PERSPECTIVES AND PERCEPTIONS
The end of 2015 marked 20 years in the legal profession for me. During those two decades the legal landscape has changed dramatically owing to both technological advancement and commercial factors. Globalisation occurred and economic effects were felt on a worldwide basis.
As lawyers we now have computers on our desks, laptops in our bags and smart phones in our pockets which have all impacted on what we do and client expectations of how and when we deliver our advice. Law firms have expanded globally in reaction to increased cross-border activity and the need to provide round the clock service. Client meetings are routinely an electronic affair and billion dollar deals are closed through the email exchange of PDF scanned copies of executed documents between deal parties.
Commercially the last two decades can be associated with challenging times rather than the 'boom times' that preceded them. We have transitioned through Y2K and recovered from the effects of the 9/11 terrorist attacks on a primary financial centre, the Global Financial Crisis (GFC) and the ponzi scheme fund blow ups. Financial institutions once thought too big to fail have failed while others only survived owing to public sector bail out plans. Furthermore, China's former double-digit growth rate has slowed to something in the region of 5-7% sending oil and natural resource prices plummeting.
A failure to react appropriately to any one of the above factors can have severely adverse business consequences. The cost of getting it wrong can be operationally fatal. As with nature, the difference between extinction and survival (ignoring the effects of mankind for a moment) is a matter of evolution and the ability to adapt to changing factors and circumstances.
Few will argue that the conception of the BVI as an offshore finance centre was initially fuelled by its ability to provide tax efficient solutions for US businesses. And back in the boom period of the 70's and 80's it was considered commercially prudent for businesses to lower their operational costs and maximize profit; lowering the tax burden was part of that business function. However, fast-forward past the GFC to the stagnation of developed economies feeling the effects of their highest ever levels of public debt, budget deficits and soaring tax rates; tax efficiency has become the dirty term of rhetoric for many media publications and political snipers needing someone or something to blame for their worsening domestic fiscal crisis. Offshore finance centres (especially the BVI) have been in their cross-hairs ever since. A summary example follows: Tax havens have been criticised because they often result in the accumulation of idle cash that is expensive and inefficient for companies to repatriate. The tax shelter benefits result in a tax incidence disadvantaging the poor. Many tax havens are thought to have connections to fraud, money laundering and terrorism. This rhetoric may sell newspapers and play well to a part of the electorate not familiar with cross-border finance and the deployment of global capital; however, that does not translate into commercial reality nor does it solve their domestic fiscal crises. And, more importantly, it is not an accurate perspective of the valuable service the BVI provides to global commerce.
FDI – DRIVING GLOBALISATION
Foreign Direct Investment (FDI) is defined by the Organisation for Economic Co-Operation and Development (OECD) as follows: "Cross-border investment by a resident entity in one economy with the objective of obtaining a long term interest in an enterprise resident in another economy." The OECD also explains that these are usually long-term investments with a significant influence by the direct investor on the management and control of the enterprise (usually more than 10% of the voting power being acquired by the investor). In short, it's where a company from one country invests in a company or project in another country.
FDI flows have doubled from the previous decade and are ten times more than they were in the 1980s. FDI growth has increased year on year despite the GFC and countries have actually amended their investment policies to attract FDI as a means of counteracting the effects of the GFC. Public debt in developed markets hit unprecedented levels after the GFC while that effect was far less dramatic in developing countries (owing to their lack of linkage to the global financial markets). FDI to developed countries declined but increased to developing countries (developed economies being characterized by recovery while developing economies became associated with revenue). FDI has become the major economic driver of globalisation, accounting for over half of all cross border investments. Companies are rapidly globalising through FDI to access and serve new markets and customers, map out their value chains in the most efficient locations globally, and to access technological and natural resources. In other words, FDI fuels growth of Multinational Enterprises (MNEs) and promotes development in the emerging markets.
The deployment of FDI is channelled primarily through equity structures, as the key requirements for an FDI are structural in that they focus on management control and voting power. The effective deployment of FDI therefore requires a corporate legal solution. FDI is a primary catalyst for joint venture and cross-border merger and acquisition (M&A) activity.
To read the full article please click here.
Originally published in BVI Finance, January 2016
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
