Originally published in Private Client Practitioner Guernsey Supplement, December 2011
Global pressure on offshore centres remains high. There is still a widespread perception that there is no difference between an offshore centre and a tax haven. However, despite these difficulties and the wider economic downturn the future still looks bright for Guernsey, says John Hunter from RBC Wealth Management.
Just as there was light beginning to appear at the end of the tunnel, the global economy seems to have taken a turn for the worse. Rather than 2012 being talked about as the year of the recovery, many now see a double dip recession on the horizon. The housing market is yet to bottom, consumer and business spending is almost at a standstill, unemployment is still rising and austerity remains at the top of the economic agenda.
Of all the industry groups feeling the effects of this global downturn, finance has, unquestionably, been the hardest hit. We've seen some of the once great financial institutions bailed out, nationalised and in some cases file for bankruptcy. Of course, few will feel any sympathy and many people blame bankers for the world's economic problems. Even the UK's own Business Secretary Vince Cable, famously joked: "What's the difference between a dead cat on the motorway and a dead banker on the motorway? There are skid marks around the cat."
This animosity towards the finance industry isn't confined to a particular faction either. Despite the roots of the financial crisis being firmly onshore, caused in large part due to speculative trading and overly benign credit conditions, offshore finance centres have found themselves treated with as much disdain as the investment banks.
The picture painted by the media, and indeed some politicians, is that offshore centres and tax havens are one and the same. Their purpose being to help unscrupulous people evade their taxes and deprive countries of tax revenue.
So, with the world's most powerful man, President Obama, pledging to "shut down" tax havens, does this mean there is a future for offshore financial centres such as Guernsey? The answer is an unequivocal yes. Guernsey is not a tax haven. It may be a low tax jurisdiction, but contrary to what some people believe there isn't an international crusade against low tax jurisdictions and the people who legitimately structure their affairs tax efficiently using offshore centres.
The OECD is very clear that the status of "tax haven" should not be applied indiscriminately to countries with no or nominal tax criterion. They state within their Tax Haven Criteria that "every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate". Instead, they deem tax havens to be jurisdictions that lack transparency and have laws or administrative practices that prevent the effective exchange of information for tax purposes.
Moreover, the aim of the much talked about FATCA legislation is not to stop US taxpayers placing their assets in, or undertaking transactions with, offshore centres. The extensive disclosure and reporting requirements being imposed on foreign banks, in respect of their US clients, are designed to tackle secrecy and enable the authorities to identify people seeking to evade their legal responsibilities.
The truth is that there are good and bad financial centres; those who are highly regulated, transparent and compliant with international rules and regulations and those who operate under a veil of secrecy. Rather than the heightened pressure and scrutiny on offshore centres being seen as a threat to the future success of Guernsey's finance industry, many see it as an opportunity for the island to demonstrate that they fall into the former category.
Guernsey is doing just that, having entered into 29 Tax Information Exchange Agreements (TIEAs), under which it will exchange information with other governments in respect of criminal and civil law tax matters. It is, however, worth pointing out that TIEAs don't provide governments with unrestricted access to client data. Only in limited circumstances will information be exchanged, such as when there is suspicion of tax evasion. People who use offshore centres can still enjoy confidentiality and mitigate their tax liabilities through the use of sophisticated financial vehicles such as trusts and companies. If they play by the rules, they have nothing to fear.
Much of the press interest in offshore finance centres is tax related, but there are, of course, more strings to Guernsey's bow than a competitive tax regime, one of which is economic and political stability. While political and economic instability has long been viewed by many as a problem of third world or emerging countries, many of the world's leading economies have become increasingly unpredictable over the last few years as they look to deal with their budget deficits. Political manoeuvring left the US just hours away from a sovereign debt default and their subsequent credit downgrade sent the markets crashing around the world.
A lack of political harmony is also at the heart of the eurozone government with potentially devastating consequences for the global economy. People are not just concerned about the health of the economies in which they live and work, but the impact that possible economic reforms may have on their business and personal interests in the shape of new laws, regulations and taxes. For example, a survey by China Merchants bank and the consulting firm Bain and Company this year found that 60 percent of Chinese with US$15 million or more have left China or are planning to leave over concerns about economic reforms.
The UK is one of a number of unlikely countries where uncertainty prevails. Whether it is the longevity of the 50 pence tax rate, possible mansion taxes or further "crackdowns" on taxes paid by foreign residents, many people are feeling somewhat unnerved by the situation. Those who do decide to move to another country will often look to place their assets in a reputable offshore centre like Guernsey. With the finance industry accounting for over 20 percent of the island's total workforce, clients can be safe in the knowledge that the government will do whatever it takes to protect the island's position as one of the world's leading offshore centres and that includes maintaining a stable political and economic climate.
Aside from a competitive tax regime, robust regulatory environment and political and economic stability, Guernsey also boasts an abundance of world-class financial institutions to choose from, including some 40 banking organisations from the UK, Europe, the Americas, Africa, Asia and the Middle East. Its GMT time zone means that business can be conducted in most major financial centres, including London, New York and Tokyo, and London is less than 1 hour away, with the major European cities all within easy reach.
So what's next for Guernsey? There is no denying that offshore centres are under the spotlight and Guernsey is certainly one of those centres by virtue of being tarred with the same "offshore" brush as many tax havens. What Guernsey must continue to do is demonstrate that it is a well regulated and transparent jurisdiction and find the balance between adhering to international rules and regulations while retaining the benefits that have long given it its competitive edge over many of its rivals. Internally, Guernsey not only boasts a highly-qualified workforce and favourable business environment, but frequently adapts and innovates to meet the evolving needs of clients.
Over the last few years, the Island has modernised both its trust and company legislation and will shortly be introducing a new foundations law. The future certainly looks bright for Guernsey.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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