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1 October 2013
The last decade has been marked by enormous changes in the distribution of wealth across the globe, driven primarily by the increased globalisation of economies. One striking feature has been the unlocking of the latent economic sway of the Brazil, Russia, India and China (Bric) economies.
As these countries have emerged onto the global stage, their relationships with the world's key financial centres have evolved considerably. It has become commonplace for companies incorporated in these jurisdictions to seek access to capital and services offered by financial centres such as London. Some 300 international companies are listed on AIM, many originating from emerging markets.
Many of these companies have been routed to London via offshore centres such as the Isle of Man. A recent report by research agency Hemscott identified that 15 of the top 100 companies listed on AIM are incorporated in the Isle of Man, followed by Bermuda with six and the British Virgin Islands (BVI) and Guernsey with four apiece. The combined market capitalisation of AIM 100 companies incorporated in the Isle of Man is in excess of £5bn.
The route to AIM has been a key part of the interaction between the emerging economies and the offshore world. Often this path has been dictated by domestic regulatory requirements that may prohibit domestic companies being listed directly on overseas exchanges.
Listing an offshore entity can be advantageous from a tax perspective, both in terms of corporate tax and distributions to shareholders. In the Isle of Man, similarly to other leading offshore centres, a zero rate of corporate tax applies to all businesses except banking, and distributions to non-resident shareholders are not subject to withholding tax.
Although the use of offshore vehicles on AIM and other stock exchanges has been the most visible form of the relationship between emerging countries and the world's offshore centres, there are other key areas where offshore centres are seeking to add value.
Of particular interest is the use of tax-neutral jurisdictions where emerging market companies are embarking on global acquisitions. For many years Western businesses have utilised no-tax and low-tax jurisdictions to create global platforms, and this is now becoming a consideration for acquisitive emerging market companies. Offshore jurisdictions have been keen to promote accessibility to such global platforms as an integral part of international trade.
Private equity arrangements are also being routed via offshore entities, both in terms of inward and outward investment. Offshore banking and private wealth management are additional business lines being investigated. Likewise, investment products and services targeted at non-resident nationals can benefit through the use of offshore structures.
Offshore jurisdictions can be useful for structuring cross-border joint venture arrangements or special purpose vehicle transactions, where the parties feel secure in the law that applies to their arrangements. Reassurance can be given on matters such as regulatory simplicity, tax neutrality, contractual certainty, transparency of security and ease of enforcement.
These factors have led to a broad spectrum of matters being routed offshore. Similarly, asset finance transactions involving corporate jets and mega-yachts are becoming increasingly appealing to Bric-domiciled high-net-worth individuals and corporates alike.
It should be noted that territories themselves are seeking to invest their foreign reserves on a global basis. China has US dollar reserves in excess of $1trn (£504.61bn) - the recent investment in BlackRock will no doubt be a taste of things to come. London has attracted the largest share (15 per cent) of all Chinese foreign direct investment into Europe since 2002.
In recent times Indian investors have become among the most prolific in the City. Again, use of offshore structures and centres are featuring prominently in such investments.
The emerging economies do present a gateway of opportunity for offshore law firms, but this is not without its challenges. Although the Bric economies are not part of the Organisation for Economic Cooperation and Development (OECD), there will no doubt be an increased engagement and dialogue as these countries take on a new importance in the world economy.
The OECD has for many years encouraged offshore centres to move away from being 'concealment' centres to become 'service' centres. The key standards required by the OECD are transparency and effective exchange of information in tax matters. Factors such as these are shaping the face of the offshore world. Jeffrey Owens, head of the Centre for Tax Policy and Administration at the OECD, recently noted that one should "distinguish between the advantages offered by low-tax jurisdictions as places that a multinational enterprise can legitimately use to lower its global effective tax rates and the tax havens that are also used to lower tax rates but which do so by breaking the law".
Ultimately the continued acceptance and success of offshore jurisdictions in the world economies will be influenced heavily by how offshore centres react to OECD initiatives and hence strengthen their reputations. As with OECD countries, offshore centres will need to be viewed as adding value to Bric economies and not a means of their citizens avoiding tax.
The Isle of Man
The Isle of Man's treasury minister Allan Bell believes that the Isle of Man economy and reputation is enhanced each time the island concludes an international tax treaty. Agreements are currently in place with the US and the Netherlands and negotiations are ongoing with a number of other countries.
The Isle of Man is keen to promote tax information exchange agreements. Other arrangements include trade agreements, regulatory memoranda of understandings and ultimately double tax agreements. Similar options could be employed with Bric economies in order to forge strategic partnerships.
The ability of the Isle of Man to negotiate such agreements on a global basis was recently enhanced by a landmark declaration signed on behalf of the UK by the Lord Chancellor Lord Falconer. The document reinforces the island's separate status within the context of its constitutional relationship with the UK and gives enhanced clarity for the Isle of Man in dealing in its own right with governments and organisations around the globe.
It should also not be forgotten that the traditional economic powerhouses such as the UK and US will have to work hard to compete for business that the emerging economies are offering e.g. the listing of Chinese entities in London has been reduced significantly since rule changes in the People's Republic of China made offshore listing more difficult.
Chinese companies are currently being actively encouraged to seek domestic listings. Offshore opportunities will therefore be influenced greatly by local/political considerations as to how the emerging economies interact with existing financial centres and markets.
Although the UK does have strong trade links with China and India there are other financial centres which are actively seeking their business such as Hong Kong and Singapore. Offshore firms will need therefore to continuously review and adapt their product offerings accordingly to fit with global trends.