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30 YEARS IN THE OFFSHORE INDUSTRY by Howard Bilton

This article is the first in a series on matters which we hope will be of interest to those working in the offshore/international finance industry. To kick that off I thought it might be interesting to reflect on 30 years in the industry and the major changes experienced in that period.

So what has changed? I think it fair to say that the industry has changed out of all recognition but nearly everything relates to one seismic shift being the total loss of secrecy and the gradual but accelerating introduction of transparency and loss of confidentiality.

This all dates back to 1996 when the OECD requested a report on “Harmful Tax Competition”. That report was delivered in 1998. The report was damning and suggested the “tax havens” (and yes they were and still are referred to as that by the OECD but we will call them IFCs here) were engaging in unfair tax competition by having lower rates of tax than the OECD membership and were therefore unfairly attracting investment. Boo hoo. The suggestion was that the OECD apply pressure to the IFCs to force them to introduce minimum (and higher) levels of taxation which would allow the major developed nations to compete fairly for investment. And that all jurisdictions abolish secrecy and confidentiality so that the OECD members could obtain the information they needed to tax their own residents fully and properly. The report called on the OECD nations to introduce counter measures against any IFC which did not comply with their suggestions. Those counter measures would include imposing a withholding tax on any payments made to a non-compliant or blacklisted IFC, disallowing any deductions for payments made to such jurisdictions and making their own banks refuse to do business with those jurisdictions or entities resident in them.

Shortly after the publication of the report, the US intervened in a surprising way by unexpectedly announcing that they thought that the emphasis on trying to influence tax rates was misplaced, that competition on tax rates was a good thing and forced countries, like companies, to be efficient and that the emphasis of the report needed to change to the introduction of transparency and removal of secrecy if it was to get US support. Without the US support the measures were dead and so very quickly the emphasis did indeed change to transparency.

From then on countermeasures were threatened against jurisdictions who did not introduce Tax Information Exchange Agreements (TIEAs). The IFCs reluctantly complied and introduced the minimum required number of 13 TIEAs. The TIEAs were never very effective. To trigger a request the onshore jurisdiction had to know about the structure in the first place and have reasonable evidence to suggest that one of their own citizens or residents were behind it. Figures for how often these TIEAs were used are not available but it is suspected that they were rarely, if ever, used.

The report in itself did not seem to change very much or prove very effective but what it did mark was a determined effort by all onshore jurisdictions to stamp out tax avoidance. Up until then nobody had paid these issues much attention. It was perhaps a badge of honour for the offshore jurisdictions that they had been so successful in attracting business that they were now a major concern to the exchequers of the onshore.

The next significant move was the introduction of the EU savings directive. This required all EU countries and any jurisdictions under their control to automatically report details of any bank accounts which were owned by residents of another jurisdiction or a territory under their control. And the EU managed to persuade Switzerland to introduce similar measures. It is not clear how they managed to persuade them to do this. There must have been grave economic substances if they refused. Details are uncertain.

At the time the Swiss banks were perceived as the major problem. They were undoubtedly banking vast fortunes for EU residents who were relying on Swiss bank secrecy when filing their tax returns which failed to mention either the original profits made to fund these accounts and/or the investment income these accounts were generating. Having the existence of these accounts revealed to their own tax authorities could prove ruinous as they would face years of taxation possibly on the principal but certainly on the investment income, fines for their failure to correctly report this income and other penalties which would probably amount to more than the contents of the account themselves. Panic ensued. Luckily the Swiss bankers came to their rescue and pointed out to their wealthy clients that the legislation only covered individual accounts so if the client set up an offshore company and transferred the money to an account in the name of that company, there would be no reporting. Mossack & Fonseca made fortunes by selling thousands of Panamanian companies to the Swiss banks so that they could resell them to their numerous clients. Banks in Cayman, BVI and other offshore jurisdictions were equally affected as they were territories “under the control” of EU member states particularly Netherlands and the UK. Initially, the initiative seemed to have the opposite effect of that intended. All it did was line the coffers of offshore jurisdictions who were the recipients of large amounts of fees for setting up large amounts of companies for large amounts of those banking offshore who had accounts in their own names. However, it wasn’t too long before the EU realised the error of their ways and amended the directive to include accounts owned by any entity owned by an EU resident. The amended legislation was almost singlehandedly responsible for the rapid development of the private banking industry in Singapore as most Swiss banks opened subsidiaries in Singapore and invited clients to close their Swiss based accounts and open similar there. This was probably coincidental and any suggestion that the Swiss banks were again contriving to assist clients in defrauding their home revenues by facilitating the non-reporting of accounts beneficially owned by EU residents, would be scurrilous and possibly libellous.

Throughout this period and continuing has been many instances of where computer systems have been hacked or data has been stolen from law firms, Swiss banks or the like and that information has been sold to onshore revenue authorities or given them in return for a reward. My legal studies always suggested that it was illegal to either purchase or receive stolen goods or information but apparently those rules don’t apply in these circumstances for reasons which escape me. And of course, nobody has much sympathy for those who are caught acting illegally by failing to report their income correctly and evading tax. The Panama and Paradise papers are the most notable examples of data being obtained illegally and sold on but there have been numerous additional instances where employees of banks have left with memory sticks and passed to various revenue authorities particularly the US who have a stated policy of rewarding those who provide information which leads to the collection of unpaid tax.

Then in 2010 along came The Foreign Account Tax Compliance Act (FATCA) United States federal law requiring all non-U.S. foreign financial institutions (FFIs) to report the assets and identities of any US clients to the U.S. Department of the Treasury.

This was followed by and provided the model for the Common Reporting Standard (CRS) which has now come into full force and effect. Now any offshore service provider must, as a matter of course, report details of any structure they set up to the home tax authority of the beneficial owner.

And now the IFCs are being asked to introduce registers of beneficial ownership which are open to the public. The UK requires the beneficial owners of property in the UK to reveal themselves. What next? Norway requires all tax payers to publish their returns!

The other major change has been the wholesale introduction of licensing and regulation of offshore service providers. They are now subject to standards which are completely absent in the onshore jurisdictions which enforced regulation upon the offshore jurisdictions. It remains the case that if you want to set up a UK company, it can be done over the internet in a few minutes for a cost of £12 with virtually no questions asked or documents required. The same process offshore requires a mass of documentation on the beneficial owners, the intended business of the company, and the inside leg measurements of everybody involved. Gibraltar was one of the first jurisdictions to introduce comprehensive regulation due to pressure from the UK government. Gibraltar has been the model of the well regulated and well-run offshore jurisdiction

The effect of all of the above has been huge additional compliance requirements for clients and service providers alike and therefore increased costs and procedures. The emphasis on offshore services has switched entirely from a way to hide money to a way to conduct proper tax planning and investment. Thirty years ago people were making calls to their offshore providers from phone boxes and confidentiality of communication was key. These days there is still a desire for confidentiality but it is no longer the rationale. Any offshore arrangement must be able to stand up to scrutiny and works because it is good planning rather than because revenue authorities can’t find out what has been going on. This is a considerable change. I don’t think even the kindest commentator would suggest that 30 years ago most offshore service providers were not setting up structures which relied only upon secrecy. These days are gone, and not before time. The hangover still exists. The onshore media and much of the onshore public still believe that anybody who does anything offshore must be up to no good and is a tax evader. Despite that the offshore jurisdictions continue to thrive but they have to some extent reinvented themselves and become much more sophisticated. Increased tax anti avoidance laws mean that simple structures will rarely be effective and much more use is being made of insurance and pension products which are statutorily exempted from tax. This looks set to continue.

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Sovereign Trust (Gibraltar) Limited
Tel: +350 200 76173