9 June 2003
28 October 2013
24 February 2014
23 July 2013
15 July 2013
5 November 2013
During the past five years, offshore jurisdictions have become more respectable after being subjected to a series of initiatives that have introduced the highest standards of anti-money laundering legislation. The current endeavour is to expand these new procedures to include cross-border tax evasion. But one threshold question arises: why just offshore?
The OECD report and the EU
The Organisation for Economic Cooperation and Development (OECD) published its report entitled 'Harmful Tax Competition: an Emerging Global Issue' in May 1998. It was supposedly a global initiative against "preferential tax regimes" of OECD member states and "tax havens", virtually all of which were not OECD members.
Shortly after the OECD initiative began, the EU raised the profile of its own internal process concerning cross-border tax evasion. In the ensuing debate it became clear that some EU member states favoured ultimate tax harmonisation, while others favoured tax competition. The EU debate evolved into two alternatives, either for the introduction of a minimum withholding tax on interest payments, which was favoured by the jurisdictions that wished to maintain bank secrecy - Switzerland, Luxembourg, Belgium, Austria and Guernsey - or an automatic exchange of tax information, which was favoured by those jurisdictions wishing to protect institutional transactions - the remaining EU jurisdictions - particularly eurobond business, the chief among which is the UK.
During the course of this debate, there was a change in Federal Government in the US and a consequent shift in the attitude of the US towards the OECD initiative on harmful tax practices, which it concluded was anti-competitive. In particular, the US government expressly disavowed international tax harmonisation, publicly favouring tax competition. It also disavowed initiatives against tax preferences designed to attract inward investment. As a result, the OECD 'tax haven' criteria became largely irrelevant and the OECD initiative evolved into one that was focused entirely on the lack of tax information exchange between OECD member states and offshore jurisdictions.
These initiatives are now on a collision course. Some countries - Panama has been the most outspoken - are outraged that the EU has allowed five members to operate a withholding tax system that is seen by many as a tax evasion charter, while at the same time through the OECD requiring commitments from non-OECD countries to exchange tax information upon request.
Essentially, there are three practices competing for international hegemony. First is a withholding tax but no provision of tax information to other states - the Swiss position. Second is no withholding taxes but the automatic provision of tax information to other EU member states when a payment
is made to one of their citizens or residents - the EU position. Last is no withholding taxes or automatic provision of tax information, but the provision of tax information to another state with which there is a bilateral treaty or agreement - the US and Cayman Islands position.
The Cayman Islands' perspective
The position of the Cayman Islands government is that, as a member of the international community, it is committed to complying with public international standards. However, the present difficulty is that on this issue there exists no international standard.
In terms of the international initiatives, the Cayman Islands gave an advanced commitment to the OECD process in May 2000 and accepted the OECD concept of tax information exchange upon request as setting forth a sensible basis. As far as the EU Savings Directive is concerned, the islands are not part of the EU and the directive would not apply to them. This makes some sense as few of the islands' clients are EU resident individuals. Further, the islands see no particular advantage, nor any moral imperative, to cause all of their service providers to comply with an EU regime that is designed not to satisfy international standards, but only a group of countries within the EU, especially when the EU countries cannot agree on a standard between themselves.
The position of the Cayman Islands government is more closely aligned with the US government's position than with the UK's and is appropriate to the islands' institutional business base.
The first five years of the initiatives against offshore financial centres can be viewed as driven by a different philosophical approach on how to deal with the major flaw in the system of direct taxation - that capital is mobile. But there is another problem relating to this form of taxation, that of a new political correctness which states that tax competition be viewed as essentially unjust competition.
However one views it, a direct system of income tax in large part must rely on voluntary compliance by its citizens for it to work. This in part explains the effort expended by onshore treasuries on negative publicity about the offshore world. However, it remains a fact that, historically speaking, some jurisdictions such as the US, the UK and Canada have had relatively high taxpayer compliance, while tax evasion has been endemic in many European and Latin American countries. It is because tax evasion has been so pervasive in Europe that automatic reporting appeals so much to the EU governments, but not, unsurprisingly, in Switzerland, Austria, Belgium, Luxembourg and now Guernsey, which are favoured jurisdictions for discrete banking.
The odd man out in all of this, culturally speaking, seems to be the UK government. While traditionally the UK has favoured the liberty and privacy of the individual and championed the rule of law, the Government's current position in support of automatic exchange of information can be understood only as driven by the need to keep a mandatory withholding tax from driving the eurobond market out of the City of London and the desire to maintain competition among the various income rates internally within the EU. Its high-handed and inappropriate attitude towards its overseas territories can only be understood in this context.
It seems inevitable that the initiatives will ultimately result in some sort of compromise. If not, tax harmonisation in the EU can never succeed. But to be workable, there have to be limits on the scope of any automatic reporting obligation, thereby necessitating some form of supplemental exchange-upon-request regime, created by bilateral or multilateral agreements.
As for the offshore jurisdictions, those with institutional business that add value will adapt as they have always done in the past, while service providers, onshore and offshore, will have to reconcile to an increasing role as agents of domestic and foreign taxing states.
Anthony Travers is senior partner at Maples and Calder in the Cayman Islands