Offshore financial centres (OFCs) have taken a bashing in the press in the last few days following the Mossack Fonseca leaks.
But the truth is that the major OFCs are extremely well regulated and have been so for many years. It is far harder to set up a company in Jersey than in the UK, for instance, because of its rigorous “know your client” rules. It is therefore wrong to judge the whole of the offshore industry on the actions of a single firm in Panama.
All the major OFCs comply with international rules on money laundering, tax information exchange and corporate governance. In fact, most people use companies in OFCs for quite mundane, non-tax reasons. If you are trading or investing internationally, an offshore company is an essential building block for your business.
One huge attraction is the excellent legal systems and experienced professionals in the legal, fiduciary and corporate governance sectors. Experienced business people will tell you that there are certain emerging markets where, under no circumstances, would you want to resolve an investors’ dispute – you would much rather resolve it in a Cayman court where you could be sure of a fair fight.
Furthermore, try listing a Nigerian company, for example, on the London Stock Exchange – it’s virtually impossible. However, there are dozens of British Virgin Islands, Cayman and Jersey companies listed, which demonstrates that their standards of corporate governance, due diligence and investor protection are extremely high.
Another reason for using an OFC is the bi-lateral treaties many of them have entered into with other countries. Mauritius, for instance, has excellent treaties with India and as a consequence it is now the world’s most important financial gateway to the sub-continent. Hong Kong, for similar reasons, is the gateway into China, and Barbados, which is part of Caricom, is the gateway into the Caribbean nations.
The press often obsesses over the fact that many OFCs have zero or low rates of corporation tax and concludes that those businesses are therefore avoiding all tax. This is simply not true, as virtually every country in which an offshore company would wish to trade or invest will impose taxes on locally-sourced profits, normally enforced by way of withholding taxes (anything up to 35 per cent) on dividends, royalties, rents, interest and other payments abroad. That’s one layer of tax.
In addition, the home jurisdiction of the shareholder of the offshore company will invariably tax that income either when it reaches the offshore company (using so-called “controlled foreign corporation” rules) or when it is extracted. That’s the second layer of tax. So what the OFC does is ensure that either there is no third layer of tax or, if there is, that it’s as modest as possible.
A bank account in the British Virgin Islands, Jersey or Panama is no more “secret” than a bank account in the UK. There is disclosure to law enforcement agencies of the beneficial ownership of companies in all the OFCs; although there is no publicly accessible register, nor is there one in 27 out of 28 of the EU member states.
OFCs are a vital part of our globalised world – without them international trade and investment would seriously suffer, global GDP would be lower, and the world would be a poorer place. It is important this is not forgotten when people clamour for the “tax havens” to be closed down.