“Tax Neutrality”: The Continuing Appeal of the

Offshore

Gregory Rawlings

Centre for Tax System Integrity

RegNet & RSSS

The ANU

Introduction: Tax-Free States High in the Mountains

The Principality of Andorra: Tax Haven located in Pyrenees mountains between France and Spain

Independent since 1278Constitution agreed 1993Total Bank Deposits 2001: €10 billion

Wealthy Banks

“our banks are very small, but very rich” (Interview, Andorra, December 2003)

Zero TaxationStrict Bank Secrecy Laws

International Tax Planning

“Practically we now have zero tax for companies and individuals…“we act principally in international tax planning” (Interview, Andorra, December 2003)

Use “completely regulated” jurisdictions

Elegant Companies it is “more elegant to have a company

from Holland these days; it’s a normal country after all” (Interview, Andorra, December 2003)

Andorra provides a “useful platform” for activities conducted elsewhere

If you go to Andorra…

“ …if I go to Andorra where there is no tax at all then I wont have to pay any tax at all…it does not work like this” (Interview, Andorra, December 2003)

All transactions must be declaredReduction of tax using double taxation

agreements

Tailors

“We are tailors. It’s like a customer who requires a certain suit. The tailor cuts it according to their customer’s needs. We do the same”. (Interview, Andorra, December 2003)

External Pressure

Has always been under pressure

Small countries have difficulties resisting

Not dependent on finance

Waiting to See “This is what we are all waiting for…all of us

are waiting to see what will happen. The Andorran government will make a decision next year. All of us are waiting to see; Andorra has had no taxation for all these years. It will mean a complete restructuration of the government. Accounts will have to be submitted for the first time…we are not very used to this due diligence requirement”. (Interview, Andorra, December 2003)

Interviews

Interviews with 30 accountants, lawyers, regulators, fund managers, insurers, bankers, CEOs, legislators and trustees and fiduciaries in Andorra, Guernsey, Paris and Singapore.

Research Areas

The effects of multilateral efforts to regulate OFCs (particularly the OECD’s Harmful Tax Practices Project and the European Union’s Savings Tax Directive)

Changes in client response/profile as a result of international initiatives

Research Areas…The current market for offshore services

Motivations for using OFCs

Tax planning techniques

Future prospects for OFCs and their clientele

Methodology

Open-ended semi-structured interviews Interviews not tapedPrimary and secondary level notesConfidentiality and no attribution Snowballing and phone booksObservations and recordings from

media, social interactions and architecture

Multilateral Initiatives: A Review

OFCs: Pressure to abolish financial secrecy in last 5-10 years

Organisation for Economic Cooperation and Development (OECD)

30 Tax Havens in NegotiationEuropean Union Financial Action Taskforce (FATF)

Impacts of Initiatives Predications that the offshore would

decline

“The fundamental attractions of OFCs – low or no taxation, banking secrecy, minimal financial regulation and political stability – face significant threat of erosion” (Hampton, 2002: 1662)

Questions

Are these initiatives having an effect on the offshore sector and if so how and why?

How has business been affected by these initiatives

What kind of impacts has this had on local economies and societies

Research SitesSamoa (2002)

Andorra (2003)

Guernsey (2003 & 2004)

Singapore (2004)

Impacts

58% of respondents reported that initiatives were having an impact

19% of respondents reported that initiatives were not having an impact

7% of respondents reported it was too early to tell

15% of respondents said not yet, but they will if fully implemented

Compliance Costs Increased compliance costs Increase due to implementation of Due

Diligence and Know Your Customer (KYC) standards.

“Slowing Down Effects”

Offshore Sectors

Trust & Fiduciary Private BankingFunds Management Captive Insurance

Client Reaction

Effects had not adversely undermined profitability or viability of firms

Clients undeterred from OFCs

Business has increased

High Wealth Individuals (HWIs)

“Bottom end of the market” has declined

HWI market almost completely unaffected

Institutions (multinationals and large corporates) unaffected

Competition

Business has become more competitive Some job loses Increasing number of mergers and

acquisitions

No Undue Concern

Causing no major concern in industry Part of a dynamic services sectorPeople must get used to the “ebbs and

flows of finance…you hear a lot of doom and gloom”, but it was really an over-reaction (Interview, Guernsey, December 2003)

Offshore Polarisations

Polarisation between OFCs in “developed” and “developing” countries

No major impact on “developed” OFCs

(Guernsey, Jersey, Isle of Man, Bermuda, Cayman Islands and British Virgin Islands [BVI])

Decreasing Tax Havens

Singapore and Hong Kong as competitors

Outlook for smaller Pacific and Caribbean jurisdictions “bleak”

Decrease in number of tax havens in next ten years

Key centres will continue to prosper

Motivations, Markets and Possibilities

Globally mobile capital and globally mobile people

Taxation has relative importanceHolding property through offshore

companies and trustsEstate planning

Expertise

Concentration of expertise in OFCs

“…within one mile of this office you will get more expertise in the setting up and management of trusts than you would anywhere in the world” (Interview, Guernsey, December 2003).

Offshore Flexibility Offshore pension and superannuation

funds Payroll facilities for seafarers Diminishing differences between

offshore and onshore

“Tax Neutrality” “Tax neutrality” remains very importantTax neutrality converges with regulatory

flexibilityLarge multinationals continued to be

attracted to OFCs, where subsidiaries and funds can be established in a “benign environment”, not subject to “six different forms” of taxation and regulation (Interview, Guernsey, January 2004).

“Global Families”Offshore structures continue to work

well for “global families” and HWIs

“There are the wealthy in this world and they will arrange their affairs, and when they become really wealthy they become itinerant” (Interview, Guernsey, January 2004)

London as a Tax Haven

UK Non DomiciliariesSet up offshore trust before moving to

LondonProperty owned by trustCapital payments tax exemptOffshore debit/credit cards entitlements

for “UK non-doms”

OECD Discrepancies US IRS issues “Qualified Intermediary

Regime” status to selected offshore firms

New Zealand provides for tax exempt offshore trusts for non-residents

Portugal establishes OFC on Madeira with EU approval and no blacklisting

Level Playing Field

Differences between OECD countries provide a continuing market for OFCs

A long way to go

One interviewee put it like this: There was no doubt that in time Switzerland and Luxembourg would meet OECD standards. But “the game still has a lot further to go yet”. For example the USA, this interviewee claimed, does not meet many of the standards that the OECD itself is promoting, “they are a very long way from doing anything similar”, he said…cont

Ongoing Opportunities cont…Although they were drafting legislation

to comply with these international standards they faced “massive opposition from corporate interests”. He continued “the concept of a global level playing will take a long time, if ever, to achieve”. In the absence of a level playing “there are still a lot of opportunities” for OFCs (Interview, Guernsey, December 2003)

Hope 100% optimism hope for future of offshore

“do I think that this industry will be here in another ten years, yes definitely, do I think that it will provide me with a successful career until I retire, yes definitely…the long term prospects are good” (Interview, Guernsey, December 2003)

It gets better every day

“Oh yes, I think it gets better every day” (Interview, Guernsey, January 2004)

“Oh God yeah…who would have thought even ten years ago that there would be millionaires in China who would need their wealth managed” (Interview, Guernsey, January 2004)

Conclusion: Offshore Niches

“There will always be an offshore sector. We are the ball-bearings in the machine of the world’s financial markets” (Interview, Guernsey, January 2004)

Thank You!

Gregory Rawlings CTSI

“Tax Neutrality”: the continuing appeal of the offshore