Shoring up

The independent review of the crown dependencies due in spring this year could have advantages for offshore financial centres, but what of the UK itself? Asks Clayton Bonnette.

Shoring upThe crown dependency review proposed by the chancellor in his pre-budget report last year is the ideal opportunity for offshore centres to demonstrate the stringent regulatory and anti-money laundering standards that are currently in place.

In many cases these standards have been recognised by the OECD, the Financial Action Task Force and Financial Stability Forum, yet offshore financial centres will be demonstrating their competency in the knowledge that the Isle of Man has been singled out by the chancellor as a tax haven in the Irish Sea, and as a jurisdiction with which the UK should reconsider its relationship.

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This is tough news, given the recent conclusion of an exchange of information agreement in tax matters with the UK, and praise from the director of the OECD’s Centre for Tax Policy, which welcomed the new agreement as a further step in efforts to bring greater transparency and fairness to cross-border financial transactions. Furthermore, the Isle of Man has been one of the first jurisdictions to engage constructively with the OECD countries to address abuse by companies and individuals of offshore centres to evade their tax obligations. And the Isle of Man has concluded nine of the last 17 signed exchange of information agreements in tax matters.
We believe the real questions the review is likely to answer are:

• What standard of financial regulations will suffice before an offshore financial centre is regarded by the UK as applying international standards of financial regulation?

• Will such a standard be regarded by the offshore financial centres as being unnecessarily onerous?

Practitioners advising at the conceptualisation stage on transactions involving an entity in an offshore financial centre are often asked what reputational risks are involved in incorporating a company in the suggested offshore centre and how well regulated is the centre. The mere fact these questions are being asked means that in order for an offshore financial centre to be taken seriously as a favourable investment jurisdiction, it will have put in place adequate regulation while at the same time maintaining a modern and conducive pro-legitimate business attitude. It is sincerely hoped the UK does not attempt to use the review as a means of prescribing an unnecessarily onerous standard of regulation that is motivated by the objective of making the offshore financial centres less attractive places of doing legitimate business, and in so doing try to attract capital onshore.

UK benefits

Back home, the review could lead to potential advantages for the UK itself. We believe the UK should use the review to take an introspective look at the substantive reasons why a person would decide to transact through an offshore financial centre rather than from the UK. It is commonly accepted that tax is a cost of doing business. Like any expense, a prudent taxpayer will seek to apply legitimate tax planning techniques to minimise such costs. That said, no prudent taxpayer will allow tax considerations alone to override sound commercial judgment. As tax rates alone are very seldom the primary driver in establishing an entity offshore rather than onshore, the UK needs to consider how it can become a more attractive place from which to do business and thus attract capital away from the offshore financial centres.

Clayton Bonnette is a senior associate at Maitland.