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Offshore Financial Centres:
OFCs' Response
to recent International Initiatives
©
2002 Dr Jean-Philippe Chetcuti. All Rights Reserved.
Bermuda
Onerous changes are never welcomed with an embrace,
especially when these changes bring along a duty to give up one’s hen with the
golden eggs. The OECD’s list of requirements for compliance gave off tinges of
fear and irritation in the Bermudan financial world, yet presently optimism, on
the reforms demanded by the OECD, dominates the Bermudan business community.
Currently, this radical financial regulatory change is depicted in a positive
shade:
[U]ltimately, as we look to the future of the global economy,
it will be those jurisdictions that adopt and maintain international standards
that will be most highly regarded. These jurisdictions will by extension inspire
confidence and continue to attract quality business, as we have experienced in
Bermuda.”
In the past, Bermuda’s reputation was marred by a high
degree of corruption. However, presentably, it boasts of its established
independent regulatory system and flexibility vis-à-vis new regulations. On May
2000 Bermuda contacted the OECD, assuring its commitment to the OECD guidelines.
Bermuda’s current fiscal regime is highly attractive to
offshore investment. No profits, whether corporate or personal, are taxed; there
is no capital gains tax regime; and no withholding taxes. Bermuda raises this
revenue from customs duties, employment taxes, hospital levies, land taxes, and
various other minor levies such as stamp duties. Yet, international companies
registered in Bermuda have the option to apply and benefit from an exemption
from any taxes on income until the year 2016, is ever such taxes are to be
assessed.
Bermuda has an edge vis-à-vis other centres. It boasts of
the highest income per capita in the world and it is a British dependency.
Hence, it does not stand much to lose by abiding with the OECD’s principles.
There is also the added concern of a large number of Bermudan financiers that a
marred label from the OECD would result in more damage than the new reforms
actually would. All these factors resulted in Bermuda endorsing its adherence to
the OECD’s proposals.
Bahamas
The Bahamas is home to 580 mutual funds, 60 insurance
companies, and 100,000 IBCs. This is approximately one for every three in
Bahamas. It also holds $350 billion worth of assets under management and boasts
of having 418 banks from 36 countries present within its territory.
In contrast to Bermuda, the Bahamas, highly depends on its offshore sector:
offshore finances account for 15 % of GDP and 20 % of governmental income.
Thus, its opposing reaction to the OECD’s actions is more than justifiable.
Yet, the Bahamas is also abandoning its aggressive,
unconformist stance vis-à-vis the OECD’s proposals. It has also been singled out
by the OECD itself, together with the Cayman Islands, as having adopted a
pro-active attitude en route to the adoption of new measures addressing the
OECD’s concerns.
The Bahamas adapted its laws addressing banking
supervision, adopted stricter rules regarding customer identification and
information about the ownership of IBCs, and branched out its channels for
providing international judicial and administrative collaboration. However,
Bahamas has still not “enacted [or] implemented all necessary reforms”
required by the OECD.
Hence the aggressive approach undertaken by the Bahamian
government to change its financial regime, including:
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the ban of anonymous ownership of its 100,000 IBCs;
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the suspension of two Bahamas-based banks for their inability to
fulfil basic banking requirements;
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an indication that it will close any bank deemed to be a threat to
“the integrity of the international financial system;”
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a real combat against money laundering;
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the enactment of the Central Bank of The Bahamas Act in 2000,
providing for improved bank supervision, cooperation on cross-border supervision
of banks, enhanced cooperation between the Central Bank and overseas regulatory
authorities, as well as extensive information gathering powers for the Central
Bank; and
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passing the Financial Transactions Reporting Act, addressing money
laundering issues;
This stance adopted by the government, is reflected in the
words:
“[A]s a people of reason, we also know that if globalisation
is to bear positive fruit, it will dictate widespread changes in the domestic
and international arenas, especially in the area of trade.”
A number of banks might consider ending their business
relationship with the Bahamas.
However, approximately more than half of the managed banks are likely to remain
and comply with the new legal regime and they are even considering expanding
their operations.
Globalisation has fostered the atmosphere for the Bahamas to become a successful
tax haven. Presently, this same globalisation is forcing the OFC to embrace
internationally accepted standards for banking and tax regulation. The result
will be melange of losses of a number of international investors and an
attraction of other investments. Both these aftermaths will be the result of the
employment of internationally accepted banking and accounting procedures.
Switzerland and Luxembourg
Switzerland and Luxembourg continue to resist pressure to
exchange information for tax enforcement purposes. In fact both dissented from
the OECD 1998 Report, even though both are also OECD members. Even if the
Federal Council had to decide to negotiate on this matter, there are heavy
constitutional restraints on its power to agree on measures to negotiate on bank
secrecy. Excluding Switzerland and Luxembourg, 27 other countries approved the
1998 Report. Hence the de minimis attitude adopted by the OECD regarding
these two countries’ dissenting view. However, one should note that the
non-cooperating OECD states are the main onshore competitors for the offshore
world and answer for many of the tax neutral structures managed onshore within
the OECD. The fundamental principle behind the OECD initiative should be a
commonly accepted standard, universally observed by all OECD states and
cooperating OFCs. Otherwise, the credibility of the project suffers.Hence, the fears of the offshore world, that if Switzerland and
Luxembourg are not compelled to abide to the standard sought to be imposed on
OFCs, investment business will drift to these OECD member countries.
4. The Future of OFCs: Maintaining the Competitive Edge
See also:
From offshore to onshore:
"Malta
International Trading and Holding Company Regime - tax efficient tax
planning vehicles in a reputable onshore regime"
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