Final Report Formatted

THE PROSPECTS FOR OFFSHORE FINANCIAL CENTRES IN EUROPE MATTIAS LEVIN CEPS RESEARCH REPORT AUGUST 2002 The Centre for European Policy Studies (CEPS) is an independent policy research institute in Brussels. Its mission is to produce sound policy research leading to constructive solutions to the challenges facing Europe. As a research institute, CEPS takes no position on matters of policy. The views expressed are entirely those of the author. Mattias Levin is a Research Fellow at CEPS and a specialist in the area of banking and financial markets in the European Union. The author wishes to acknowledge the valuable input he received in the context of two other projects: a high-level workshop in Liechtenstein on offshore financial centres in November 2001 and a study mission to Madeira with his colleague Wolfgang Hager, also in November 2001. He would also like to thank Prince Nikolaus of Liechtenstein, Stefano Catelani of Du Pont and Karel Lannoo, CEPS CEO, for their constructive comments on earlier drafts of this report. All opinions and any remaining errors, however, are the author’s alone. ISBN 92-9079-382-1 © Copyright 2002, Centre for European Policy Studies. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the prior permission of the Centre for European Policy Studies. Centre for European Policy Studies Place du Congrès 1, B-1000 Brussels Tel: 32(0)2 229.39.11 Fax: 32(0)2 219.41.51 E-mail: [email protected] Website: http://www.ceps.be CONTENTS EXECUTIVE SUMMARY ........................................................................................................I INTRODUCTION ...................................................................................................................1 1. THE RISE OF OFFSHORE FINANCIAL CENTRES ............................................................2 1.1 OFCs defined .....................................................................................................2 1.2 From humble beginnings to a flourishing industry............................................3 1.3 Benefits to users and hosts.................................................................................3 1.4 A deteriorating business climate........................................................................5 1.5 Unilateral attempts to handle low-tax jurisdictions ...........................................6 2. OFCS UNDER SIEGE..................................................................................................12 2.1 Economic integration and collective action.....................................................12 2.2 The FSF – Threat to financial stability............................................................17 2.3 The OECD – Harmful tax competition............................................................19 2.4 The FATF – Money laundering.......................................................................22 2.5 The EU – Obstacles to the integrity of the single market................................25 3. A SURVEY OF EUROPEAN OFCS ...............................................................................29 3.1 Andorra ............................................................................................................31 3.2 Gibraltar...........................................................................................................33 3.3 Guernsey..........................................................................................................35 3.4 Isle of Man.......................................................................................................38 3.5 Jersey...............................................................................................................40 3.6 Liechtenstein....................................................................................................42 3.7 Madeira ............................................................................................................45 3.8 Monaco ............................................................................................................48 3.9 "Legitimate" OFCs .........................................................................................50 4. THE PROSPECTS FOR OFCS.......................................................................................55 4.1 A deteriorating outlook....................................................................................55 4.2 Policy recommendations..................................................................................56 REFERENCES .....................................................................................................................60 USEFUL ADDRESSES .........................................................................................................65 List of Tables 1. Offshore financial centres in perspective ....................................................................3 2. The benefits from using OFCs.....................................................................................4 3. Policy coordination in the field of tax and finance....................................................14 4. Summary of policy initiatives....................................................................................16 5. FATF’s blacklist (February 2002) .............................................................................24 6. The FATF’s special recommendations on terrorist financing...................................25 7. The Feira European Council Agreement on the taxation of savings .........................26 8. A survey of selected OFCs........................................................................................30 9. Andorra's financial centre..........................................................................................32 10. Gibraltar’s financial centre ........................................................................................34 11. Gibraltar’s tax regime ................................................................................................34 12. Guernsey’s financial centre .......................................................................................36 13. Guernsey’s tax regime ...............................................................................................37 14. Isle of Man’s financial centre ....................................................................................38 15. Isle of Man’s tax regime ............................................................................................39 16. Jersey’s financial centre.............................................................................................40 17. Jersey’s tax regime ....................................................................................................41 18. Liechtenstein’s financial centre .................................................................................42 19. Liechtenstein’s tax regime.........................................................................................43 20. Madeira’s financial centre .........................................................................................47 21. Madeira’s tax regime .................................................................................................47 22. Monaco’s financial centre..........................................................................................48 23. Monaco’s tax regime .................................................................................................49 24. Strategies for adapting to a harsh environment .........................................................56 List of Figures 1. Total tax revenues as percentage of GDP ....................................................................19 2. Different taxes as share of GDP in the EU ..................................................................20 3. Different specialisations of OFCs’ ..............................................................................31 List of Boxes 1. The collapse of Enron – Hiding profits and losses offshore........................................9 2. The use of tax havens: The Foreign Sales Corporations (FSC) regime in the US ....10 3. Possible counter-measures by the OECD..................................................................21 4. FATF counter-measures against non-cooperative jurisdictions and territories.........24 5. State aid rules in the EU ............................................................................................27 6. Fiscal incentives in the Canary Islands......................................................................46 EXECUTIVE SUMMARY ince 1998, a considerable amount of attention has been devoted to offshore financial centres (OFCs). Little is known, however, about OFCs and the business S environment in which they operate. The aim of this paper is therefore to increase the awareness of OFCs. It provides a critical assessment of the various initiatives targeting OFCs and a first in-depth overview and comparison of European OFCs. The international actions targeting OFCs are partly motivated out of genuine concerns. Onshore countries fear that OFCs may erode their tax bases. They also claim that OFCs may offer a safe harbour for money launderers. Finally, it is claimed that OFCs endanger international financial stability. As a result, OFCs have faced “attacks” from the OECD on

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