At the start of 1999 the total value of deposits held by Guernsey’s 78 licensed banks stood at a record UK£52.9bn about two thirds of which was in foreign currency, mostly US dollars, Swiss francs and German deutchemarks. This compared with a total of UK£49.3bn held by 78 banks at the start of 1998.
The number of funds (collective investment schemes) also increased during 1998 from 372 to 393 and the number of worldwide investors in these funds rose from 123,874 to 130,495. However, during the year, the value of assets held by the funds fell from UK£16.5bn to UK£15.7bn, a situation that reflected the volatility of international stock markets, particularly in Asia and Russia.
Also at the start of 1999 there were 349 captive insurance companies (including 13 protected cell companies (PCCs) containing 30 cells in Guernsey, altogether holding assets of UK£5.2bn, and 13 offshore life companies with total assets of UK£2.2bn. This compares with 331 captives at the start of 1998 (including 5 PCCs containing 14 cells) holding assets of UK£4.7bn and 11 offshore life companies with assets of some UK£1.8bn.
It is understood that international business conducted by over 150 trust and company administration specialists holding estimated assets of at least UK£50bn also increased during 1998.
This steady growth is especially encouraging because, at the start of 1998, the financial services sector of the Island’s economy appeared to face a number of challenges. One of them was a review of Guernsey financial regulations and legislation instigated by the UK Government and conducted by former UK treasury executive, Mr Andrew Edwards. Jersey and the Isle of Man were also involved in this examination of Britain’s Crown Dependencies. A copy of Mr Edwards’ Report can be obtained via the Commission’s web site.
In addition there was an OECD report on Harmful Tax Competition that proposed its elimination among member states as being detrimental to international trade. The report also suggested the drawing up by October 1999 of a list of "tax havens" located in offshore jurisdictions.
Furthermore, there were concerns about Guernsey’s proximity to the EU and the EU’s tax code of conduct covering the principles for harmonisation of tax structures which the EU believes need to be adopted in order to achieve full economic union. One of the issues raised in the Code was the imposition of a withholding tax throughout the EU, that is taxing interest payments at source, or the free exchange of information on interest earned on non-residents’ bank deposits. At the time of writing this proposal is of particular concern to the UK’s Euro bond industry.
As far as the Edwards’ report is concerned, when finally published in November 1998, the Crown Dependencies were not only described as `very successful’ but also: "Clearly in the top division of offshore finance centres. Compared with other offshore centres they have developed reputations for stability, integrity, professionalism, competence and good regulation. The Islands’ judicial and prosecution systems have shown themselves well able to deal with international finance centre business".
From the Commission’s perspective, the two main suggestions made by Mr Edwards were about matters that were already being addressed. These were the introduction of "all crimes" money laundering legislation and the introduction of legislation for the licensing and supervision of trust and company administration businesses. The former was promulgated at the end of March 1999 and, in anticipation of the latter, the Commission appointed Mr Talmai Morgan to be its first Director of Fiduciary Services and Enforcement from 4 January.
Other matters raised by the Edwards’ review, including the up-dating of Guernsey’s insolvency legislation, are being considered by special working groups set up by the Banking, Insurance, Investment Business and Fiduciary Services and Enforcement Divisions of the Commission. The Commission passes the conclusions of these committees, together with its own views to a co-ordinating group established by the Island Government’s Advisory and Finance Committee.
All in all, the contents of the Home Office review were extremely positive about Guernsey and the volume of the report prepared by Guernsey’s authorities serves as a professional’s guide to the financial services and financial regulation available in the Island.
It is hoped that a similar result will emerge in respect of Guernsey’s submission to the secretariat of the OECD made in response to its Report on Harmful Tax Competition. In brief, the submission affirms that the Island’s tax structure is not detrimental to international trade and argues that Guernsey should not be on the OECD’s list of tax havens. In addition, comparisons were drawn between the Island’s fiscal policies and tax rates and those of the UK and other jurisdictions in the OECD in order to demonstrate that Guernsey does not fit the OECD criteria used to define a tax haven. The OECD is not expected to form its conclusions before the winter of 1999 and, even then, progress in implementing a programme is expected to take some time. This is because there is no support from Luxembourg and Switzerland while some OECD members who do support the programme have elements of beneficial tax arrangements of their own which they would be reluctant to abandon.
Similarly the EU’s code of tax conduct is expected to have little or no impact on Guernsey in the future. This is because Guernsey’s special relationship with the EU is set out in Protocol 3 of the UK’s Treaty of Accession to the Treaty of Rome and, by omission, this makes it quite clear that the Island does not need to comply with any EU tax harmonisation measures or financial directives.
Guernsey’s tax structure was created and has been maintained to meet the public spending requirements of the Island Government which, since the late 1950s have been made from a standard rate of income tax on individuals and corporations of 20%. There are no other direct taxes such as death duties and inheritance tax. In addition, the Island does not levy VAT but additional revenue is raised from indirect taxation on imports.
So, if international finance business is not mainly attracted to the Island because of its tax regime, what other attractions have helped to keep it in the forefront of international finance centres?
First there is political stability. The Island has been domestically self-governing and fiscally independent for centuries and although part of the British Isles it is not part of the UK. Guernsey has no party political system so, following parliamentary elections, there are no sudden changes in public policy.
Second, as was endorsed in the Home Office Review, the Island is well regulated to a high international standard, has good quality financial legislation and possesses a comprehensive commercial, judicial and professional infrastructure
Third, it is a mature and natural international finance centre in that it is long established and has not, like some other offshore centres around the world, been artificially created.
With the opening in St Peter Port in October 1998 of the Channel Islands Stock Exchange (CISX), Guernsey can justifiably claim to be, in most respects, a "one-stop-shop" for financial services. Or, as one local banker puts it: "A global finance business park".
Now that the international initiatives that commenced in 1997 and 1998 are less prominent, the Commission, in consultation with the finance sector, is continuing its incremental programme of new company and trust legislation. The two PCC ordinances and the significant number of captive insurance companies and collective investment schemes established as PCCs emphasise the importance of legislation outside the statures governing financial services. PCC structures allow assets to be placed in different cells within the same company. The assets of each cell are protected by law from any liabilities of other cells. One of the benefits of PCCs is that the concept extends the use of captive insurance to smaller companies and organisations who would otherwise find setting up their own stand-alone captive too expensive.
It is anticipated that the next three years will see a wide range of company and trust legislation. In particular, a new company law, replacing most of the extant company legislation, promises to keep the Commission and practitioners busy for the foreseeable future.
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.
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