NARRATIVE REPORT ON BRITISH VIRGIN ISLANDS PART 1: NARRATIVE REPORT British Virgin Islands: Rank: 21 history of a Caribbean tax haven Chart 1 - How Secretive? 60Secrecy Overview and background Score The British Virgin Islands (BVI) is ranked at 24th position in the Moderately 2015 Financial Index. It has a relatively high secrecy score of 60, secretive 3-40 though it accounts for only a small share of the global market for offshore financial services. Yet its relatively low ranking in our 4-50 index seriously understates its true importance in the world of 1 offshore secrecy, as this report explains . 5-60 The BVI is an archipelago of about 60 Caribbean islands with 6-70 fewer than 23,000 inhabitants. It is a British Overseas Territory, substantially controlled and supported by Britain, but with a fair degree of political autonomy. The UK ultimately has the power 7-80 to strike down BVI secrecy legislation, though it chooses not to. The BVI has long been linked to wave after wave of scandals; 8-90 Lord Oakeshott, a former top UK politician, said in 2013 that the BVI “stains the face of Britain.” Nevertheless, it has made Exceptionally secretive 9-00 some significant improvements in transparency in recent years, improving its secrecy score, though secrecy remains a key hallmark of its offshore sector. Chart 2 - How Big? The secrecy here comes most importantly from the BVI’s lax, flexible, ask-no-questions, see-no-evil company incorporation regime, which allows owners of companies to hide behind ‘nominees’ to achieve strong secrecy2, and to set up companies quickly and at low cost. This supposed ‘efficiency’ of incorporation has translated into carte blanche for BVI companies to hide and facilitate all manner of crimes and abuses, worldwide. This tiny state where financial services directly make up around half of government revenue (p6) is a quintessential example of a jurisdiction captured by offshore financial services, with almost no local dissent against offshore finance. The BVI is now the world’s leading centre for company incorporation, with a thriving industry selling corporate secrecy British Virgin Islands accounts for slightly under 0.3 per cent of the global market for offshore financial and over a million shell companies incorporated since landmark services, making it a small player compared with legislation was introduced in 1984. Of these, 479,000 were still other secrecy juridictions. active in early 2015: 20 for each inhabitant. On paper, the BVI was the fourth largest recipient of Foreign Direct Investment (FDI) in The ranking is based on a combination of its secrecy score and scale weighting. 2013 (p6) and the world’s sixth largest source of outbound FDI (p5). In reality, the BVI is merely a conduit or ‘brass plate’ for licit Read more and illicit financial flows between countries. → Full data → British Virgin Islands on TJN Blog → Full Methodology The IMF in 2010 estimated, very conservatively, estimated that © Tax Justice Network 2015 - 23.9.2015 If you have any feedback or comments on this report, please contact us at [email protected] British Virgin Islands DENMARK BVI companies held over $600 billion in assets.3 states, including the English-speaking BVI. The BVI has expanded its range of offshore Riegels quickly agreed to incorporate a BVI offerings since the industry really took off in the company for Butler. As his son Colin Riegels 1980s, and today it is also a leading domicile later explained, this was the opening though for mutual funds, shipping registration, hedge which a whole new world of tax avoidance funds, and captive insurance, many of which emerged. U.S. corporate business began to also use BVI companies and trusts. grow steadily and was soon producing modest fee income for the BVI (at vastly greater cost to The BVI has almost no taxes: no effective income the U.S. Treasury.) tax, no capital gains tax, no inheritance taxes, no gift taxes, sales taxes or even value added taxes. But in 1981, disaster apparently struck, nipping It raises income mainly through payroll taxes, this fledgling industry in the bud. The U.S. land taxes and various fees. This is a classic ‘tax government produced a hard-hitting report on haven’ pattern of creaming small amounts each tax evasion and tax haven abuses, fingering the time from a large numbers of transactions, and BVI in several instances, and voicing emerging relying on locals to pay the bills. concerns that it is generally a bad idea to sign DTAs with tax havens. The U.S. suddenly How the BVI became a secrecy jurisdiction terminated its double tax agreement (DTA) with The BVI’s modern offshore sector was born in the BVI, among others. 1976 when Paul Butler, a lawyer from the Wall Street firm Shearman and Sterling, called the It could have been the end for the fledgling BVI only law office in Tortola, then staffed by two tax haven. Instead: it spurred a completely new Oxbridge-educated British lawyers, Neville way of doing business. Westwood and Michael Riegels. Lift off: the International Business Companies In those days U.S. multinationals were running Act of 1984 lucrative tax avoidance schemes through the Paul Butler suggested that the best way to Netherlands Antilles (see box, and our Curaçao respond to the U.S. treaty cancellation was report). to offer a completely new offshore “product” that was not designed to provoke corporate Box 1: the Netherlands Antilles loophole. tax leakage in the United States (and thus The Netherlands Antilles wheeze worked like defensive counter-measures from the world’s this. If a U.S. corporation borrowed directly most powerful country) but would instead from overseas (most lending came from the target wealthy individuals in countries around unregulated, London-focused Eurodollar the world, particularly vulnerable and corrupt market; see our UK report) the foreign lender developing countries that would not have the would pay a 30 percent U.S. withholding tax on powers to defend themselves. the loan’s interest income. But if they borrowed via a Netherlands Antilles company instead, A so-called “gang of five” lawyers – Butler, the U.S.-Antilles Double Tax Agreement (DTA) Riegels and Westwood; the then Attorney exempted the lender from the withholding tax. General Lewis Hunte, and Richard Peters, a new The loophole worked well enough for a while, partner at Harney, Westwood & Riegels – began even if it wasn’t clear whether it was technically searching for an alternative offshore model. legal or not. It was eventually closed down in The result was the International Business 1987. Companies (IBC) Act, a radical new libertarian, lax and permissive corporate regime that th Yet many firms were unhappy about the Dutch became law on August 15 , 1984, with almost language barrier and about the questionable no interference from London. legal basis for the Antilles loophole. Butler had become aware of similarly lenient DTAs The IBC Act was a curious hybrid adapted between the U.S. and various Caribbean micro- from laws elsewhere. The strong initial U.S. DENMARK British Virgin Islands focus and Sherman & Sterling’s role meant it flowing from them - would remain firmly in the was modelled strongly on Delaware law, but it shadows. incorporated many aspects of English common law too. Colin Riegels stressed that “it is easy to Registered agents providing the nominees overlook how radical it was at the time.” could even claim truthfully that they had no knowledge of the real buyer or owner of a The new IBCs were exempt from all BVI taxes company because they took all their instructions and even stamp duty. But that was only the from a so-called ‘introducer’ based in another start of it. country – such as Panama, Nevis, Vanuatu or Dubai – where British courts have little reach. Any company incorporated under the IBC Act Often, BVI companies are owned by a trust in was “ring fenced” – prohibited from trading such locations, making secrecy even stronger. or conducting business with residents of the The IBC Act also allowed bearer shares, regarded British Virgin Islands – i.e. it was restricted to as particularly pernicious because these shares international business. ‘Ring-fencing’ is a classic are ‘owned’ by the person who literally holds ‘offshore’ approach – partly designed to protect them in his or her hands – and are therefore one’s own economy from the sector while also effectively untraceable. It was a free-for-all, rejecting any effective regulatory responsibility attractive for libertarian business interests and for the activities of an IBC, it is a tacit recognition criminals alike. that the offshore sector is toxic. Underpinning the whole game, however, was The Act gave owners and controllers of BVI the BVI’s reassuringly umbilical relationship IBCs tremendous leeway to act as they pleased, with the United Kingdom, the “mother unaccountable to anyone but themselves. For country” that underwrote its laws and courts, instance, it abolished the legal concept of ultra and even made available a court of appeal vires (under which companies are permitted to at the Privy Council in London. As with other act only within their stated corporate objectives) British Overseas Territories such as the Cayman – in fact, companies were no longer required Islands or Bermuda, this link provided the to have any stated corporate objectives at all. constitutional and legal bedrock to reassure It heavily curtailed normal requirements of investors that their money was safe and corporate benefit, where directors are required governed by a predictable legal system – while to use their powers for the commercial benefit at the same time still permitting them to get of the company and its members. It allowed away with whatever they pleased.