Global Tax Trends And Impact On Offshore Jurisdictions
Abacus Seychelles Limited
05 May, 2017
The world is finding its equilibrium – The beginning of a new era of lower taxation, deregulation and sensible compliance – global tax trends and the impact on small island nations.
Since the financial crisis in 2008, the last decade has seen left winger Governments increasing expenditure, increasing taxes, increasing regulation, increasing compliance, increasing reporting. In an effort to protect and avert another crisis we moved to over regulation.
The result – we find ourselves in a bigger crisis; a long recession which we just can't seem to get out off. A few blips of upward activity which give hope but no sustained growth leading to unemployment, slumpish growth, low economic activity and lower tax collection.
Has increased regulation, compliance added value? Improved our GDP? Provided jobs? Improved economic activity? Improved the quality of businesses to consumers or provided added protection to consumers? Has it prevented money laundering, terrorist financing?
Quite the opposite – huge regulatory fines on banks have scared the banks and made business impossible! Anyone with money is a criminal until proven otherwise.
Additional reporting like FATCA has increased the burden of compliance – whether more revenue was collected by the IRS on account of FATCA is unknown but the US deficit continued to balloon after its introduction.
The other G-20 countries followed suit with the common reporting standards (CRS), copious amount of regulations and suffer the same fate – a recession they cannot seem to rise from.
Increased regulation has just made doing business a burden and many businesses find the cost of compliance more than the income they earn resulting in a closure of the business – like correspondent banking. The closure of this line for certain countries lacking volume or on a risk basis or both has had dire consequences on small island nations like ours and even bigger countries like Mexico and Philippines.
The new proposed US tax policy may be the start of the reversal of the trend of increased reporting and taxes which has obviously failed. It could be the world finding the right equilibrium. Some key highlights of the proposed policy.
1. Makes tax territorial – taxes Americans only on income earned in US. This moves away from the global taxes on all US persons policy.
2. Reduces corporate taxes from 35 per cent to 15 per cent
3. Lowers the income tax rate into 4 bands starting at 0
4. Simplifies the tax code and reduces the compliance
5. Encourages corporates to remit profits back to the US and reinvest.
On regulations, as per a Trump executive order for every new regulation passed 2 previous regulations have to be scrapped!
This revolutionary tax proposal eases the tax burden and compliance on the low income earners. It seems to assure higher collections from the rich by plugging loopholes and encouraging them to pay by lowering the rates. It therefore states it is tax neutral.
What happens to FATCA? With income only on assets earned in US is it relevant? It had become impossible for an American outside of US to open a bank account, do business; no one wanted to do business with them due to increase burden on laws to comply with. This may now ease their burden.
With low corporate taxes, financing, skilled manpower, infrastructure, an environment conducive for entrepreneurship this move would make the US one of the most attractive countries to do business. Corporates will move their headquarters to the US and expand their operations there.
How does this impact the rest of the world? What happens to CRS and BEPS?
It is likely that to compete with the US the other G-20 nations will have to follow suit – reduce taxes, simplify their tax code. We need to keep an eye on CRS and BEPS and how they develop with international trends in tax policy.
UK has been steadily reducing its corporate taxes from 28 per cent to 17 per cent.
Tax is also the hot topic of the ongoing French election where the leading candidate Mr Macron has proposed to reduce the corporate tax rate from 33.3 per cent to 25 per cent and slash government spending.
Ireland has a corporate tax rate of 12.5 per cent for trading income and 25 per cent for non-trading.
The Nordic states like Denmark, Norway, Sweden corporate taxes range from 22 per cent to 24 per cent.
Switzerland tax rate is 8.5 per cent. Eastern European nations like the Czech Republic have been steadily decreasing their tax rates from an all time high of 45 per cent to 19 per cent.
In Asia, Singapore has surprisingly increased their tax rate to 17 per cent from 15 per cent. However the rate is still within the current international average of 15 per cent to 25 per cent as opposed to the former average of 35 per cent.
Hong Kong maintains its rate at 16.5 per cent.
Mauritius has a flat 15 per cent rate which since its introduction has resulted in a steady increase in taxation and collection. Mauritius is an example where lower rates have increased collections and compliance with tax laws.
In the long term, this is the only real solution for the erosion of capital, shifting of profits, reporting and compliance.
Blindly cut, copy and paste copious regulations in the name of "compliance" with no value add has dragged businesses through a quagmire of unnecessary paperwork.
Compliance simply means complying with the laws. The laws need to be simple enough to comply with whilst achieving the goals set out. Somewhere along the way we remain so focused on compliance we forgot the business or the goal we set out with. This has had its impact on the global economy and now needs to be corrected.
The big question now – what is the future of offshore jurisdictions particularly small island nations who prospered on low taxes?
It is likely that these jurisdictions will have to reinvent themselves.
If these proposals go through, US will become the best tax haven for businesses – taxes plus all the added benefits.
These jurisdictions could become financial centers to promote cross border transactions, financing, transshipment, trade, headquarter companies. Singapore, HK, Mauritius, UAE who have simplified tax codes, attractive tax rates, good multilateral and bilateral trade agreements, skilled manpower are good examples. They are and will continue to grow as hubs for investments in their regions.
Other jurisdictions could specialize in specific licenses – Bermuda with insurance, Cyprus in non banking, Cayman with funds.
In summary, the world as we know it is changing – Government overspending, heavy taxes, increased regulation, increased useless compliance is out.
It is time to focus on what matters to answer the question – are we adding value?
Rather than stagnate in the policies of the past, island nations known as "tax havens" must relook at their models, adapt fast and in the right direction.
Abacus (Seychelles) Limited
« Go Back to Articles