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Hobknobbing with Singapore finance officials - By Kitty Miv, Editor

Kitty Miv, Editor
17 November, 2011

How extraordinary that some tiny specks of land dotted around the world have come to play such a prominent role in international financial affairs. This week, Guernsey (all 65 sq km of it, with a population of 65,000) was instrumental in a US$6bn private equity acquisition, whilst on the other side of the world, island bigwigs were hobknobbing with Singapore finance officials in a bid for Guernsey companies to be approved for listing on Singapore's stock exchange (they're already approved for Hong Kong). And Guernsey has the highest credit rating that's possible for a territory without its own currency.

This isn't intended to hold a candle for Guernsey in particular, which just happened to have a week in the limelight: I could tell a similar story for its fellow speck, Jersey, for the Isle of Man, for the Cayman Islands, and for many other 'offshore' jurisdictions, above all perhaps for Hong Kong. Every one of them has stellar figures for locally-managed assets, levies very low taxes, and has massive cash balances instead of debt.

In the last ten years, these islands of financial success (some of them aren't islands) have mostly had economic growth rates on a level with China, while their financial assets have grown even more quickly. And this has been achieved in the teeth of enmity, to use a polite word for something much nastier, on the part of the great and good of the world financial system, that's to say the G7, G8, G20 etc etc and so forth, the EU, the OECD, the UN, the FATF and every other 'rich' country organization worthy of the name.

Except they aren't rich, are they? They are deeply in debt, have growth rates that are close to zero, and stagger from one crisis to another. Some of them at least are so broke that it's hard to see how they will ever be solvent again in the foreseeable future.

Yet these limping major economies seem to be able to dominate the moral agenda, and succeed mostly in portraying the highly successful low-tax jurisdictions in a very negative light.

At a time when banks, and financial institutions in general, have been demonized, and are popularly viewed as being the cause of the problem (the debt crisis), it is all too easy to classify the offshore jurisdictions as a bunch of Devil's familiars, and wish to consign them to the flames along with their masters.

The reality of course is that it was the spendthrift behaviour of governments which caused the debt crisis, and it is governments and their spin doctors which are in the forefront of the anti-bank, anti-offshore campaign. They hope, I suppose, to distract attention from their own culpability; or perhaps they even believe their own economies with the truth. I hope they don't; I hope for all our sakes that they are not that stupid.

Even so, there is a real argument to be had, although it is not the one you will read about in the media. And it has less and less to do with HINWIs and the management of their wealth. If it was once true that rich individuals could live in the Hamptons or Chelsea or the Bois de Boulogne and escape taxation using trusts or foundations, that is becoming increasingly irrelevant, at least for citizens of 'Western' nations. The battle now has more to do with corporations v government, and the argument is about whether corporations should be taxed at all.

As Mrs Thatcher said: "Companies don't pay tax; people do". Governments don't go along with that, naturally enough, but the reality is that the international nature of modern business, and the ability of most companies to choose where to invest, have forced governments to compete for their favours, leading to a downward spiral in corporation tax rates, and an increasing trend towards 'territoriality', ie the taxation of profits where they are made and not in another country.

Companies would prefer to pay no tax at all, naturally, so whenever they can they make their profits in a low- or no-tax jurisdiction. No prizes for guessing that this is why the private equity transaction this week took place in Guernsey: the special purpose vehicles and the securitized issues that would have been involved are highly tax-efficient.

The investment funds that bought into the deal are themselves based in Luxembourg, Guernsey or the Cayman Islands (I am guessing) because their own investors won't invest into a tax-inefficient fund. And who are their own investors? Why, they are your and my pension funds, for example. We may have to pay tax on any income we currently take from our funds, but more probably we don't take any income from them, and we have every intention of living on their tax-free capital in Dubai by the time we come to retire.

The logical end result of competition between corporate tax regimes is of course the abolition of corporate taxation, which would create a truly level playing field for corporate investment, and would incidentally be life-threatening for 'offshore'.

So the advice to give to treasury ministers in high-tax countries should be: 'If you can't beat 'em, join 'em'. And abolish corporation tax.

But don't worry, Guernsey, they aren't listening; it will be 30 years before the inevitable happens, and a lot of water will have passed through the English Channel by then.

Ciao, Kitty


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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