UK: A Bright Future in the Changing Offshore World

Last Updated: 17 June 1999

The Offshore Centres are changing. They always were. Once they were Tax Havens then Offshore Centres, now often called International Financial Centres. The latter name gets away from the idea of islands in a turquoise sea.

The decline of the term Tax Haven has come about by the lessening of the appeal of tax advantages. A wider range of financial services are now offered and expected. Anti-avoidance measures have stimulated the introduction of new services and the development of new skills. The jurisdictions, being smaller and more focussed on the needs of international investors can be more reactive to market influence.

Previously changes in these centres were inspired by the ambitions of each jurisdiction to develop and extend its appeal. Local and expatriate professionals supported the governments in making their laws more consumer acceptable. This is changing. The facilities of offshore centres are now an important part of the investment world and not attractive appendages to it. The tendency now is for changes to come from outside influences. The current atmosphere is that they should be part of the world's financially regulated system.

Concern is expressed in many offshore centres that things are changing for the worse. Things are certainly changing and if for the worse then the matter needs to be re-appraised. Offshore Centres have themselves to blame: they have been too successful. Facts on this success are not hard to obtain. One author (Walter H Diamond, Editor of International Trust Laws and Analysis) claims that 61 tax havens manage $5trillion of offshore funds of which 40% are moved into the safekeeping of international trustees. This is the handling of funds of a different magnitude from the traditional concept of tax havens where few rich men sat in the sun and suffered boredom to avoid paying tax. Handling sums of this magnitude means that the offshore world altogether has become a major economic force. No wonder the main onshore centres look at this offshore activity with envy.

At this point we arrive at the difficulty of definition. The offshore centres are a collection of very different countries: they have some characteristics in common, but are by no means a co-ordinated group of jurisdictions. In EU terminology they are unharmonised. Some centres, are otherwise considered as mainland countries. The United Kingdom, with lower tax rates, incentives, freedom from withholding tax, and the variety of services available makes an ideal offshore centre for many operations. But the UK itself is one of the pioneers of attacking countries more traditionally regarded as being offshore. Any examination of the centres always produces exceptions and anomalous situations. The challenges come from countries which are not centres. Economic and political jealousy inspires attack. What then is the theory that leads often to viscous and unmerited criticism? Much of the criticism is inspired by political and journalistic bullies. An easy sensation is achieved by some revelation of a tax haven sensation which is usually exaggerated. Behind this sensationalism the free traders of the world at the bottom of it all. There is nothing wrong with free trade; the removal of artificial barriers and an attitude of 'may the best man win', is unobjectionable and certainly not by the offshore centres who have taken on the economic giants and in many cases succeeded; the mice have certainly roared.

To think that free trade is an objection in itself is naďve. It is only the first stage towards the promised land of economic integration. Economists usually differentiate between several stages. After free trade comes customs union, then the common market, economic union, then economic integration, which ends up with unification of monetary, fiscal, social and counter cycliable policies. (see Towards Corporate Tax Harmonisation in the European Community: An international procedure and analysis by Adolpho J Martin & Jimenez, No. 22 in the series of International Taxation by Kluuer)

After that then political integration becomes a real possibility. To really achieve this requires the spirit of Charmaine or Napoleon. A few small countries with minds of their own are not going to be allowed to stand in the way. With harmonisation as the inspiration, practicalities are irrelevant. Also, the researches of Dr Jimenez, referred to above, comes to a rather distressing conclusion, that in the EU there is no institution, legislative or judicial, which is in the position to undertake the task of harmonising corporate taxation. Perhaps it is not surprising that all of the efforts so far have dismally failed. But failure is no discouragement to the zealot.

As tax advantages were in the vanguard of the development of offshore centres, tax harmonisation is the fashionable precursor of further harmonisation in the EU, but the EU seems incapable of achieving this, other than by attacking dissenters in their policies. The EU regards as harmful tax rates which are too low. Although contrary to the general trend in recent years to lower taxation to stimulate trade, the reverse is the ambition of the harmonisers. This requires eliminating the stimulation within the EU, provided by Dublin, IFSC and Luxembourg's (amongst others). Then there is the currently unresolved situation where the UK is reluctant to introduce withholding tax on payments of interest. Switzerland is standing in the wings waiting to pick up the benefits of the lucrative Eurobond market from the city of London. This puts the UK government in the same position as an offshore centre. The arguments that business will be lost in the city of London and hardship suffered is not unlike that which the offshore centres put to the British government. This makes Switzerland and the UK similar to islands in the Pacific, and why not? Sovereign states are ranked equally; the question of sovereignty has prevented other countries invading the economic integrity of independent offshore centres. But some are not privileged to be politically and economically independent and there are some offshore centres which cannot claim any sovereignty. These are the remnants of empire. They have successfully developed their international financial services with the encouragement of British governments. The current government finds itself somewhat embarrassed, under the scrutiny of the Supranational Power to which it is subject.

Then there are those offshore centres, the Channel Islands, the Isle of Man, which are politically independent, but depend upon the goodwill of the United Kingdom so far, for their prosperity and with whom a dialogue is maintained. Of course the UK keeps an eye on them. The recent Edwards' Report must be a rather disappointment to many. The report failed to reveal any lapses in the proprietory in which these countries conduct their affairs. However, this puts the spotlight on those countries that are more independent and free of influence from the UK, or the United States. These truly independent countries are hard to find. Where such countries do exist they find it difficult to attract investors. Even the most adventurous would hesitate to place their funds in a completely foreign environment. The moon would make a very unsatisfactory offshore centre!

The fundamentals are in danger of being forgotten. Taxation is the means by which governments finance their obligations to their populations. No one disagrees with this. Taxation as a tool of social engineering or international politics is less acceptable: tax planning is the result.

So perhaps it is wrong to separate offshore centres from the others. Certainly the frontiers are blurred. This is even more so when matters other than those relating to fiscal advantages are considered. Although tax advantages are the easiest to install, the prosperous offshore centres look for a wider appeal. A more sophisticated approach certainly embraces international trusts and foundations. It is in this field that offshore centres have been in advance of the main investment areas. Adapting, or even introducing, trust law, based upon the English law, to the requirements of the modern investor is one of their success stories. An example is the establishment of purpose trusts and reducing the complexities of the perpetuity period and giving protection against forced heirship claims and (often with a smaller enhancement of their reputation) against creditors.

A maturity in this aspect is being shown by the number of substantial cases which are being brought in the offshore centres. It is likely that in the next year these will increase. The cream of the Chancery Bar and of international lawyers will be on display. New trust principles will be examined, and some of their more adventurous uses challenged. Such challenges are the price of leadership and it is significant that the new frontiers are being challenged offshore.

In other areas, offshore centres do not seem to have been subject to any recent challenges. For example, ship registration, which is centred on relatively few jurisdictions, it is a major non-tax haven activity which has been successfully engaged in. The administration of mutual funds is another, and growing, activity. This has its tax appeal, but these are appeals based upon double taxation treaty advantages, which are open and negotiated and not the so called unfair tax rates of tax havens introduced to attract business. Captive Insurance companies are a further area where the expertise of the operation is a more dominant attraction than any tax advantages.

So the way to go is to establish expertise and challenge major centres on these grounds.

Modern communications makes this easier. International expertise is no longer found only on the Wall Streets of the world, but can be found almost anywhere where the experts wish to establish a base. However, offshore centres are not merely collections of individuals. The state has a role to play with political and economic stability. A democratic government and the means to install new laws of international standard are required. Communications and a modern administration and judiciary are required together with competent international support systems. The latter sometimes is missing. Sometimes local practitioners are reluctant to embrace the wider dealings of international business and expatriates are similarly reluctant to set up without an existing client base in new jurisdictions. Offshore centres need to attract them and should take special measures to do so. Similarly, a modern judiciary and legal practitioners is called for. Investors want to be certain that their rights under an offshore centre's law can be enforced. So many of the activities in offshore centres are based upon the application of law. It is necessary for any centre to demonstrate the quality of its law and procedure. This is frequently done in the forms of reprints of statutes and articles. But equally important is the administration of that law. In some jurisdictions, for example, litigation has been conducted, but the result of the case is not made known. On one hand the argument is that matters concerning trusts, for example, are private affairs and should remain confidential even after judicial intervention. This is not very encouraging. A significant factor in promoting goodwill is to have a reliable and regular system of law reporting. This does not need to be based upon a vast publishing operation as in US, Canada, UK etc. but making known to the world and other investors the fairness in which disputes are settled and the law administered.

Overall the future of offshore centres depends on maintaining their initiative and their integrity and making it known to the world what they have to offer, so as to overcome their detractors who are so willing to wave the flag of tax evasion or money laundering without perceiving the important role that offshore centres have played, and will play, in maintaining the flow of investment and trade which the major countries now seem to have lost. The future for the offshore world is bright.

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com

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