A growing climate of hostility to offshore financial services

On December 4 and 5 the Premiers and Chief Ministers of the UK’s Overseas Territories will gather in London for their annual Joint Ministerial Council with the British Government.

The meeting will begin by focusing on the UK’s White Paper published in June; consider the UK’s priorities, than move on to issues such as relations with the UK parliament and self-determination. Participants will also discuss issues such as investment promotion, relations with the Commonwealth and the role of national security councils.

True to his word, the British Foreign Secretary will bring ministers from every relevant British government department to spell out how they and their officials will work to support the overseas territories in the areas of education, governance, justice, health care and the environment. They will also meet the Prime Minister, confirming a new found centrality that overseas territories have in the UK’s thinking.

Despite this, some of the Caribbean Overseas Territories governments have other concerns on their minds that are likely to emerge, particularly in their bilateral meetings. In the last few days articles have appeared in the UK media that suggest a growing climate of hostility towards the offshore financial services that the UK’s Caribbean Overseas Territories provide. Unfortunately the issue is surrounded by confusion, as much of the media are prone to wrongly conflate the very varied offshore, financial, registry and other services offered, into an all-embracing story of illegality, greed and tax evasion.

The newspaper campaign began a week or so ago with a report that the British Treasury has in draft form an agreement  that will require all offshore centres over which it has jurisdiction to disclose from January 1, 2014 on, the beneficial owners of all accounts held by UK taxpayers including those hidden by trusts or companies. To achieve this the British Government was reported to be threatening to prevent Crown Dependencies (the Isle of Man, Jersey, and Guernsey) and, it was suggested, the Overseas Territories, from agreeing to meet the terms of the US Foreign Tax Compliance Act (FATCA) unless they agree to a similar information-sharing agreement with the UK.

The US FATCA, which comes into force on January 1, 2013, requires foreign banks to provide full details of all US citizens holding accounts outside of the US to the US Internal Revenue Service.  Without doing so their US banking operations could not continue.

The original story emerged through a leak to the magazine, the International Tax Review, which suggested the UK government is drawing up plans to impose its own version of the US Foreign Tax Compliance Act (FATCA) on its Crown dependencies, and possibly thereafter on its Overseas Territories.  What, however, is still far from clear is how these reported developments might relate to existing provisions. The Caribbean Overseas Territories are already subject to the EU Savings Tax Directive. This requires that the number of accounts that EU citizens have with financial institutions and their aggregate savings income are automatically reported to tax authorities in Europe and to the European Commission.

The reports about the new disclosure proposals coincide with publication of previously confidential names of the beneficial UK owners of a number of British Virgin Island offshore companies by the Guardian newspaper in Britain and a left leaning US-based body, the International Consortium of Investigative Journalists (ICIJ).

The stories also appear just as draft documents are emerging from the European Commission that make far reaching recommendations on co-ordinating tax policy towards third countries, seek to develop an EU wide approach to aggressive tax planning and outline a draft policy relating to tax fraud and tax evasion. These are difficult issues as they divide the ways in which the Caribbean Overseas Territories and the British and other developed nation governments, see the world.

Viewed through the eyes of the taxpayer and governments trying to increase their tax take, greater regulation to the point of ending offshore secrecy in nations over which they have jurisdiction, may seem reasonable, even just. It is, they argue, in line with popular sentiment that believes that at times of hardship, tax avoidance and aggressive tax planning is both immoral and unfair.

However the same issue when seen though the eyes of the governments of Caribbean Overseas Territories is very different. They have carefully crafted, with the British government’s agreement, legally sound and responsible tax and financial service environments, and have made their micro states among some of the most successful in the world. For them any sudden change in policy will appear to be unjust, destructive and likely to reverse a long period of economic growth that has enabled them to become self-governing and advanced nations.

What the recent flood of hostile coverage signals is a significant change in public and government opinion, the implications of which the Cayman Islands, the Turks and Caicos Islands, and the British Virgin Islands need to be aware of. This is because it carries with it the real possibility, going forward, that all political parties in the UK will see electoral value in establishing greater control and oversight so as to ensure the greatest possible tax revenue and to meet the demands of public opinion. Already, senior UK politicians, such as the UK’s Shadow Chancellor, Ed Balls, sensing political advantage, are beginning to suggest that financial services arrangements in both the UK Crown dependencies and the overseas territories may have to change.

If this is the intention, then a debate is required now about how these small Caribbean nations, that have achieved real success in tourism and financial services, are in future to maintain their economic viability and their financial independence from London.
Previous columns can be found at www.caribbean-council.org

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