THE ISLANDS EDITION TAX JUSTICE FOCUS VOLUME 3, NUMBER 4 The OECD and other international initiatives William Vlcek 1 EDITORIAL The quarterly newsletter of the tax justice network The prospects for Island Havens 3 FEATURES What future for the Crown Dependencies? 5 Richard Murphy The tax haven model 7 Nicholas Shaxson NEWS AND RESEARCH THE OECD AND OTHER INTERNATIONAL Letter from Geneva: UN Tax Committee 9 Dries Lesage INITIATIVES: A VIEW FROM THE CARIBBEAN Jersey presses the self-destruct button 10 John Christensen Over the past decade the Caribbean the local economy have recovered. St. Vincent the EU have focused on individuals (those who islands have certainly felt the impact and the Grenadines hosted thirteen offshore avoid or evade income tax, or clean ill-gotten WORKSHOP banks in 2000 but as of June 2007, there were gains) and not on the financial activities of Tax Justice, Transparency and Accountability of initiatives by the OECD, the EU and none. In the Cayman Islands, the number of corporations. In this context, however, it is not Invitation to participate 12 the Financial Action Task Force (FATF) banking firms has fallen from a high water mark a simple matter to determine the actual extent to counter tax competition, money of 475 in 1997 to 265 by September 2007. of tax avoidance activity. Assets may represent, laundering and terrorist financing. say, multiple iterations of the same underlying Nevertheless, throughout the Caribbean foreign deposit – such as through securitisation and assets on deposit have not fallen: instead, the derivatives, for example; and offshore financial overall trend is upwards. Data reported to the assets are far more than simply the savings he number of offshore banks has fallen, Bank for International Settlements showed accounts of high net worth individuals. Many across the board. In the Bahamas, for deposits in Caribbean OFCs growing from $1.3 assets of individuals are also held offshore T example, legislation was rewritten in trillion in 1998 to $3.3 trillion in 2006.1 This through corporate structures and trust Editor: Nicholas Shaxson 2001 in response to an FATF blacklist, leading to may be partly because the OECD, the FATF and companies. Government revenues, however, are a decline in the number of offshore banks and Contributing editor: John Christensen Design and layout: www.tabd.co.uk trusts licensed by the government (from 395 in 1 For more details on the Bahamas, Cayman, Dominica and St Vincent and the Grenadines, see William Vlcek (2007) “Why Email: [email protected] 1999 to 226 in 2006.) This reduced government Worry? The Impact of the OECD Harmful Tax Competition Initiative for Caribbean Offshore Financial Centres” The Published by the Tax Justice Network International license revenue, but local employment in Round Table: The Commonwealth Journal of International Affairs 96: 331–346. Several other Caribbean jurisdictions are Secretariat Limited described in Oral H. Williams, Esther C. Suss, and Chandima Mendis (2005) “Offshore Financial Centres in the Caribbean: banking and its direct economic contribution to Prospects in a New Environment” The World Economy 28: 1173–1188. © Tax Justice Network 2008 For free circulation, ISSN 1746-7691 FOURTH QUARTER 2007 VOLUME 3 ISSUE 4 TAX JUSTICE FOCUS “Data reported to the Bank for International Settlements showed deposits in Caribbean OFCs growing from $1.3 trillion in 1998 to $3.3 trillion in 2006” the EU.2 The Directive came into force in July Limiting our analysis to offshore financial 2005, and after the first full year the revenue centres and island tax havens, however, collected was far less than expected. Two obscures the full extent of the challenge. major gaps in the Directive have allowed EU Any country may function as a tax haven citizens to continue to avoid tax payments: for the residents of any other country. first, a failure to include some recognised The barrier to tax equity is not simply the offshore centres in the programme, leading operation of Caribbean OFCs, but national to significant financial flows to Singapore borders and national sovereignty. If we agree and Hong Kong. The second gap is that, like that tax equity is a global problem, then it the OECD’s tax competition project, the EU clearly requires a global solution. This, then, Directive only covers the savings of citizens: confronts us with the hard reality of national so any OFC with a company registry could differences over taxation. Ugland House: more than 12,000 companies “work” in this building. Photo: thanks to Cayman Net News. provide EU citizens with a corporate vehicle to transfer their assets into in order to avoid As long as tax laws are national, shifting assets generated by license fees, independent of the have done so by diversifying, or by improving tax. to another country will continue to be used quantity of assets that transit the Caribbean. on their specialisations in specific sectors. as a way to avoid taxes. The future is likely to What does the future hold? Officials in the be a more complex version of the present, at For the Cayman Islands, figures represent The European Caribbean territories (Anguilla, Caribbean OFCs recognise the benefit in least until co-operative global solutions are assets on deposit for the 8,707 (as of Aruba, British Virgin Islands, Montserrat, diversification. Antigua and Barbuda have put into place. September 2007) mutual/hedge funds Netherlands Antilles, Turks & Caicos) are attempted to establish offshore Internet- registered there. For the British Virgin Islands, subject to the European Union’s Savings based gambling. The Cayman Islands, noting William Vlcek is Lecturer in International Politics at data includes assets channelled through more Tax Directive. After years of work, the Middle Eastern investors’ and depositors’ the Institute of Commonwealth Studies, University than 774,000 (December 2006) international EU achieved a compromise on some worries about possible asset freezing by of London and author of the forthcoming study, business companies (IBCs). In Bermuda, member states’ objections to exchanging the US government in its “war on terror” Offshore Finance and Small States: Sovereignty, assets on deposit to some extent represent account holder information to help other are creating regulations to support Islamic Size and Money (Palgrave Macmillan). capital used to underwrite policies issued Member States collect taxes owed by financial services. Public and Congressional by 1,460 (December 2006) international their citizens. The compromise introduced frenzy against the proposed acquisition of insurance and re-insurance firms. the alternative of a withholding tax American ports by the Dubai firm, Dubai instead of taxpayer information exchange, Ports World, did little to mollify these The OFCs that have weathered the but the geographic coverage of the concerns. international campaigns most successfully Directive did not extend very far beyond 2 See also Tax Justice Focus, Third Quarter 2007 (vol 3, issue 3). 2 FOURTH QUARTER 2007 VOLUME 3 ISSUE 4 TAX JUSTICE FOCUS THE PROSPECTS FOR ISLAND HAVENS editorial Change has swept through the offshore world in the past decade and island tax services providers: collecting, verifying and the Pacific (Vanuatu and the Cook Islands) exchanging information is laborious and and the Caribbean (Antigua & Barbuda, havens have been buffeted by inter-linked multilateral initiatives from the OECD, expensive. Aruba, Dominica, Grenada, Montserrat, the the Financial Action Task Force (FATF,) the EU and others. Netherlands Antilles, St Lucia, St Vincent Financial centres in rich countries are often and the Grenadines), face stagnation of their spared these new requirements – so they industries. compete on a playing field tilted in their favour. oncerns about tax evasion, money Titles like ‘The Death of Tax Havens’ or ‘A For example, most of these centres still offer Yet many people doubt that island havens are laundering and financing for Death Knell for Tax Havens’ back up the first bearer securities (which confer anonymity); doomed. For one thing, the most prominent C terrorism have generated pressure view. Hampton and Levi (1999) suggest that they do not regulate corporate service and established ones seem to be booming. on island havens to give up some of their these centres may be ‘spinning into oblivion’. provides; and they allow non-residents to The Cayman Islands, the British Virgin Islands, selling points, and many have tightened An industry insider holds that: ‘It is likely form de facto anonymous companies. Island Bermuda, the Isle of Man, Jersey and Guernsey regulation and relaxed strict secrecy. Even that many of today’s tax havens will not be havens and others offering such services now are enjoying steady – and sometimes more threatening is competition from major fit enough to survive’ (2002: 98). Richard risk being blacklisted and jeopardising their spectacular – growth; the same is true for offshore financial centres like Delaware and Hay, a prominent member of the industry, international banking links. Singapore and Hong Kong. Perhaps this is London which now, in some cases, offer has claimed that island OFCs adopting more compatible with the first analysis: business tighter secrecy and looser regulation than stringent regulations than competitors like Some evidence also supports this view that will become concentrated in a few leading what is available in the island havens. Delaware are committing ‘financial suicide’ tax havens’ heyday is over. For example, centres, while most are squeezed out. (STEP 2005). Many predict that the number the Pacific islands of Nauru, Niue and Two broad views about the future have of tax havens will fall sharply in a few years. Tonga have withdrawn from the offshore What is more, some newer entrants using emerged. The first one questions whether market due to external demands for tighter supposedly out-moded or unsophisticated the island havens can survive: at a minimum The new initiatives require OFCs to collect regulation.