Still demonised by Western governments for aiding tax evasion, major offshore centres have in recent years ushered in substantive moves to bolster standards and transparency. Will it be enough?
Britain’s prime minister David Cameron wrote to the leaders of several UK Crown dependencies and British overseas territories in May, confirming his support of their low-tax status, but insisting they establish new rules that complement international initiatives against tax avoidance.
A few weeks later, Jersey and Guernsey’s chief ministers replied individually to Cameron, reaffirming their commitment to tackling tax evasion and their intention to sign the multilateral Convention on Mutual Administrative Assistance in Tax Matters, an initiative spearheaded by the Organisation for Economic Co-operation and Development (OECD).
Then, at the G8 meeting in Northern Ireland in June, the eight members jointly declared that tax information would be shared, and the rules that allow companies to transfer profits across borders would change, including the publication of national action plans that detail the true owners of shell companies.
Not that agreeing to share tax information is something the offshore world typically shies away from any more; all of the major jurisdictions have signed a substantial number of tax information exchange agreements (TIEAs). It is more that the efforts of offshore jurisdictions to be at the forefront of the exchange of tax information are finally being recognised, according to Harneys’ London-based global managing partner, Peter Tarn.
Ultimately the onslaught against tax evasion in the media, and from governments, provides the offshore world with a platform to show how transparent and regulated it actually is. Being in the spotlight also allows the offshore territories to demonstrate that their business models are robust enough to withstand additional regulation and compliance requirements.
Fair exchange
Jersey, for example, is fully signed up to the G8 agenda on beneficial ownership; so much so that the OECD wrote to Jersey’s chief minister Ian Gorst in July congratulating the island on the measures it had taken in support of international tax transparency.
Jersey also attaches great importance to the principle of a level playing field in tax information exchange globally. Efforts to secure this, such as the G8’s recent declaration, are welcomed: in Jersey’s June letter to Cameron, Gorst even said that Jersey was willing to give technical advice and assistance to the club of industrialised nations, the OECD and the EU, and offered to help develop global standards.
The fact that an offshore territory like Jersey is in a position to offer assistance to other countries is testament to its success story as a transparent, highly regulated jurisdiction. Moreover, Bestwick believes that the standard of beneficial ownership information for tax purposes to which Jersey already works is yet to be matched fully by most EU, G8, G20 and OECD countries.
The OECD Convention was another development in a long line of ongoing initiatives. In December 2012, the Isle of Man (IOM)’s chief minister, Allan Bell, announced that the IOM would be entering into closer tax co-operation with the UK via an automatic exchange of information agreement based upon the Foreign Account Tax Compliance Act (FATCA) agreement it is negotiating with the US.
FATCA, which became law in the US in March 2010 and will be implemented in July 2014, targets tax non-compliance by US taxpayers with foreign accounts. The controversial law requires foreign financial institutions to report to the US Internal Revenue Service information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.
Transparency challenge
‘It is clear from the court’s decision that the procedure for obtaining information under TIEAs operates effectively as a means for countries exchanging tax information,’ says Andrew Boyce, a partner in Carey Olsen’s Guernsey office.
The court’s dismissal is also good for Jersey’s image. ‘It shows how robust the island is at enforcing agreements entered into at an international level,’ says Heather Bestwick, the technical director and deputy chief executive at Jersey Finance.
The appeal was against a decision that called on Volaw Trust & Corporate Services, the fiduciary services arm of local law firm Voisin, to produce documents and records related to one of its clients – a Norwegian taxpayer named Berge Gerdt Larsen – and certain companies in which it was said that Larsen was suspected of having an interest. The information was requested by Norway’s tax authority.
Under a TIEA that Jersey had signed with Norway, Jersey’s comptroller of taxes is empowered to request such information from Jersey financial services entities when the Norwegian tax authority asks for it.
According to Volaw’s managing director Robert Christensen, both Volaw Trust & Corporate Services, upon which the notice under the TIEA was served, and Larsen were disappointed with the court’s decision. An appeal has been lodged and is scheduled to be heard by Jersey’s Court of Appeal towards the end of September.
The appeal is on the grounds that the court improperly upheld the provisions of the notice, which required the production of documentation that pre-dated the TIEA – documentation already provided by Volaw to the Norwegian police under orders granted by Jersey’s Attorney General. The appellants also allege the court failed to take into account the fact that the notice under the TIEA related to tax liabilities not covered by the agreement. The concern is that this case will spark further challenges in other signatory countries. It wouldn’t surprise Peter Tarn, Harneys’ London-based global managing partner, if a request for the exchange of tax information was also disputed in the Caribbean. ‘This is simply because the legal framework and quality of the requests often leave a lot to be desired,’ he says.
This means that IOM financial institutions, including trust companies, will provide a wide range of information to HMRC on UK-resident taxpayers’ financial interests on the island.
More recently Guernsey announced its own agreement with the UK in March, under which British holders of Guernsey accounts or trusts will report any unpaid tax to HMRC by September 2016 or face stiff penalties. Under EU rules, European citizens with Crown dependency accounts must already declare interest payments – the UK deal requires balances to be disclosed.
In the days that followed Guernsey’s announcement, Jersey announced a similar package with the UK government, which will include an inter-governmental agreement (IGA) that closely follows the FATCA agreement currently being negotiated by Jersey with the US. This includes an alternative reporting arrangement for UK-resident, non-domiciled individuals, and a disclosure facility that allows investors with assets in Jersey to settle their tax affairs before information on their accounts is automatically exchanged.
All in all, Guernsey has 44 TIEAs in place; while the IOM has entered into 29 such agreements. As for Jersey, the island has signed up to 31 TIEAs and has another seven in the pipeline. ‘They assist in showing that we are a reputable jurisdiction that is a safe place to invest in and that will not tolerate tax evasion,’ Bestwick says.
Clear water
In the Caribbean, the Cayman and British Virgin Islands (BVI) governments have also taken recent proactive steps to enhance co-operation with US, EU and international regulators so as to adopt best practice international standards and strengthen their regulatory structures against money laundering, terrorism, crime and tax fraud.
‘Cayman has a good track record of co-operating with the international community, including revising its laws and entering into treaties to deal with issues that have arisen over the years,’ says Jason Allison, managing partner of Carey Olsen’s Cayman office.
Cayman and the BVI have also agreed to be part of the G5 European multilateral tax information exchange programme. ‘This is just another example of how Cayman and the BVI have already shown themselves to be very willing to co-operate with the onshore jurisdictions and to promote transparency,’ says Martin Livingston, a partner in Maples and Calder’s Cayman office.
Furthermore, Cayman and the BVI agreed to support the UK’s tax transparency programme following the G8 conference. ‘Their support also confirms the commercial certainty that these jurisdictions offer as solid, high-quality international financial services centres that make valuable contributions to the global financial architecture,’ says Ray Wearmouth, Ogier’s BVI managing partner.
These various recent agreements are, broadly speaking, good news for the relationship between onshore and offshore territories, according to Ingrid Pierce, Walkers’ Cayman-based global managing partner. The addition of new TIEAs means that jurisdictions are now better placed to position themselves in the eyes of foreign investors, governments and the general public as transparent, reliable and legitimate.
However, a TIEA must be more than a symbolic gesture. ‘As a practical matter, it means a greater degree of consistency in the standard of information exchanged between authorities in the context of a specific investigation,’ says Pierce.
Similar to the Crown dependencies, Cayman and the BVI have also entered into agreements with the US in anticipation of FATCA’s July 2014 implementation.
These deals simplify FATCA compliance for Cayman and BVI financial institutions, including hedge funds, private equity funds, structured finance and aircraft finance vehicles, banks, trust companies and insurance vehicles. In addition, compliance with FATCA will be greatly simplified for foreign financial institutions domiciled in Cayman or BVI – as there will now be no need for each Cayman or BVI foreign financial institution to deal directly with the US tax authorities.
Having an IGA in place is critical for financial centres outside of the US, believes Maples’ Livingston. Financial institutions, investment funds, and their investors using Cayman and the BVI will now benefit from increased certainty in preparing for any potential registration or reporting obligations under FATCA.
Work streams
The US ‘Model 1’ IGAs are also likely to affect the local legal market: because of the automatic reporting involved, they will generate increased volumes of instructions for offshore legal service providers. Corporate service providers and funds administrators will also enjoy greater workloads as they provide compliance solutions to help clients with the new reporting requirements.
Carey Olsen is another firm that is up to speed. The firm is keeping abreast of FATCA developments by closely monitoring government and media reports, as well as attending and running training sessions. ‘We have also been preparing the standard wording for the documents that are applicable to foreign financial institutions, such as investment funds,’ Allison says.
With all eyes on the transparency of offshore territories, there is also an opportunity for lawyers to debunk some of the more lingering misinformation around offshore financial centres.
For example, there are a number of myths that the press, politicians and certain lobbying groups perpetuate about Cayman and the BVI, argues Maples’ Cayman-based global managing partner, Henry Smith. This is despite the fact that the financial regulation and prevention of financial crime regimes of both jurisdictions have been extensively evaluated, road-tested and recognised by third-party organisations such as the International Monetary Fund, the Financial Action Task Force (FATF) and the OECD.
‘The principal myth about Cayman and the BVI – and for that matter offshore jurisdictions generally – is that it is all about tax, which it is not,’ says Simon Schilder, a partner in Ogier’s BVI office. While tax structuring may be a driver for work emanating from certain locations, for a number of markets, particularly the emerging economies, the driver for using jurisdictions such as Cayman and the BVI is often more to do with facilitating business from their access to investors and financing.
There is also the common misconception that offshore jurisdictions are driven by secrecy, only benefit the rich and powerful, and are tax havens where money laundering and abusive tax practices are rife.
‘The islands are well-regulated, transparent offshore jurisdictions with sophisticated legal systems, and are internationally compliant,’ asserts Carey Olsen’s Guernsey partner Andrew Boyce.
Furthermore, Cayman, the BVI, Bermuda, Guernsey, Jersey and the IOM have all been put on the white list by the OECD. White-listed countries are essentially jurisdictions that have implemented internationally agreed tax standards, and are therefore not regarded as tax havens by the OECD.
‘The onshore governments should give more credit and recognition to the considerable efforts that places like Cayman and BVI have made in this regard,’ says Maples’ Smith.
As for the persistent myth that billions of dollars are hidden away in the BVI and Cayman, Harneys’ Tarn says that it is nonsense. Very little money actually passes through the BVI and while Cayman has a significant banking sector, the funds involved are from large financial institutions, and are fully disclosed. ‘The image of individual retail investors somehow hiding money in the BVI or Cayman might be a handy narrative tool for Hollywood, but it is patently false,’ Tarn says.
Investors in a Cayman/BVI fund or company remain responsible for paying tax in respect of their Cayman or BVI investments in their home countries. ‘This is a process that the Cayman/BVI government assists with by co-operating with the tax authorities from other nations and promoting transparent banking,’ Maples’ Smith says.
It is also widely believed that Jersey, Guernsey and the IOM are tax havens, and are used by businesses and individuals, both legally and illegally, to reduce the tax they pay to the British authorities.
Critics of Jersey’s place in international finance usually focus their comments principally on tax evasion/aggressive tax avoidance, and secrecy. ‘This is to create the myth that Jersey has something of the night about it, which is unfair,’ says Nigel Pearmain, a Jersey-based partner at Voisin.
But because it is well known that Jersey has entered into a vast array of information-sharing initiatives over the years – often well ahead of other jurisdictions, including the UK and the US – tax evaders, and those looking to use Jersey illegitimately, are unlikely to find it an easy destination in which to operate.
Jersey recently played its own part in debunking the myths about what offshore financial centres do by presenting evidence of the island’s specific contribution to the UK economy. Capital Economics, commissioned by Jersey Finance to provide the most comprehensive analysis to date of the relationship between Jersey’s economy and that of the UK, published its findings in July 2013.
The report concluded that more British tax is generated by Jersey than lost through it; the island helps the UK generate around £2.3bn in tax revenues each year, in addition to supporting 180,000 British jobs. Moreover, £1 in every £20 of money that is invested by foreign individuals and companies in assets located in Britain reaches the UK via Jersey.
‘This was the first time that an independent leading economist confirmed what we’ve always known about the true contribution we make to the UK’s economy,’ argues Bestwick.
‘The options offered by the jurisdiction underpin the fabric of the UK finance sector, and provide a very tangible benefit to the UK economy, and to the standing of London alongside New York as the dominant global finance centres,’ says Alex Carus, a partner in Walkers’ Jersey office.
World stage
Because they uphold global transparency and co-operation standards, and enable market efficiency and competition, the benefits created by successful offshore centres are not just limited to the UK.
For the UK and the rest of the world, jurisdictions such as Cayman and the BVI also offer some of the most cost-efficient environments for international capital flow and portfolio investment. Such competitive market offerings allow companies to raise financing and package financial risk more economically.
The financial industry in Cayman and the BVI also allows international investors from all over the world to come together to invest in businesses and major infrastructure projects in the US, Europe, Asia, Africa, and the emerging markets.
The offshore territories may be increasingly achieving recognition from institutions such as the OECD for their high levels of regulation and transparency, but whether all the industrialised onshore countries can match offshore jurisdictions for transparency and quality of regulation is another matter.
In terms of how countries fare on the money laundering spectrum when establishing new companies, both Cayman and the BVI have stricter controls than the US or certain other OECD countries, according to Harneys’ Tarn. The US state of Delaware, for example, has long been singled out for an incorporation process that leaves it vulnerable to criminal activity.
The state laws that govern the creation of corporations in the US generally do not require company formation agents to be licensed or collect ownership information on the entities that they register. Consequently, the FATF has criticised the US for failing to comply with a FATF standard on the need to collect ownership information, and has urged the US to correct this deficiency.
‘We all applaud the sentiments of the G8 meeting and the fight against tax evasion; but the big countries should acknowledge that transparency is a two-way street. It will be interesting to see how the US delivers on this, given it has Delaware in its backyard,’ says Bestwick.
By contrast, the know-your-customer due diligence rules for company formations – and the identification of beneficial owners – in Cayman and the BVI are stringent. Cayman and BVI company formation agents must be licensed by the Cayman Islands Monetary Authority/BVI Financial Services Commission respectively; they are also obliged to verify and keep records on the beneficial owners of entities to which they provide services, the purpose of the entities, and the sources of the funds involved.
It is a similar story for Jersey, which already holds a central register of beneficial ownership of companies; and information is available to the tax authorities and law enforcement agencies on request. ‘In other words, we are already there,’ says Bestwick. LB
julian.matteucci@legalease.co.uk