“tax neutrality”: the continuing appeal of the offshore gregory rawlings centre for tax system...
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“Tax Neutrality”: The Continuing Appeal of the
Offshore
Gregory Rawlings
Centre for Tax System Integrity
RegNet & RSSS
The ANU
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Introduction: Tax-Free States High in the Mountains
The Principality of Andorra: Tax Haven located in Pyrenees mountains between France and Spain
Independent since 1278Constitution agreed 1993Total Bank Deposits 2001: €10 billion
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Wealthy Banks
“our banks are very small, but very rich” (Interview, Andorra, December 2003)
Zero TaxationStrict Bank Secrecy Laws
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International Tax Planning
“Practically we now have zero tax for companies and individuals…“we act principally in international tax planning” (Interview, Andorra, December 2003)
Use “completely regulated” jurisdictions
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Elegant Companies it is “more elegant to have a company
from Holland these days; it’s a normal country after all” (Interview, Andorra, December 2003)
Andorra provides a “useful platform” for activities conducted elsewhere
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If you go to Andorra…
“ …if I go to Andorra where there is no tax at all then I wont have to pay any tax at all…it does not work like this” (Interview, Andorra, December 2003)
All transactions must be declaredReduction of tax using double taxation
agreements
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Tailors
“We are tailors. It’s like a customer who requires a certain suit. The tailor cuts it according to their customer’s needs. We do the same”. (Interview, Andorra, December 2003)
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External Pressure
Has always been under pressure
Small countries have difficulties resisting
Not dependent on finance
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Waiting to See “This is what we are all waiting for…all of us
are waiting to see what will happen. The Andorran government will make a decision next year. All of us are waiting to see; Andorra has had no taxation for all these years. It will mean a complete restructuration of the government. Accounts will have to be submitted for the first time…we are not very used to this due diligence requirement”. (Interview, Andorra, December 2003)
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Interviews
Interviews with 30 accountants, lawyers, regulators, fund managers, insurers, bankers, CEOs, legislators and trustees and fiduciaries in Andorra, Guernsey, Paris and Singapore.
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Research Areas
The effects of multilateral efforts to regulate OFCs (particularly the OECD’s Harmful Tax Practices Project and the European Union’s Savings Tax Directive)
Changes in client response/profile as a result of international initiatives
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Research Areas…The current market for offshore services
Motivations for using OFCs
Tax planning techniques
Future prospects for OFCs and their clientele
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Methodology
Open-ended semi-structured interviews Interviews not tapedPrimary and secondary level notesConfidentiality and no attribution Snowballing and phone booksObservations and recordings from
media, social interactions and architecture
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Multilateral Initiatives: A Review
OFCs: Pressure to abolish financial secrecy in last 5-10 years
Organisation for Economic Cooperation and Development (OECD)
30 Tax Havens in NegotiationEuropean Union Financial Action Taskforce (FATF)
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Impacts of Initiatives Predications that the offshore would
decline
“The fundamental attractions of OFCs – low or no taxation, banking secrecy, minimal financial regulation and political stability – face significant threat of erosion” (Hampton, 2002: 1662)
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Questions
Are these initiatives having an effect on the offshore sector and if so how and why?
How has business been affected by these initiatives
What kind of impacts has this had on local economies and societies
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Research SitesSamoa (2002)
Andorra (2003)
Guernsey (2003 & 2004)
Singapore (2004)
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Impacts
58% of respondents reported that initiatives were having an impact
19% of respondents reported that initiatives were not having an impact
7% of respondents reported it was too early to tell
15% of respondents said not yet, but they will if fully implemented
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Compliance Costs Increased compliance costs Increase due to implementation of Due
Diligence and Know Your Customer (KYC) standards.
“Slowing Down Effects”
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Offshore Sectors
Trust & Fiduciary Private BankingFunds Management Captive Insurance
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Client Reaction
Effects had not adversely undermined profitability or viability of firms
Clients undeterred from OFCs
Business has increased
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High Wealth Individuals (HWIs)
“Bottom end of the market” has declined
HWI market almost completely unaffected
Institutions (multinationals and large corporates) unaffected
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Competition
Business has become more competitive Some job loses Increasing number of mergers and
acquisitions
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No Undue Concern
Causing no major concern in industry Part of a dynamic services sectorPeople must get used to the “ebbs and
flows of finance…you hear a lot of doom and gloom”, but it was really an over-reaction (Interview, Guernsey, December 2003)
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Offshore Polarisations
Polarisation between OFCs in “developed” and “developing” countries
No major impact on “developed” OFCs
(Guernsey, Jersey, Isle of Man, Bermuda, Cayman Islands and British Virgin Islands [BVI])
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Decreasing Tax Havens
Singapore and Hong Kong as competitors
Outlook for smaller Pacific and Caribbean jurisdictions “bleak”
Decrease in number of tax havens in next ten years
Key centres will continue to prosper
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Motivations, Markets and Possibilities
Globally mobile capital and globally mobile people
Taxation has relative importanceHolding property through offshore
companies and trustsEstate planning
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Expertise
Concentration of expertise in OFCs
“…within one mile of this office you will get more expertise in the setting up and management of trusts than you would anywhere in the world” (Interview, Guernsey, December 2003).
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Offshore Flexibility Offshore pension and superannuation
funds Payroll facilities for seafarers Diminishing differences between
offshore and onshore
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“Tax Neutrality” “Tax neutrality” remains very importantTax neutrality converges with regulatory
flexibilityLarge multinationals continued to be
attracted to OFCs, where subsidiaries and funds can be established in a “benign environment”, not subject to “six different forms” of taxation and regulation (Interview, Guernsey, January 2004).
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“Global Families”Offshore structures continue to work
well for “global families” and HWIs
“There are the wealthy in this world and they will arrange their affairs, and when they become really wealthy they become itinerant” (Interview, Guernsey, January 2004)
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London as a Tax Haven
UK Non DomiciliariesSet up offshore trust before moving to
LondonProperty owned by trustCapital payments tax exemptOffshore debit/credit cards entitlements
for “UK non-doms”
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OECD Discrepancies US IRS issues “Qualified Intermediary
Regime” status to selected offshore firms
New Zealand provides for tax exempt offshore trusts for non-residents
Portugal establishes OFC on Madeira with EU approval and no blacklisting
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Level Playing Field
Differences between OECD countries provide a continuing market for OFCs
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A long way to go
One interviewee put it like this: There was no doubt that in time Switzerland and Luxembourg would meet OECD standards. But “the game still has a lot further to go yet”. For example the USA, this interviewee claimed, does not meet many of the standards that the OECD itself is promoting, “they are a very long way from doing anything similar”, he said…cont
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Ongoing Opportunities cont…Although they were drafting legislation
to comply with these international standards they faced “massive opposition from corporate interests”. He continued “the concept of a global level playing will take a long time, if ever, to achieve”. In the absence of a level playing “there are still a lot of opportunities” for OFCs (Interview, Guernsey, December 2003)
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Hope 100% optimism hope for future of offshore
“do I think that this industry will be here in another ten years, yes definitely, do I think that it will provide me with a successful career until I retire, yes definitely…the long term prospects are good” (Interview, Guernsey, December 2003)
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It gets better every day
“Oh yes, I think it gets better every day” (Interview, Guernsey, January 2004)
“Oh God yeah…who would have thought even ten years ago that there would be millionaires in China who would need their wealth managed” (Interview, Guernsey, January 2004)
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Conclusion: Offshore Niches
“There will always be an offshore sector. We are the ball-bearings in the machine of the world’s financial markets” (Interview, Guernsey, January 2004)
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Thank You!
Gregory Rawlings CTSI
“Tax Neutrality”: the continuing appeal of the offshore