The Channel Islands of Jersey and Guernsey, with a track record of more than 30 years as reputable finance centres, were included on a list of harmful tax regimes produced by the OECD, alongside less regulated offshore jurisdictions, such as those in the Caribbean. It may seem a paradox, therefore, that while centres such as Bermuda and Cayman have been successful in removing themselves from the list, the Channel Islands have yet to do so, and there are interesting reasons for this course of events.
Jersey and Guernsey have been proactive in introducing appropriate regulation, taking a cautious approach to regulate internal affairs. Historically, the authorities have been cautious in allowing businesses to be established. During the late 1980s, for example, Barlow Clowes was refused to set up in Jersey, an approach that has helped many other offshore centres.
Recent regulations include very thorough know-your-client regulations, which in turn require organisations to carry out detailed checks on those wishing to do business in the islands. This is a positive step for those institutions with high-quality work because they have nothing to fear and they know that steps are being taken to ensure that unsavoury business is not being allowed in, which in turn could undermine their own reputations by association.
The Caribbean jurisdiction that I feel is most similar to the Channel Islands is Bermuda, which has also taken a cautious approach and has become regarded over the years as a quality centre with a focus on international insurance business, whereas the Channel Islands have concentrated on private banking. The other Caribbean islands have suffered in the sense that they have been the target over the years for drug traffickers, so that their reputation is not as strong as those of Bermuda or the Channel Islands. All these offshore centres have recently been under some level of scrutiny. The Financial Action Task Force placed Guernsey and Jersey in Group One, whereas the Caribbean countries were much lower down, with Cayman in Group Four.
The approach adopted by the Organisation for Economic Cooperation and Development (OECD) was to look at several factors, one of which was the tax regime in offshore centres discriminating between those who live there and those doing business there. Bermuda was able to say that it did not discriminate because there is no income tax for residents or foreigners wishing to do business. Instead, they raise substantial revenues with indirect taxation.
The Channel Islands have a 400-year history of fixing their own tax rates, and Jersey and Guernsey have had an income tax rate of 20 per cent for residents since 1945. It is not a rate that was introduced to attract offshore tax business. When the latter started to develop, there was no need to tax foreigners doing business in the same way, and exemptions were devised. These arrangements are one of the OECD’s reasons for putting them on the “list”.
Both Bermuda and Cayman were also on the list and it is interesting to consider how they responded. Bermuda was quickly removed, having given certain undertakings to the OECD. As far as I am aware, nobody other than the Bermudian authorities and the OECD knows the extent of the undertakings. The OECD’s letter to the authorities appears on its website, but the all-important “annex” to which the letter refers does not. Cayman gave almost unqualified undertakings to do what was required.
While the Channel Islands are supportive of the OECD’s desire to reduce money laundering and drug trafficking, they feel discriminated against because of their offshore status and are keen to agree a sensible arrangement.
It is unlikely that it will be possible to dispense with low tax centres. There is the possibility of negative incentives in the form of legislation in OECD member states to discourage dealing with centres that appear on OECD lists. But there is a strong case for aiming for well-regulated centres. One need only look at the European Union (EU) and the incentives that exist in member states for doing business there. I don’t think the OECD, EU or any other such organisation can ever achieve total fiscal transparency or a level playing field.
Jonathan White is chairing partner at Ogier & Le Masurier, Jersey
See special report: Caribbean and Bermuda, page 35