In the year 2000 offshore centres were emerging from being regarded as tax havens into serious international business centres. This was against the background of them actually having progressed, in most cases, from this trivial pursuit into more serious activities. It has taken perhaps as long as ten years before the general perception has caught up with reality. Political and media perception lags even further behind. In line with most comments made at the start of the Millennium the mood was optimistic about the future. Does such a positive attitude prevail a year later?
In the last year offshore business has again changed considerably. This has been due, principally, to the offshore centres' governments taking the activities of the international agencies more seriously than before. Perhaps a stream of criticism, most unjust and ineffectual, over the years has lead to the feeling that if nothing is done the critics will tire and go on to something else. This has not happened this time. The deliberations of the Financial Action Task Force continue. We have not heard the last from them by any means although there the remedy is simple: install anti-money laundering laws and procedures and get onto the list of co-operative countries. That is straightforward even though it may be ineffectual. That is not the fault of the offshore centres. If the anti-criminal money regimes which have been given gospel status have been misconceived and superficially directed at the fringes of the activities that is not the offshore community's fault. The blatant cases of vast amounts of criminal money passing with apparent ease through London and New York are regrettable but of less concern than a rumoured offshore trust and company structure being used by a public figure who is then branded as a likely crook. But that is the way of the world or, at least, the way of the offshore world.
Plenty of other things have happened. The Edwards Report passed quietly into history after having considerable influence that was generally beneficial to the jurisdictions examined. Their reputations have been enhanced with the now implied approval of the UK government. The game is on to get international approvals. It is not only a public relations campaign but also a real challenge. The reward is acceptance by an international community of non-offshore experienced prophets. The game isn't compulsory. Some may choose to remain aloof and ride out the storms of enquiry, confident of their positions and enduring appeal of their advantages. This needs a position of strength, which is denied to many aspiring centres and which depends on preserving their reputation. This is sometimes difficult: the criteria so often seems to require a highly developed regulatory system which, in emerging centres, is not required or practical. Local knowledge is often more effective than a formal framework riddled with loopholes. Nevertheless, standards are global. Big or small, the offshore centres have to attain them. The international supervisors have to look at the substance rather than the form of regulation. How often have we heard that before but applied to condemn an over-elaborate tax structure? Can it be sustained to criticise excessively formal regulation?
The emergence of the OECD's activities at the beginning of 2001 is the dominating offshore influence. Many offshore centres have not yet come to terms with the OECD's modified programme. Time is short. By June the labels will be issued and more than one offshore centre will find itself branded in the wrong half of the offshore world by default. By October 2000 the way forward was clear. Low tax itself is no longer condemned. This was a great breakthrough following constructive criticisms of the OECD's position on legal , economic and political grounds. Many offshore centres ignored the issue and now seem to be taking up the cause when the issue is over. The need now is to work positively and constructively to achieving an acceptable position, or staying out altogether and taking what comes.
There was little expectation of the problems that the first OECD Report would cause. The whole concept put forward by them of harmful tax regimes at first was received quietly by the offshore centres. They were somewhat stunned. There was the OECD, an organisation of prosperous states, apparently, pointing a finger at the lowly offshore jurisdictions with the implication that these offshore jurisdictions were robbing the main industrial countries of their rightful taxation. Of course, it was nothing of the sort. At the best, it was perhaps a public relations miscalculation by the OECD and, at worst, it was probably a misunderstanding by the OECD countries, the majority of which have a civil law background, of the way in which offshore centres are managed. After a while criticisms became plentiful. Ample economic, political and legal arguments were brought out to show that the worst interpretations of the OECD's intentions were a disaster for international relationships. Sovereignty appeared to be kicked aside. But this is no place to analyse the "harmful tax" concept. It is enough, thankfully, to note that matters seem now to be calming down. The criteria are now clarified even if the actions looked for are not acceptable. However the offshore centres react it will not be immediately appreciated and will be seen by the sensation seekers of the mainland press as merely panic measures of a technical nature. Rather than argue now about the role of the OECD the offshore centres should attempt to enlist the public relations efforts of the international agencies to improve the image of those who meet the requirements. But there is far more going on than a mere resistance or bad feeling towards the offshore centres campaign - the situation has a more global dimension.
On the one hand the industrial countries have seen their revenue from corporation tax decrease. There has been certain desperation by some of the OECD members' attempts to mop up what extra revenue they can find. Perhaps the offshore centres have been too successful. If they have, then tax advantages have played their part but had not been the entire reason for their success. Of course, to save tax, or even to defer it, is an attraction. But, contrary to the worst interpretation on the harmful tax regime theorists, they are not pits of tax evaders although the media may have thought otherwise. Offshore trusts and IBC's have become synonymous with tax evaders and international fraudsters. This is journalism at its best and ignorance at its worst.
To engage in these debates is a pointless activity. It is a permanently boring aspect of international finance. Point out to any critic that in any list of multinational companies the majority will have a complex international structure. This normal business practice is lost upon them. The tax advantages of these multinationals are controlled by some powerful legislation. Double tax treaties and controlled foreign company legislation are two areas that keep the taxation of international structures under control. The unitary taxation system of California was, at one time, an anti-avoidance regime which could have been adopted elsewhere, but little is now heard of this. Fashions change. The debate goes on year after year. But, where are we now? It certainly seems that we are entering into calmer waters. The offshore centres have found a new vigour. Their defence of their integrity and sovereignty has produced results. The result has been to illustrate that all offshore centres are not utterly pure and that when calmly expressed, the OECD's real objection has some justification. It would be going too far to suggest that they are entirely justified.
We must not forget that the OECD finger has also been pointed at their own members. It is not an anti-offshore centre campaign. At least the current principles of the OECD thinking are to look for transparency in each jurisdiction, from which offshore activities are carried on, the identity of the beneficial owners of the activities are known to someone in the jurisdiction and that, subject to proper application being made to that jurisdiction, information can be transferred abroad provided a just cause is made out and that the correct procedures are followed.
Rather more controversial is the "anti-brass plate" campaign. The OECD look for some substantial operation in a jurisdiction where a company or other vehicle is set up. This is clearly aimed at the abuses of the international business companies. This will prove more difficult to resolve.
Are IBCs Abused?
This will depend on how one looks at the concept of abuse. The old-fashioned offshore answer would be that IBCs are formed, managed and used according to the law of the jurisdiction in which they are incorporated. Sovereignty is all. On the other hand, other countries might feel that they are losing revenue because of these privileges and could conclude that they are insubstantial and contrived. No-one has dared yet to come up with the concept of a "sham" company, but it will not be long before they do.
At least both sides are now talking. Although the declaration looked for by the OECD of a firm intention to aim towards achieving their objectives by 2005 will remove an offshore from public damnation, there is still a difficult time ahead.
Then, there is the difficult spectre of money laundering and this is a personal topic. The test is whether an offshore centre has been co-operative with the FATF. This raises other questions. The FATF list has stimulated more questions than it has answered. Some of the comments entered against co-operative countries seem to be more severe than the reasons why others have been omitted from that list. Money laundering is another anomaly which exists between onshore centres and the big boys. Russian manipulation of several billion dollars through US banks can escape money laundering prosecutions in the US whereas offshore centres are called upon to justify some minor procedures. The anti-money laundering campaign is another example of the onshore countries trying to mould the offshore centres as they think they should be. Again, this may change. Despite the careful law enacted in offshore centres and its conscientious administration, money laundering continues undiminished. But where does the money go? It certainly does not go offshore in any large amounts. If even a fraction of the money went where the press claim it to go, it would be easily visible. Transparency is a grand name but in offshore communities, by their nature and size, are such that everybody knows what is going on in a small island economy. This is village life. This is something which the Whitehall warriors have long forgotten.
Strangely enough these and other campaigns have done much to strengthen the resolve of offshore centres. They will ultimately be the beneficiaries. They have shown that their intentions are as honourable and their actions are rather more efficient than those of their critics. Another result is that the offshore centres have joined the real world. No longer are offshore centres hidden behind a palm tree curtain. Their qualities have been revealed and they have willingly produced capable and real defences to allegations made against them. This is the real progress and the real promise. This is why we can again be confident that the future is bright and, in the offshore world, the sun never sets.
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