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"I don't know," he said, "but I hope they're nowhere near the Isle of Man." - By Kitty Miv, Editor

Kitty Miv, Editor
22 March, 2012

Offshore is finished, right? The OECD's new sets of rules will prevent abusive transfer pricing, right? Senator Levin is about to get his heart's desire with a raft of anti-offshore legislation, right? All international corporations are structurally transparent, right?

Wrong, wrong, wrong and wrong. Offshore is booming, but whereas once it was built on the need of rich people to secure their wealth out of sight of tax inspectors and ex-wives (there is still some of that, by all means), the new offshore is a vital and entirely respectable part of the structure of international business.

Don't believe me? Here is the BVI's week: it is a key player in the merger of Sberbank and Troika Dialog, which have ambitions to grow in investment banking, using the BVI as a base for holding companies; it is involved in structures recently formed to assist M&A activity by listed companies from the UK, Australia, Canada and the USA; and Ernst & Young is re-opening its office in the BVI after a few years due to demand for its regulatory and financial facilities, partly because The Financial Stability Board (FSB) recently announced that the BVI was a jurisdiction that demonstrated 'sufficiently strong adherence' to new global regulatory and supervisory standards.

Where are these miraculous British Virgin Islands, for heaven's sake? Winston Churchill had an answer for that question when it was posed to him in the House of Commons: "I don't know," he said, "but I hope they're nowhere near the Isle of Man."

Where they are is at the centre of the tax-optimizing behaviour of companies, which takes every possible account of the fiscal situation in the countries where they do business. There is a kind of hierarchy of needs here, thank you Professor Maslow: politicians want first of all to be re-elected, and as a proxy for that they want to create employment. Somewhere far down the list comes the need to raise tax revenue, because taxing people is 180 degrees out of phase with the first two imperatives. And as for getting into debt, they do it like they have hot dinners and mistresses; it's only in rare circumstances like today's that they are brought face to face with the need to control spending and increase taxes.

It's clear therefore that countries will compete strongly to attract corporate investment, since it ticks all the politicians' boxes; the only problem is that the companies won't come unless they are given tax privileges, or, at the minimum, allowed to optimize their tax structures. I will give you jobs, yes, but you must allow me to make my profits in the BVI. Most countries accept this unspoken, or at least unpublicized bargain, although there are exceptions, such as France, which has a very rigid tax-raising culture, and charges increased withholding tax rates on distributions to tax havens ('paradis fiscaux' in their beautiful phrase).

If you were to talk to the OECD, they would tell you confidently that they are going to get on top of this problem, but they are dreaming. It's just not going to happen that there will be a uniform international taxation structure for companies. Or rather, the only uniformity will come about through a standard zero rate of corporation tax. If I was running an offshore paradise like the BVI, that's about the only thing that would give me nightmares. From that perspective, the current global fiscal whirlpool is good news for offshore: the more horrid becomes the debt situation of big countries, the less chance there is that they will continue with the secular process of reducing corporate tax. 2008-2012 has probably won offshore 10 or even 20 years of continued life; instead of corporation tax reaching zero by 2040, the process is now going to take until 2060.

It will happen, though, even if I will be long gone to the paradis spirituel.

Ciao

Kitty

 


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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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