Regulation

A New Dawn for Caribbean IFCs?


By Anthony Travers, Chairman, Cayman Islands Stock Exchange, Cayman Islands (01/10/2011)

Linked by geography, the financial centres of the Caribbean (and we include here Bermuda and the Bahamas), in fact, started out on the path to their development for different reasons and is each developing in tangentially different directions. 

The catalyst for the Cayman Islands was the decision of the Bahamian Government in the 1970s to insist on Bahamian employment in the financial services industry; the BVI had to reinvent itself after the US BVI double tax treaty was revoked and did so by undercutting the marketplace for IBC incorporations; Bermuda being a reinsurance centre shunned the development of competitive banking at the behest of the two privately owned Bermudian banks, leaving a gap in the marketplace which the Cayman Islands filled. 

All of this is the history but there is, however, one, and possibly the most overlooked, tie that now binds them.  All of these offshore financial centres are or were British Overseas Territories. And what can be said with certainty, due to the little lauded but all encompassing influence of the Foreign and Commonwealth Office (and the Bahamas was obliged by the OECD to follow suit), is that each now demonstrates remarkably similar levels of taxation and anti-money laundering transparency which, contrary to popular misunderstanding and mis-characterisation, set the world leading standard. Indeed the independent OECD Peer Review process has now, in the cases of the Cayman Islands and Bermuda, established that fact beyond any doubt or potential further criticism.

In the foregoing circumstances, the continued use of the pejorative term ‘tax haven’ leads to misunderstandings of the sort regularly exhibited by certain US Senators, notably Sn. Sanders of Vermont, who still appears to believe that monies are ‘stashed’ in the offshore jurisdiction.  In part, we can attribute this to blame-deflecting politics; no doubt it would be a pity to derail the current demands for further and more intrusive onshore regulation with any tacit recognition that it was the complete failure of domestic banking regulation that was the major contributory cause of the financial crisis. However, given the evident transparency, which jurisdictions like the Bahamas, Bermuda, BVI and the Cayman Islands now demonstrate, this type of criticism is not only indefensible and unfair but it leads to a tortured misunderstanding of how the international financial market place operates in practice, the benefits that it brings to onshore jurisdictions, and what should be done by onshore jurisdictions to enhance those very real onshore capital flows. 

At the height of the market pre-crisis, assets under management of Cayman Island hedge and mutual funds exceeded US$3.5 trillion - all of which was reinvested in onshore markets, some 80 per cent in the United States and most of the balance in Europe. These capital flows were not only regulated, or more accurately, available for regulation had domestic onshore legislation required it in the jurisdiction of investment (here there was a notable distinction between the position of the FSA which did impose such regulation on hedge funds and the SEC which did not), but they provided employment of onshore investment advisors administrators and prime brokers and essential tax revenues in those jurisdictions. This essential dynamic appears completely lost in the negative public relations which seemingly emanate from the socialist inspired thinking of certain bureaucrats in onshore Treasury departments. 

Whilst much of this negativity may indeed be based on a confusion between the transparent Caribbean model of the offshore financial centre as practiced in Bermuda, Bahamas and the Cayman Islands, where capital is pooled for reinvestment in onshore markets through the mechanism of hedge or mutual funds, structured finance or reinsurance vehicles, on the one hand and on the other, that of Liechtenstein and Switzerland which, until recently (and possibly yet unless the new Swiss treaty is ratified by way of referendum), provided a non-transparent model, which promoted banking secrecy and tax evasion, it may well be that there is some other dynamic at work. 

Very possibly, the real concern, which drives the continued negative public relations that surrounds the offshore financial centre, has more to do with a not so hidden agenda, which has nothing whatsoever to do with tax evasion. And that is the desire on the part of the OECD and the nations that it represents, or at least those certain bureaucrats within the relevant Treasury or other civil services departments to introduce the concept of one global flat rate of tax, no doubt established at the rate that the whim of an omnipotent, non-elected European bureaucrat determines best suits the maintenance of a European Super State.

In this demonic vision, not only is tax evasion unlawful but tax avoidance and tax structuring to minimise tax revenues paid to Governments is also outlawed.  There exists then no legitimate strategy to combat the profligate spending of Big Government.  Indeed, in the current subtle but evident shift of rhetoric, which now suggests that lawful tax avoidance should be viewed in the same way as tax evasion, we see the germ of this critical shift in policy.  The philosophical basis for this altered state of affairs has not been established and certainly not agreed, nor does it form any part of domestic legislation which maintains the distinction.  And yet insidious aspects of this initiative are becoming more manifest in the continued criticism of the fully transparent offshore financial centre.  What can be said with certainty is that the continued criticism cannot be based on the practice of tax evasion or non-transparency.  Not only does the Cayman Islands, for example, have full regulator to regulator disclosure under the IOSCO accords but it also adopted full proactive tax reporting with each of the 27 European Union Treasuries under the European Union Savings Directive and has sufficient Tax Information Exchange Agreements to ensure its place on the OECD white list of tax compliant jurisdictions. 

But what the Cayman Islands maintains, together with Bermuda, Bahamas, BVI and others, that no doubt continues to inflame the left leaning OECD bureaucrat is an indirect tax system which ensures the absence of corporation, personal income, capital gains or indeed, other taxes (albeit that Bermuda and the BVI have introduced payroll tax).  This it seems is the substance which offends the philosophy of the OECD Harmful Tax Competition – An Emerging Global Issue Report 1998, which brands jurisdictions with low or attractive tax rates ‘tax poachers’ and yet fails to establish any basis to suggest that high tax rates and Big Government are, or represent, a preferable system for economic development which, it should be remembered, is the essential objective with which the OECD is exclusively, by its constitutional objectives, charged. 

However, notwithstanding the continued negative public relations criticising the offshore financial centre, the future is by no means as calamitous and doom ridden as the popular press would cause us to conclude. 

Informed observers, noting the recent decision of the European Court of Justice in Luxembourg, may well have heard the distant peel of bells heralding the death of the OECD Harmful Tax Competition initiative. Advocate General Niilo Jääskinen, has advised that Court's judges to rule in favour of Gibraltar and its effective 10 per cent low rate of tax in the face of the EU Commission's argument that this rate structure constituted unlawful tax competition.  The EU Commission had attempted to argue that the 10 per cent corporate tax rate constituted a scheme of State Aid incompatible with the internal market on the grounds that it was ‘regionally selective’ in that it constituted a tax region distinct from the United Kingdom, to which Gibraltar is subject constitutionally, and ‘material selective" in that it was inherently discriminatory since the proposed tax regime would result in offshore companies in Gibraltar not being taxed at all. 

Furthermore, the OECD initiative cannot function effectively unless it creates a global structure and we know from the protection afforded by PRC to the regimes in Hong Kong and Macau in the most recent OECD black listing process that there are Nations that do not embrace the belief that tax competition is itself harmful. 

The problem that the Overseas Territories in the Caribbean have had to face over the past decade has had more to do with a Socialist government in the United Kingdom, which, it is fair to say, has not been one of the dissenting voices arguing against the imposition of even higher tax rates.  It remains to be seen whether by way of contrast, Mr Bellingham, the newly appointed Minister for the Overseas Territories in the current UK administration, will adopt a more enlightened approach to tax competition and fully recognise the benefits which a well regulated and transparent offshore financial centre have conferred and will continue to confer on the City of London and other onshore markets by directing capital flows from their investment vehicles.  

If so, the future should rightfully herald a new dawn in which the Overseas Territory maintaining a transparent and appropriately regulated offshore financial centre is recognised by those responsible for maintaining the pre-eminence of the City of London as an essential part of the financial architecture and one which enhances their ability to do so.