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Offshore & Midshore Financial Centers

By Lowtax Editorial
24 March, 2015


After 15 years of black lists, grey lists, white lists, rebukes, condemnations, threats, and interference from the "high-tax" world under the banner of various plurilateral organizations like the OECD, the G8, the G20 and the EU, offshore financial centers are still refusing to roll over and die. Quite the opposite in fact: casting an eye over the recent Lowtax news archive demonstrates that a number of offshore jurisdictions are in remarkably good shape.

It was with fortuitous timing that, just as this feature was being commissioned, Ed Miliband, leader of Britain's Labour Party, became the latest political figure to declare a crusade against the "secretive" world of offshore.

Under Miliband's plans, in the event that Labour wins the May 2015 general election, the UK's Overseas Territories (OTs) and Crown Dependencies (CDs) would be given six months to publish publicly accessible central registers of beneficial ownership.

The announcement prompted a predictably prickly response from the authorities in said OTs and CDs, as several pointed out that they already store such information in one format or another (which, by and large, is more than can be said for Britain itself), and would be happy to consider making it public when the UK and other jurisdictions pledge to do the same.

Reacting to Miliband's intervention, the Bermudan Government said that it was "surprised and disappointed" that the island has been included in Labour's list. In a statement, the Government pointed out that Bermuda has had a central registry since the 1940s.

Jersey said that it has captured beneficial ownership information on a corporate registry since 1999 and this information is available to law enforcement agencies. "Jersey adheres to current international standards and is already a global leader in capturing and exchanging such information through agreements between regulators and fiscal authorities," a statement published by Jersey Finance, the island's investment promotion agency, explained.

Although he is merely the Leader of the Opposition in the UK, Miliband's proposals can't be dismissed entirely out of hand. Despite his disastrous poll ratings, some political commentators expect that he will nevertheless emerge victorious from what is expected to be one of the most tightly contested general elections in history. And let's not forget that several of the world's largest offshore financial centers are British OTs and CDs, and therefore the UK Government still exercises considerable influence over them; we have seen this happen in the recent past with the signing of FATCA-style information sharing agreements between offshore territories and the UK.

At the same time however, as the introductory passage to this feature suggests, this must, to a certain extent, feel like water off a duck's back for the offshore centers targeted by Miliband's proposal and others of the same ilk. Not that efforts to purge the world of tax havens haven't had an effect over the years. Many have been forced to abolish ring-fenced "offshore" legal and tax regimes and treat all companies the same regardless of whether they conduct business in the local economy or not; usually, this problem was overcome by applying low rates of tax across the board.

Furthermore, the worst financial crisis since the 1930s undeniably had an impact on offshore financial centers from 2008/9 as falling levels of global investment depressed company incorporation rates and reduced income from fees and other charges. Consequently, a number of low- and no-tax jurisdictions have had little choice but to introduce new taxes and charges in an attempt to balance the books.

And the future is going to be nothing if not challenging for the world of offshore, as Orlando Smith, Premier and Minister of Finance of the British Virgin Islands, observed in a speech in Hong Kong last year. National laws like the United States FATCA legislation have provided a catalyst for automatic exchange of information on a global scale, and offshore territories are being pressured to fall into line with ever more stringent transparency standards as never before (unlike the developed countries responsible for the new initiatives, where levels of transparency leave something to be desired in many cases). And nobody is quite sure how the offshore world will fare as a result of the OECD's base erosion and profit shifting project, which is attempting to make some profound changes to the international tax landscape.

At the same time though, Smith argued that these challenges provided opportunities for offshore and "midshore" financial centers to adapt and break new ground in the area of international finance. Not only this, places like the BVI can capitalize on growth in the developing world by switching their focus from traditional markets in the West to emerging ones in the East.

The BVI has in fact benefited tremendously from the liberalization of China's economy. As Smith pointed out, "During the global financial crisis, China continued to experience growth, and chose the BVI as a facilitator for this growth. Today, the exponential growth of the middle class in China undoubtedly creates the greatest opportunities for us to work together for mutual benefit. Demand from China and other emerging markets will ensure that offshore and midshore centers have a sustainable future in the global economy."

But to a large extent, the more forward-thinking offshore centers have already realized this, having gravitated away from their traditional 'bread and butter' business of fiduciary services for wealthy Europeans and Americans – a market much diminished by successive tightening of anti-avoidance legislation – to corporate finance and wealth management in the emerging economies. Promotional campaigns have targeted regions with a rapidly expanding class of wealthy individuals, notably the Near East and the Far East, and the strategy appears to be paying healthy dividends in many cases.

Indeed, switching our focus from the past and future to the present, there is plenty of evidence to suggest that offshore financial centers have bounced back from the financial crisis and, having adapted their legislative frameworks to new realities, are thriving.

A report published recently by offshore service provider Appleby shows strong company registration growth in the BVI, the Cayman Islands, Mauritius, and Jersey in the first half of 2014.

Also, figures published by the authorities in the jurisdictions themselves paint a picture of offshore growth rather than offshore decline.

For instance, in June 2014, Bermuda reported strong growth in both offshore and local company registrations. More recently, the Bermuda Monetary Authority reported healthy growth in 2014 for its insurance industry, with licenses granted to 89 new insurance entities

Recent data for Jersey also points to a finance industry performing well, led by the funds sector, where the value of funds business in Jersey reached the highest level in five years.

According to new statistics from Jersey Finance, the number of Jersey-incorporated companies listed on stock exchanges globally increased by 13 percent during 2014 to 110, and these companies' total market capitalization rose 62 percent to GBP269bn (USD408.68bn).

Of these 110 listed companies, 57 are quoted on the London Stock Exchange's (LSE's) Alternative Investment Market (AIM), with Jersey being home to the largest number of AIM-listed companies outside the UK. An indication that the far eastern promotional campaigns are paying off is the fact that just under one-fifth of Chinese companies listed on AIM are now incorporated in Jersey.

However, neighboring Guernsey has more non-UK entities companies listed on the LSE than any other jurisdiction globally, according to new figures from the market authority.

LSE data shows that, at the end of December 2014, there were 122 Guernsey-incorporated entities listed on the three LSE markets.

Indeed, Guernsey-incorporated Market Tech Holdings Limited was the largest listing of 2014 on AIM.

These figures lead Dominic Wheatley, the Chief Executive of Guernsey Finance, to believe that Guernsey is now "the jurisdiction of choice for listings on the LSE."

Guernsey's insurance sector also fared well in 2014, with 85 licenses granted to international insurers. And in January 2015, Guernsey was named European territory of the year for captive insurance business for the third year running at the UK Captive Services Awards. "These figures show that last year was very successful for Guernsey as an international insurance center," Wheatley observed.

Fund administration is also big business for Guernsey, as demonstrated by Brazil's Providence Global acquisition of Guernsey fund administrator Fund Corporation in December 2014. "Guernsey is a proven environment in which to successfully deliver investment administration services, and we see it becoming a pivotal hub for our future operations," commented Providence Co-Founder Antonio Buzaneli.

In fact, the accolades for Guernsey keep on coming: it was reported recently that mergers and acquisitions activity bucked the overall offshore trend in the third quarter of 2014, with substantial increases in both deal value and volume compared with the second quarter; and the value of deposits held by banks in Guernsey also grew, by GBP3.5bn (USD5.5bn), during the third quarter of 2014, with Guernsey banks holding GBP80.9bn at the end of September.

Not to be outdone, fellow CD the Isle of Man is confident about strong growth prospects for 2015, with the island's niche industries said to have performed strongly last year, especially e-business, which is the island's fastest-growing sector. The Isle of Man's Minister for Economic Development, Laurence Skelly, said: "We have had further good news in this sector recently with Microgaming receiving planning approval for expanding its headquarters in Douglas."

Indeed, further enhancing its claim to be the leading low-tax base for digital industries, the Isle of Man has become one of the first jurisdictions to consider regulation of digital currencies such as Bitcoin. Minister for Economic Development, John Shimmin claimed that this development was further proof that the Isle of Man "is synonymous not only with innovation, but for a regulatory environment that is both effective and pragmatic."

The Manx authorities' efforts to foster the creation of a niche market centered on digital currencies seems already to be paying off, after the Isle of Man enabled the formation of the first company with Bitcoin capital, Garigus Limited, in October 2014.

So, given that a good percentage of the investment and personal wealth flowing into the traditional offshore financial centers now originates in the East, it is not that surprising to learn that the Asian "midshore" centers that Smith referred to, most notably Hong Kong and Singapore, are also reporting healthy levels of business, in spite of wider political (in the case of Hong Kong) and economic (in the case of both) concerns.

The term "midshore" is an apt one, because Hong Kong for example doesn't have "offshore" legislation, but it has certain characteristics of an "offshore" system i.e. territorial taxation, low taxes and reasonably high levels of legally-guarded privacy. And it is perhaps precisely because Hong Kong isn't readily labelled as an offshore financial center – in other words, a tax haven – that it has an automatic reputational advantage over the many sub-tropical islands that are so easily weighed down by their offshore baggage. However, ultimately, the business of name tags probably makes little difference. And that is because Hong Kong and Singapore have in the last two decades found themselves at the epicenter of an explosion of wealth and investment in the Asia-Pacific region, led by China's rapid (until recently) economic growth.

Over the past couple of years, the world has grown increasingly concerned at China's cooling economy. But the slowdown doesn't seem to be deterring local and international investors, as company registration statistics show.

According to the Hong Kong Companies Registry, the number of local companies registered under the Hong Kong Companies Ordinance surpassed 1.2m for the first time in 2014, after year-on-year growth of 9.4 percent.

Meanwhile, the total number of registered non-Hong Kong companies reached more than 9,600 by the end of 2014. In fact, Invest Hong Kong, the territory's inward investment agency, assisted a record number of businesses to establish operations in 2014.

Said InvestHK's Director-General of Investment Promotion, Simon Galpin: "Despite ongoing challenges in the global economy, Hong Kong continues to attract overseas and Mainland investors because of its enduring advantages and emerging business opportunities."

It is also worth noting that Hong Kong's stock market had a stellar year in 2014, and Hong Kong Exchanges and Clearing Limited (HKEx) confirmed last December that its securities and derivatives markets set several new annual records.

So can we expect the good times to last for the world of offshore? Well, without the aid of a crystal ball, it is impossible to say with any certainty. But the fact that offshore jurisdictions have survived the OECD's recent onslaught, and in many cases emerged from it stronger, bodes well for the future.




 

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