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Being lead to think that the 'battle against offshore' is being won - By Kitty Miv, Editor

Kitty Miv, Editor
26 April, 2012

One of the most remarkable phenomena to be observed in the global tax jungle at present is the spectacle of specks of rock in the Atlantic cosying up to the economic megaliths of the Middle East and Asia Pacific. Bermuda, which won't like being described as a speck of rock, but that's all it is by comparison with China, was doing the mutual wining-dining dance this week in Shanghai and Beijing.

A few weeks ago, Jersey was presenting its way across the Gulf, while Guernsey was setting out its attractions to wealthy Indians.

There was a time when these jurisdictions (we have to use this slightly odd term to describe them, since they are not exactly countries, although they like to think of themselves as every bit equal to countries proper) were quite toffee-nosed, and would look very askance at anyone other than the most WASP-ish of clients. How times have changed! Rich WASPs, if not quite a threatened species, are no longer the dominant life-form that they were in the middle of the 20th century, but have been supplemented, if not supplanted, by rich Russians, sheikhs, Chinese and now, increasingly, Africans as that benighted continent begins to make its way at long last towards a more prosperous future.

So the jurisdictions have had to adapt quite rapidly to a changed customer universe, and at the same time they have had to respond to the attacks of the enemy, as seen at any rate from offshore, of the OECD and the FATF. Ironically, the multilaterals' attempts over the last 20 years to throttle the offshore jurisdictions have had the effect of forcing them to become transparent and respectable - a nice example of Darwinian evolution, so that now they offer highly competitive regimes across a wide spectrum of financial sectors which in many cases are equal or superior to those in the rich countries which tried to torment them, and are certainly more tax-efficient. The dominance in new stock exchange listings of the UK's offshore dependencies (the Isle of Man and the Channel Islands) is a perfect case in point.

Increased transparency has of course made offshore's plain vanilla traditional offering of secret bank accounts largely a thing of the past, so that the jurisdictions (more evolution) have had to specialize in order to compete for new types of business. The BVI has particularly attracted wealthy Chinese; Guernsey has captive insurance companies; the Cayman Islands have hedge funds; and Mauritius has India, although perhaps not for much longer.

Despite all the difficulties, and against most predictions, 'offshore' - let's just call it 'low-tax' - has continued to thrive. Figures for total low-tax assets don't exist, but most of the main jurisdictions have been clocking up high single-figure annual increases in assets for a long time now, and it's difficult to see why the process shouldn't continue. Back of the envelope calculations suggest that low-tax jurisdictions house around 20% of world assets, and that figure has probably doubled in the last yen years.

Secular factors which will support continued flight towards the low-tax sector include the crushing burden of debt taken on so carelessly by many of the larger, richer countries in the last few decades, which will see sustained upwards pressure on tax rates, the tendency of developing countries to increase their overall tax takes at rates which far exceed economic growth (China is an obvious, but by far from the only example, with recent years seeing the tax take increasing at double the rate of its already stunning GDP growth), and the growing sophistication of the low-tax industry itself.

The rhetoric of tax authorities, the EU, finance ministers and 'the enemy' would lead you to think that the 'battle against offshore' is being won, but the facts are otherwise. There is only one way in which the high-taxing countries can counter the 'threat' of offshore, and that is by having lower taxes, and the dreams of Messrs Semeta, Hollande and Obama are of course in precisely the opposite direction. Let them dream on; we know better.





About the Author

Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net


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