 summit.

A year on and a sense of optimism has begun to return. The pervading mood is that, despite the negative publicity of the past 12 months, the facts remain that the offshore industry is integral to the concept of globalisation and continues to play a crucial role in the global financial supply chain.

Five years into the initiative, we've witnessed a handful of trends beginning to emerge and felt it's time we do some "crystal balling". We've debated which of these trends can be extrapolated through to 2020 and which will fade out. Some of the predictions will be obvious; some you may disagree with, but hopefully they will provoke thought and dialogue about the direction the industry is heading and the opportunities available for those willing to embrace change.

Offshore in 2020 – The Predictions

Self Confidence

The offshore industry will be better regulated, more globally integrated and transparent, and generally more robust than what it was in 2010. Hardened by the regulatory pressure of recent years, the industry will be better equipped to cope with unforeseen challenges than ever before, resulting in change being seen through the prism of opportunity, not just threat. In short, the industry will be bruised by a decade of external pressure being forced upon it, but confident in its rightful place within the global financial supply chain.

Growth & Development

Corporate service providers within the industry will consolidate with this phenomenon driven by two factors. First, increased regulation will push up the cost of doing business – investment in the infrastructure and increase headcounts goes hand-in-hand with heightened compliance. Second, by 2020 international private equity firms will have held stakes in the industry for approximately 15 years, giving the major players ample time and capital to make strategic acquisitions. The industry will ultimately display similar characteristics to the international tax and accounting industry. A "Big Four" corporate service providers will emerge with true global scale, while a large number of single jurisdiction operators will carve out successful niche for themselves. A handful of major players will end up listed on global stock exchanges, reinforcing the move towards a more transparent, better regulated industry.

Automatic Exchange of Tax Information

Many of the key principles of the United States (US) Foreign Account Tax Compliance Act (FATCA), and the broader automatic exchange of tax information, will be adopted by the majority of the G8 nations but fall short of a full take up by the G20. China, Russia, India, Indonesia and Saudi Arabia will all push back to varying degrees. The "Westerners arguing with other Westerners" mind-set will prevail and those not part of the debate will develop FATCAfree channels for economic engagement.

FATCA

After approximately six years in existence, causing significant upheaval for jurisdictions, financial intermediaries and other industry stakeholders, FATCA is unlikely to "break even". The cost of implementation and ongoing management will exceed the additional revenues it generates for the US and other governments. As global economic conditions continue to improve, questions will be asked as to whether the cost of "running" has created an additional burden for the tax payer. Some will appreciate the irony that a piece of legislation designed to plug tax leakages and help pay down debt has in fact only added to governments' fiscal burdens.

Public Registers of Beneficial Ownership

Public registers of beneficial ownership will not be adopted broadly, regardless of political pressure from certain quarters. Some European Union countries will implement registers, with varying degrees of success and consistency. In the United Kingdom – which led the initial calls for public registers – there will be numerous exemptions to the public aspect, due to legitimate privacy and security concerns. Central registers of shareholders (not beneficial owners) will become the global standard.

China

China will be the major growth driver for new business within the industry. This will be driven by state owned enterprises and private companies from all sectors expanding overseas, the local base of high net worth individuals growing at a rate that far outpaces Western markets, and an increasingly convertible renminbi facilitating the move of a further wave of Chinese capital into the global economy. As China becomes more integrated into the global economy, the fruits of its growth will not be harvested by Greater China-based service providers alone. Service providers across the entire spectrum of the value chain – legal, accounting and corporate services – will be actively looking to China to drive future business growth. All major jurisdictions will be far more proactive with their engagement with the country in an attempt to create a niche for themselves.

Compliance Burden

Increased compliance burdens will see business move to (or stay within) jurisdictions that are either historically better regulated or invest in the relevant infrastructure to get themselves there. Survival depends not only on compliance but also on creating a defensible market position, whether it involves catering to a high-end niche or a large volume of customers.

IFCs

From an Asian perspective, the "Big Four" jurisdictions – the British Virgin Islands (BVI), the Cayman Islands, Hong Kong and Singapore – will retain their dominance. The BVI's role as a lynchpin for international business companies and Cayman Islands' popularity for funds and capital markets vehicles may gradually erode, but they will not fracture. Hong Kong, Singapore, Luxembourg and Malta will continue to grow in importance as mid-shore jurisdictions, offering a combination of traditional offshore benefits and onshore credibility, enabling clients to build substance. By 2020, a handful of new midshore jurisdictions will be emerging in Africa and the Baltic States, attempting to capture a slice of the new world economy. Even more interesting will be the emergence of "cloud-based" corporate service providers which will challenge the existing sovereign based compliance requirements.

The Offshore Debate

The moral debate over the use of offshore structures will not have disappeared, but its severity will fluctuate based on the health of the global economy and the emergence of other potential targets for politicians. Non-governmental organisations (NGOs) with a stated vested interest in the demise of the offshore industry will remain well funded and serve as the mouthpiece for a broader political cause. As a result, the industry will be more co-ordinated and assertive in its approach to public relations and lobbying relevant stakeholders. Vested interests are difficult to shift, but a true industry body involving the financial centres and private business will emerge. The work of the International Financial Centres Forum, the Society of Trust and Estate Practitioners (STEP) and other associations will all play an important role in this process.

Due to significant reputational risks created by negative publicity, a handful of high profile multinationals will agree to pay higher rate of tax than legally required in their jurisdictions of incorporation. Beyond that, the majority of global businesses will continue to utilise the bilateral or multilateral infrastructure – such as double tax treaties – to facilitate cross-border operations. Further to the Base Erosion and Profit Shifting (BEPS) initiative, there will be greater country-by-country reporting by multinationals. This will result in a higher tax spend by these companies in certain countries and sectors, but implementation will be inconsistent – tax incentives will continue to be used as a means of attracting business. A consensus will gradually emerge on how to tax online businesses, but new opportunities will arise and multinationals will retain the ability, resources and the leverage to restructure and take advantage.

Wealth Planning

Asset protection and wealth management will be the primary drivers for using offshore entities at an individual level. As developing economies mature across Asia, the Middle East, Africa and Latin America, an entirely new, first generation of individuals and families will utilise a range of legitimate wealth protection strategies that have been employed by their Western counterparts for generations. This will continue to fuel the growth of the industry in 2020.

Globalisation

The concept of globalisation will have been established in modern economic terms for approximately 40 years. While not perfect, the outlook for an interconnected and interdependent world with free transfer of goods, services and capital across borders will be largely recognised as essential for growth. China and other non-G8 nations will play a much larger role in the global economy than any time since the mid﹣1800s. To enable globalisation, an economically efficient trading and investment infrastructure is required, which means the offshore industry will continue to evolve in response to customer demand. Offshore financial centres enable globalisation and by 2020, this concept will be better understood.