One often hears that “the market knows best”. It would appear this applies as much to political initiatives – such as the current Organisation for Economic Cooperation and Development (OECD) proposals to eliminate so-called “harmful tax competition” – as it does to purely economic questions. Since the OECD announcement, there has been continuing, and even accelerated, growth in the financial services sector of the Channel Islands.
The islands stated at an early date that, unlike some other jurisdictions, they would not comply with the OECD’s requests without first having answers to fundamental questions. They would not sign a blank cheque. Also, before agreeing to anything, they demanded a level playing field among all OECD countries. This was particularly important, as most of the major OECD countries do not comply with the organisation’s current proposals. The “market” may already have considered the likelihood or otherwise of the major OECD countries complying with the proposals.
The confidence shown in the islands may be a result of the stance of both Jersey and Guernsey in questioning the legitimacy and the fine print of the OECD proposals to impose upon the world new international standards of cooperation between countries in matters of taxation. Indeed, this appears to be quite a novel concept. Traditionally, countries such as the US and the UK have considered it legitimate for jurisdictions to attract foreign investment by operating fiscally-attractive measures and providing high-quality professional services. Indeed, they have held the view that worldwide tax competition is a good thing and conducive to global economic development, which is supposed to be the main objective of the OECD.
The islands recognise that all jurisdictions should provide appropriate forms of international cooperation that are consistent with international laws and conventions. However, they do not accept that the present OECD proposals constitute accepted international standards – instead, they remain emerging standards.
The islands are aware that some of their existing tax practices, such as the ring-fencing of non-resident businesses, may need to be modified as the work within the OECD starts to define new international standards. Unfortunately, the islands have so far not been able to obtain from the OECD a comprehensive statement of what steps need to be taken to address the aspects of the tax system that offend OECD criteria.
Before the islands are able to sign up to a commitment, they will need to be confident that they are not signing up to anything which proves to be to their disadvantage when viewed against their competitors. They will need to be absolutely sure beforehand that there is a level playing field and that their main competitors, including Switzerland and Luxembourg, are equally committed. The islands have asked the OECD to keep them adequately informed of progress on agreeing standards with its own members and the implementation of those standards. This has not happened to date, but remains an essential element in convincing all involved of the existence of a level playing field.
The islands are carefully considering the proposals on the exchange of tax information, because ill-considered proposals would have a detrimental effect on their finance sectors. They have no problem with exchange of tax information in criminal cases – they have cooperated in this area for decades. They also understand the desire for international standards relating to intergovernmental cooperation concerning exchange of information in non-criminal cases, since there is currently no global international standard. The islands will participate in future dialogue and accept any responsibilities consistent with the global level playing field concept.
As world-class centres of excellence in the provision of offshore financial services, the islands recognise the need for the development of new international standards in both these areas. They view the development of such standards not as a threat but as an opportunity, and are confident that, with the global level playing field, they are well placed to benefit from such developments. The business profile of the finance sector on the islands is constantly evolving. If as a result of the adoption of some of the OECD’s proposals some business opportunities decline, changes in marketing and business plans will undoubtedly ensure that any new direction will be a profitable one. In his report on financial regulation in the islands, Andrew Edwards wrote that if the islands adapt to the emerging international standards, then they will continue to be profitable and will remain in the top league of international financial centres. So far the market has agreed with this proposition.
John Langlois is a senior partner at Carey Langlois in Guernsey.