Virtually all small islands that have financial services sectors have at one time or another been labeled a tax haven.
What is a tax haven? If you ask ten different people you’ll get perhaps twelve different answers. Whatever the answer, these days, you can be sure that any country that is called a tax haven is not being complemented. In fact the phrase has migrated from having a suggestion of intrigue or mystery to being a down right pejorative.
On my first visit to London as Minister of Finance, I was shocked at the vitriolic and hyperbolic rhetoric emanating from the powerful NGO community, directed against so called tax havens including my island, Bermuda. We were characterised as the source of all evil in the world, including taking food from the mouths of starving babies in Africa!
The narrative was that multi-national corporations in extractive industries in Africa were diverting much needed tax and corporate revenue from the local African economies, where it could be used to feed starving babies. Profit was then shifted overseas to tax havens. Crooked politicians in those African countries were bribed and they, in turn, hid their dirty money in those tax havens.
So it was all blamed on the dots on the map – the tax havens. Never mind the crooked politicians who took the bribes and the companies that paid them; never mind the fact that a significant percentage of those multinationals involved are headquartered in the UK and are listed on the LSE, never mind the fact that the assets of the well-funded NGO’s and the pensions of millions of Britons are invested in these very same companies.
Never mind all that, it’s all the fault of those nefarious tax havens – those vampirish dots on the map that are sucking the lifeblood out of the global economy.
This is the cockamamie world we live in today, as offshore financial centres.
Once upon a time, the only obligation a person or corporation had was to pay the taxes he/she or it was legally required to pay. That was pretty cut and dried, but now paying taxes has morphed into the blurry and slippery world of the “moral imperative.”
Judgments are being made about multinationals paying their “fair share” of taxes in a particular jurisdiction. What does that mean?
One thing it means to me is that having failed by means of laws and tax treaties to collect the tax revenue they want, major industrialized countries are turning to moral justifications that are replete with inconsistencies, double standards and contradictions. OECD countries have moved from legal based criteria for taxes i.e. tax evasion, or not, to something called “aggressive tax avoidance”, which has no definition in law.
What is the proof of this? The proof is the shifting goal posts of requirements to avoid various black lists of being “uncooperative or non-compliant.” Since the late 1990’s these requirements keep shifting. We comply with the changes they demand, then a few years later those are no longer enough and there appears, out of the ether, yet another set of requirements.
This brings to mind the old question asked by football fans, “How did the legendary Pele score all those goals?” The answer, “They never moved the goal posts.”
So we now have G7 countries, particularly EU countries, talking about “aggressive tax avoidance.” How does one prosecute someone for aggressive tax avoidance, and perhaps more importantly, how does one mount a defense against that charge and who is the judge and jury?
In such cases the accuser, the prosecutor, the judge and the jury are all one in the same – namely a G7 or G20 country with high tax rates.
The truth is you can’t prosecute somebody for aggressive tax avoidance, so instead offshore financial centres are continuously harassed with black lists and other such threats.
While we are constitutionally British Overseas Territories, I suspect that, like my island Bermuda, most of your financial services business originates in countries other than the UK.
What this means is, in terms of the financial services we provide, we don’t trade in a UK centric world, but rather in a global world.
Therefore we have to be more focused on the rules and conventions established by supranational entities rather than those necessarily favoured by or solely in the interest of the UK. Organisations like the Financial Action Task Force (FATF), IMF, OECD, G7, G20 and EU. Along with powerful US specific structures like NAIC and that wonderful US export known as FATCA.
The fact is we exist in a world of double standards.
KYC & anti-money laundering standards for offshore jurisdictions have been ratcheted up continuously since the 1990’s by FATF, OECD and IMF, but these bureaucratic requirements have curiously not been similarly applied to many G7 countries. For example, it is far easier to open a bank account in NY, Delaware, Nevada, or London than in, say, Bermuda.
There are more billionaires resident in the UK per capita than anywhere else in the world. There are more french speaking people in London than virtually any city in France, except Paris. I suspect it is not the climate that is the attraction, but rather the tax climate.
Yet the UK continues to pressure Overseas Territories.
The UK is constructing a central register of beneficial owners of all companies registered in the UK to demonstrate leadership in the drive for greater transparency. This would enable the public to be able see who the human beings behind corporate entities actually are. And they are pressuring OT’s to do the same.
They were surprised and somewhat skeptical when I first advised them that Bermuda has had such register for about 70 years. I think now they have come to accept that this is true.
Long ago, in the 1940’s, Bermudian authorities took the view that the island didn’t want international criminals and other undesirables using Bermuda as a home. Therefore a screening mechanism was established which required all applicants to divulge the ultimate beneficial owners of the Bermuda entities involved, and that any changes of ownership going forward would require approval, thus ensuring that the register would always be up to date.
The legal authority for this whole bureaucracy was the Bermuda Exchange Control Act. Bermuda relaxed Exchange Control in 1992 whereby most transactions required no permissions or government intervention – except the requirement involving beneficial ownership.
Now, it meant that it would take little longer to set up in Bermuda than in some other places – but the whole structure was set up to protect Bermuda and Bermuda’s brand from unsavoury elements, many of them, of course, originating from the very same countries that now accuse us of outrageous things.
Corporate service providers were originally just local law firms and subsidiaries of local banks. This has evolved over time but the principle that corporate service providers had to have a Bermuda connection remains to this day. This has allowed us to monitor, if necessary, the types of business being conducted from Bermuda, to ensure they are consistent with the brand we want to project.
There are significant differences between the register that Bermuda has evolved and that which the UK is building.
Bermuda’s registry is available to international law enforcement (since the 1980’s) and our TIEA network partners. It is not available to Tom, Dick or Harry, as the UK’s will be. The UK will put their data on a website. Our policy is we will cooperate with competent authorities that have a legitimate interest in one of Bermuda’s corporate clients. We believe that privacy ought to still have a role in this modern world.
Bermuda’s registry is mandatory – by law. The UK’s, I understand will be voluntary. I suspect the crooks are not likely to volunteer information for their registry.
Bermuda’s registry penetrates the veil of trusts. We have always insisted on knowing the ultimate beneficiaries of trusts, – the human beings, using the good name of our island. The UK registry merely relies on the trustees who could be a bank, law firm or trust company. The UK will never know who are the people benefitting from assets held in trusts.
Most very wealthy families have their assets in trusts so the effectiveness of the UK registry appears to miss the intended target.
Many of us expected the pressure from the UK to disappear after the May general election. Well, it has reduced but not disappeared. The question is, what is the appropriate response, given the current climate.
My view is that international pressures on dots on the map will continue for the foreseeable future. The fundamental issue is the network of bilateral and multilateral tax treaties, based on the world as it was around the time of the Bretton Woods Conference in 1944, which formed the IMF, no longer works.
The overwhelming proportion of trade in those days was in physical goods. Today much trade consists of intellectual property, due to the IT revolution. Companies have great flexibility as to where these intangible assets are domiciled and such decisions could very well be made on tax efficiency grounds.
Many large, high tax countries are pushing back and using dots on the map as scapegoats, instead of updating the system of tax treaties that they created.
The BEPS project (Base Erosion Profit Shifting) is an attempt at doing just that, but it is unclear at this time what the outcome will be.
The tensions between offshore financial centres and major, high-tax, industrialised countries reminds me of an episode of British Empire history that I’m sure most of us in this room studied in school. Remember the story of the Spanish Armada? – Large, powerful, but ponderous Spanish galleons versus the small, swift and maneuverable English ships.
One well targeted broadside from any one of those galleons could totally obliterate any one of those small ships. But by being watchful and nimble those small ships not only survived but prevailed.
The parallel here is obvious. The only advantage offshore financial centres have is nimbleness – we can move much more quickly than the ponderous yet very powerful large countries. Combine that with good intelligence as to what the international trends are, offshore financial territories can use their nimbleness to their advantage in a hostile world.
For example, in the area of cooperation with international law enforcement, non-compliance is like allowing the great galleons to rain down a broadside on your little ship. So cooperation with international law enforcement is essential.
It has been suggested to me that Bermuda would escape all this tax haven criticism if it only instituted corporate income tax, but set such taxes at a very low rate. If we observe what is happening around the world we would have to conclude that this notion, while well meaning, is naive. The Republic of Ireland has been severely criticised, and labeled a tax haven, even though they have corporate income tax – a relatively low level income tax, but corporate income tax nevertheless.
Another weapon in the galleons’ arsenal is international “black listing” which started in the late 1990’s with the OECD and has been adopted by other countries and even the European Union.
“Black lists” can be exercises in naming and shaming or they can contain serious financial penalties. They are mostly based on two basic principles: a jurisdiction being declared “un-cooperative” or being declared a “harmful tax regime.”
“Uncooperative” jurisdictions are those that fail to adhere to OECD standards on exchange of information.
“Harmful” tax regimes are those which meet the definition in the EU’s Code of Conduct. According to EU officials “low or no” tax regimes are not “harmful” per se. For clarity, the EU Code of Conduct for its own Member States outlines what they say a harmful tax regime is:
The fact that the European Commission or certain high tax Member States or indeed any other country may not like low or no tax regimes, does not make such regimes illegitimate, far less illegal!
Another important element of today’s international tax environment is that, in addition to the ponderous galleons’ targeting of tiny ships, they are targeting each other. Most of the EU attention has been focused on large multinationals, primarily of US origin; IT companies in particular. Offshore financial centres can, and have, become incidental casualties in trans-Atlantic crossfire over taxation.
Bermuda’s approach to these external challenges, which are economically existential in nature, has been
One of the most important things that we find we constantly have to do, is to show the value proposition that Bermuda brings to the global economy.
The most prominent of this set of value propositions is Bermuda’s proven expertise and capacity to insure and protect customers against catastrophic events around the world, thereby enabling further economic growth.
After 911, Bermuda reinsurers wrote multi-billion claims cheques, right on time, while their onshore counterparts struggled. It was a defining moment for the Bermuda reinsurance industry.
Bermuda is the third largest insurance centre in the world, behind New York and London. It’s unlikely, but it’s true. Still, it’s amazing how many people in influential and powerful positions in the world’s capitals do not know this. And if they don’t, their opinions are shaped by stereotypes pushed by the media.
Once you can show that the activities that take place in your jurisdictions actually add value to the global economy you put yourselves in a position to change attitudes.
During last December’s JMC there was great pressure being applied by HM Government to make a commitment to adopt their version of a register of beneficial ownership of companies. To make the point of how this could affect OT’s, I adapted the old joke about the chicken and the pig.
The chicken and the pig commit to make breakfast. The chicken commits to provide eggs while the pig commits to provide bacon. Now, the commitment of the chicken and that of the pig are two completely different levels of commitment: one is convenient, the other is existential. I pointed out to the delegation that evening that unfortunately for us, in this analogy, the UK was the chicken and we were the pig.
So the challenges that face offshore financial centres have never been greater. But if we take our lessons from the Spanish Armada, cooperate with legitimate initiatives to improve transparency with the international community, and demonstrate the economic value proposition we provide the global economy, we can survive the current international tax onslaught and provide a viable means for our islands to earn the foreign exchange necessary for a good standard of living for our people.