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Death of the IOFC? Au Contraire!

By Lowtax Editorial
09 October, 2014


The leading international offshore financial centres (IOFCs) might have fallen in the latest Global Financial Centres Index issued biannually by Z/Yen, but this finding seems to contradict what is happening on the ground with several IOFCs seemingly flourishing.

Based on recent news stories published on Lowtax.net and on partner website Tax-News.com, it is fairly evident that offshore jurisdictions, while under intense international pressure to adapt to new global tax and transparency standards, are still reporting strong interest from global investors and are continuing to innovate and grow.

The Isle of Man for example announced in October 2014 that its economy has grown for the 30th consecutive year, reaching an output of GBP4bn (USD6.44bn) for the first time.

New figures for the year 2012/13 show that the economy grew by 3.2 percent of gross domestic product (GDP) in real terms, up from 2.1 percent in the previous fiscal year.

The growth was strongest in the e-gaming sector (up 49.9 percent) and the information technology sector (up 28.7 percent). The Isle of Man's GDP-per-head increased and continues to be more than double the UK's (at 217 percent, up from 206 percent).

The Government's latest quarterly economic report also shows that the Manx economy is continuing to grow in 2014.

Meanwhile, across the Atlantic Ocean, the Caribbean territory of St Kitts and Nevis is on track to outpace the other territories of the Eastern Caribbean Currency Union after undertaking major fiscal reforms recently.

Addressing the 17th Annual National Consultation on the Economy, the Governor of the Eastern Caribbean Central Bank (ECCB), Dwight Venner, said that the performance of the economy of St. Kitts and Nevis since 2013 has been very encouraging and has been the bright spot in the ECCU.

Venner noted that the territory has successfully completed its eight-point program, which included a focus on debt restructuring and fiscal consolidation.

The success of its fiscal consolidation program can be attributed to the implementation of a value-added tax and strong receipts from its citizenship by investment program, the ECCB Governor explained.

Hong Kong was once again confirmed as Asia’s number one and the world’s number three financial centre after New York and London, and is continuing to capitalise on its unique position as the platform for the international trading of the renminbi (RMB), as Beijing continues to liberalise China’s currency.

On October 2, Hong Kong’s Permanent Secretary for Financial Services and the Treasury Au King-chi said in Rio de Janeiro that Hong Kong is to welcome increased business from Brazilian corporations and financial institutions under its offshore RMB platform.

At a roadshow luncheon on "Hong Kong as a global offshore RMB business hub and the opportunities for Latin America," Au emphasized the role of Hong Kong in RMB internationalization, and how the increasing use of RMB in international trade and finance would offer new opportunities for Brazilian corporations and financial institutions.

Hong Kong’s role as a leading light in international insurance was also confirmed by figures released at the end of September 2014 by the Hong Kong's Commissioner of Insurance, which showed that total gross premiums of the Hong Kong insurance industry increased by a very creditable 13.7 percent to HKD299.5bn (USD38.6bn) in 2013.

The statistics are seen as highly positive given Hong Kong's recent efforts to support the insurance business, which is considered to be one of the major pillars of its financial services sector, as it has recorded annual double-digit growth for more than a decade in terms of both insurance density and penetration. Hong Kong’s insurance centre now ranks second in Asia.

It is not just large multinational companies that Hong Kong hopes to attract either, with the Government keen to nurture entrepreneurs and small businesses. This was demonstrated in October 2014 when Invest Hong Kong (InvestHK), the Department established by the Government to attract foreign direct investment and support overseas and Mainland businesses set up or expand in Hong Kong, announced the launch of a dedicated team to assist start-ups.

The Director-General of Investment Promotion, Simon Galpin, said: "The setting up of the new start-up team marks a milestone for InvestHK in its outreach to founders and the local and overseas start-up communities. I am hoping that the start-up team will further embed Hong Kong's position as a leading destination and hub for start-ups and attract entrepreneurs and founders to set up their businesses in the city."

Fund management and administration has become an increasingly lucrative business for offshore financial centres in recent years, and Jersey is one jurisdiction which has become particularly good at the latter, having been named Best Fund Administration Centre by investment management publication Investment Week for the second consecutive year in September 2014.

"The market has reacted well to Jersey's approach to international regulation, whilst fund creation volumes and net asset values are growing,” said Geoff Cook, the Chief Executive Officer of Jersey Finance Limited. “This, backed up by this latest accolade, which was awarded at a ceremony attended by London's leading investment professionals including many of the UK's major fund service providers, is extremely encouraging for our funds industry."

One the advantages that offshore financial centres seem to have over conventional finance centre is their readiness to adapt to global trends in tax planning and wealth management. For instance, neighbouring Guernsey has recently launched an aircraft registry, which has got off to an encouraging start with the registration of its first wide-body aircraft, an Airbus A330.

The benefits of the island's register include a neutral nationality mark (2-xxxx), no capital gains tax, capital transfer tax or withholding taxes, no insurance premium tax, and access to the island's network of Double Taxation Agreements.

The most recently available figures show that 22 aircraft had been registered by the end of August 2014.

Another Guernsey innovation is the jurisdiction’s image rights register, which was launched in 2012 and was the first of its kind in the world. This public registry offers the opportunity to register image rights affording greater legal protection, ease of transfer, and possible taxation benefits.

By June 2014, the register had received over 30 applications from charities, sportspersons and celebrities, among others, and in October, the first financial services firm was registered.

Ravenscroft, a Guernsey-based stockbroking and investment management company, registered its image to protect the company's brand name and logo. The company's Chief Executive, Jon Ravenscroft, said: "Guernsey is a world leader in image rights and the island's Intellectual Property Office has attracted interest from around the globe."

Guernsey’s willingness to listen to investor needs and concerns was once again demonstrated in September 2014 when its Commerce and Employment Department responded to feedback received during a consultation on changes to the regime governing the island's financial services regulator, the Financial Services Commission.

Minister for Commerce and Employment, Kevin Stewart, said: "The proposals made for Guernsey's 21st century regulatory framework will assist in maintaining and enhancing Guernsey as a premier International Finance Centre with a robust, fair, and independent regulatory regime."

When it comes to giving investors what they want i.e. low taxation, and tax and regulatory certainty, it is probably Dubai which wins this competition hands down at present, with its growing array of free zones which offer companies guaranteed exemption from income tax and minimal interference from the authorities. It is a model which has borne fruit, with most free zones announcing impressive growth rates year after year.

In September, it was the turn of the Dubai International Financial Centre (DIFC), a free zone which seeks to act as a gateway to investment between international markets, to announce "solid growth" during the first half of 2014.

During the period the number of active registered companies operating within the centre reached 1,113, representing a seven percent increase compared with December 2013 levels, the DIFC said.

Shortly before the DIFC’s announcement, the Jebel Ali Free Zone revealed that 363 companies chose to set up in the zone during the first six months of 2014, an increase of 21 percent year-on-year.

The free zone has been undertaking a number of promotional visits to key economies to promote the zone. It recently conducted a five-day roadshow in China, where it said it had garnered interest from an "overwhelming" number of firms.


Information Exchange

As mentioned earlier in this feature, ever greater demands from the OECD, the G20, the EU and other groups of rich developed countries for tax transparency has seen the proliferation of international new information exchange mechanisms like FATCA, and the expansion of existing ones, notably the OECD Convention on Mutual Administrative Assistance in Tax Matters.

In July this year, the OECD released a Common Reporting Standard for Automatic Exchange of Financial Account Information in Tax Matters, calling on governments to obtain detailed account information from their financial institutions and exchange that information automatically with the jurisdictions of residence of account holders on an annual basis. Several offshore jurisdictions have pledged to cooperate with this initiative.

The Seychelles is one of the latest countries to commit to the automatic exchange of tax information as part of a scheme piloted by the Group of Five (G5) nations aimed at deterring and cracking down on tax evasion. 

Switzerland has been under increasing pressure from the EU and the United States in particular to share more information with governments about individuals with Swiss bank accounts and steadily, it is falling into line with the new international standards.

On October 8, 2014, the Swiss Federal Council adopted definitive mandates for negotiations with other countries to introduce the new global standard for the automatic exchange of tax information in tax treaties. Additionally, negotiations will be launched with the EU on the automatic exchange of information while a Model One FATCA agreement will also be negotiated with the US. The agreements will allow data to be exchanged automatically between the competent authorities on a reciprocal basis.

On September 15, 2014, the Hong Kong Government indicated to the Global Forum on Transparency and Exchange of Information for Tax Purposes its support for the new global standard, with Secretary for Financial Services and the Treasury, Professor K C Chan, saying that it is “crucial for Hong Kong to adopt the latest global standard on tax transparency in order to maintain our international reputation and competitiveness as an international financial and business centre."

In the previous month, Hong Kong signed tax information exchange agreements (TIEAs) with six Nordic jurisdictions – namely, Denmark, the Faroes, Greenland, Iceland, Norway and Sweden. Welcoming the agreements, Professor Chan said that the signing of the TIEAs demonstrated the city's continued commitment to fulfil its international obligations on promoting tax transparency, along with its efforts to expand its network of comprehensive double taxation agreements (CDTAs) with its trading and investment partners.

Mauritius also confirmed in September 2014 that it will implement the Common Reporting Standard. The announcement came after Mauritius became the first African country to implement a framework to facilitate compliance with FATCA.

Andorra was another jurisdiction that recently signed the OECD’s declaration on automatic exchange of information in tax matters. By signing the Declaration, Andorra is obliged to implement the new single global standard on automatic exchange of information.


Conclusion

It might be stretching the truth somewhat to suggest that the world of offshore is in rude health at the moment as certain sections of it are struggling to recover from the financial crisis, having run up budget deficits and debt. But the benefits offered by low-tax financial centres clearly remain in demand, and those jurisdictions flexible enough to move quickly into new areas of tax planning and investment activity, especially in the area of e-business and information technology, are reaping the dividends.

It remains to be seen how the latest drive for new global corporate tax rules and automatic exchange of information affects IOFCs. But 15 years of offshore bashing by the OECD and other groups of countries has not resulted yet in the death of IOFCs. On the contrary, some jurisdictions appear to have emerged stronger. 




 

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