Wednesday, March 10, 2010Shifting Goal Posts

Mason MarcusThe BVI - 25 Years as a Financial Services Centre

Hit a baseball out of the park, and you know it’s a homerun. Knock a rugby ball through the posts and you know you’ve scored a conversion.

But for the British Virgin Island’s Financial Services Commission, hard and fast rules for coaching the territory through the international regulatory playbook haven’t always applied. The Organisation for Economic Co-Operation and Development and other multinational organisations have a history of moving the goalposts.

For years, international organisations like the OECD have attacked IFC’s with accusations of tax evasion and secrecy, but efforts internationally to clamp down on tax avoidance picked up steam since the worldwide economic recession caused governments to tighten their belts and seek out new revenue streams late last year.

So far, 2009 has been the year of the Tax Information Exchange Agreement. Offshore finance centres from the Cayman Islands to the Channel Islands have been inking agreements to remove themselves from the stigma of falling on the OECD’s “gray” or “black list” of non-compliant jurisdictions and the stalwarts of European secrecy, Switzerland and Lichtenstein, have been coaxed or coerced into deals of their own.

By mid-September, the BVI had concluded 13 TIEAs internationally and was in the process of finalising agreements with Ireland, Germany and Mexico, placing the territory firmly with the requisite number to be shifted from the OECD’s grey to its white list.

For some, the OECD has lent its weight to many positive reforms for the offshore world. “It gave us an idea of what needed to be done to improve respectability and move into the fold of nations,” said Appleby managing partner Michael Burns, adding, “The offshore world is a harder world of business than the onshore world. Transparency is the order of the day, and any jurisdiction that falls behind probably deserves to.”

Premier Ralph T. O’Neal called the agreements integral to the survival of the territory’s financial centre. “The highly competitive nature of the environment in which we operate coupled with the downturn being experienced in the global economy, makes it even more imperative that we do all in our power to maintain and further improve our standing in the international arena,” he said.

But what further regulation can the territory expect? At least one observer believes the territory should not stop signing tax agreements.

“I think the BVI cannot be satisfied with 12 TIEAs,” said Lorna Smith, in a recent interview. Ms. Smith, who served as past-director of the International Finance Centre and the now-defunct International Affairs Secretariat, said the territory should pre-empt criticism by signing as many tax agreements as possible.

“I think that our aim should be to sign with all [the OECD member and non member] countries, so there will be no excuse to say that we are not compliant. Then, if the developed countries are going to be looking for a goalpost, they will have to move beyond the goalpost of the international standard, or the gold standard that was set by the OECD and non-OECD countries,” she said.

For Ms. Smith and others—almost every time the US or European economy takes a beating, the OECD or G20 comes knocking.

“I think we are going to see this [pressure] for as long as the global economic instability continues,” she said. “I think that the G20 countries were delighted to have found a whipping boy, or an excuse, or a fall guy, and this was the international finance centres.”

As the worldwide community levies attacks against the IFCs, lawyers and legislators from around the globe have taken to the airwaves and Internet to defend their cases. Last September, Maples and Calder Senior Partner Charles Jennings posted a response to a critical article in the Guardian Newspaper, questioning the reporter’s carping portrayal of the Cayman Island’s financial services sector.

“Many banks here are branches of banks regulated in onshore jurisdictions under Basel II principles. Many Cayman hedge and private equity fund managers are regulated by the UK Financial Services Authority and many funds are listed on recognized stock exchanges. Multinational companies routinely disclose their overseas subsidiaries in their public annual reports. The Cayman Islands Monetary Authority, which regulates financial services businesses, often co-operates with overseas regulators,” Mr. Jennings wrote.

The BVI frequently mounts a similar defence: applauding the territory’s strong regulatory arm and robust legislative framework.

But Ms. Smith said she believes finance centres, like the BVI, need to actively market to the international community. “We need to do some more research and we need to present a case for justifying the need for IFC’s…we need to say we are not interested in doing dirty business, we are not interested in tax evasion, we are here for a purpose as offshore finance centres and we do contribute in a positive way,” said Ms. Smith.

Speaking from his Road Town law offices, former BVI Attorney General Lewis Hunte agreed too little is known internationally about the territory’s financial services. “I feel that the OECD countries do not know about what goes on down here,” he said. “That they believe we have huge bank accounts in these offshore countries, that really compromise their tax dollars, and that is absolutely not so. So they will continue to move the goalposts until they find, or they believe they find out what the situation is.

Mr. Hunte, who shepherded the first business company act through the BVI government in 1984, said increased regulatory pressure from abroad would continue. “Since they find that we achieve the target so easily, that is an encouragement for the [OECD] to set bigger targets, and they will continue to do it, because they feel there will come time when we will reach a breaking point. I believe they are wrong again in that regard.”

For Peter Goddard, of McGuireWoods London Llc, who began working in the Cayman Islands in 1994, tax evasion will no longer be a valid criticism going forward as each jurisdiction builds a “sophisticated regulatory, anti-money laundering and anti-terrorist financing infrastructure,” The only possible objection to the top tier of IFC’s, says Mr. Goddard, is the fact that they are zero-tax centres.

“Some major onshore jurisdictions have deliberately offered zero-tax options in the hope of attracting similar business; and still others thrive on offering very low-tax solutions to international businesses…So, if that is a valid criticism of IFC’s, it is one that must also be levelled at some OECD and EU member states as well,” he wrote recently.

For Mr. Goddard, tax transparency should yield its own dividends to IFC’s. “There will always be a need for tax efficient, tax compliant structuring for private clients in centres of excellence, so that line of business should continue. Clients will be able to maintain confidentiality of their affairs, provided they are not breaking the law,” he said.

For the past 25-years, the BVI’s financial services industry has shown ingenuity in the face of an uncertain future. When the UK and US unilaterally cancelled their double-taxation treaties with the territory in the late 70s and early 80s, the territory crafted international business company legislation.

By 1995, the territory could boast 47.7 percent of all global offshore company formation. But greater international success meant greater international scrutiny. In 1998, the OECD published its report on harmful tax practices, naming and shaming the VI and 34 other countries as tax havens whose offshore financial activities were “harmful to the developed world,” including the BVI.

For the last decade, the territory has worked to remain compliant with various initiatives emanating from international organisations including the OECD, the Financial Action Task Force (FAFT) and the European Union’s Savings Directive, which collectively have pushed for greater transparency and automatic exchange of information, amoung other concerns.

For some, the EU Savings Taxation Directive may be the focus of a new regulatory thrust.

Earlier this year, FSC CEO Robert Mathavious warned industry members that the EU was not satisfied with their tax take from the directive, and was revisiting the idea of expanding the legislation to include corporate vehicles and trusts.

“It may be prudent and timely for the BVI to consider switching voluntarily from the transitional withholding tax option to the automatic exchange of information option,” he said.

Other jurisdictions have also taken notice. Martin De Forest-Brown, director of international finance for the Chief Minister’s Department in Jersey, said the Channel Island publicly stated its support for automatic exchange of information, as a “matter of principle,” but wants to see it adopted as an international standard.

“This would be a fundamental change for jurisdictions such as Switzerland as the requirement would be in conflict with their national banking secrecy laws. On this matter the European Union already leads the way under the EU Taxation of Savings Directive. As a result of the G20 initiative it is expected that the requirements for the EU Savings Directive to move wholesale to automatic exchange of information will be met by January 2012,” he said.

Richard Peters, managing partner of Harney‘s, in the BVI, said the EU may try to “plug up some of the loopholes,” concerning withholding tax, though he argued regulators would likely not touch dividends.

The implementation of the Savings Taxation Directive had one goal, to allow EU Member States to tax the foreign interest income of their resident individuals. But it remains unclear whether tweaking the regulations will fill Europe’s tax gap.

According to a recent working paper published by the European Commission’s Taxation and Customs Unit, tasked with examining tax co-ordination, the implementation of the directive has not lead to major shifts in international savings.

“A possible reason for this surprising result is that the existence of loopholes makes it easy for investors to circumvent taxation on foreign-source interest. Furthermore, the countries where most of the international deposits are held (Switzerland and Luxemburg) did not exchange information, but levied a withholding tax with a relatively low rate of 15 percent in the period surveyed by this paper,” the study reported.

With increased transparency and automatic exchange of information on the horizon, some in the industry say key services will differentiate the IFCs that survive through the next few years—and those that fall by the wayside.

For Andrew Burns, the new director of the H. Lavity Stoutt Community College’s Financial Services Institute, IFC’s that once gained competitive advantage from tax avoidance vehicles will now take the lead by offering “intellectual capital.”

According to Mr. Burns, few IFCs around the world have invested heavily in what he calls the “bricks and mortar” of financial work, qualifying professionals with international accreditation from Institute of Chartered Secretaries and Administrators or the Society of Estate and Trust Practitioners.

“The jurisdiction that enhances its own intellectual capital will certainly have the capability to find new uses for their current offshore products. In developing and differentiating its core capabilities those offshore jurisdictions will create an ability to take advantage of emerging markets,” he said.

Mr. Peters, Harneys managing partner agreed. “I think we have to upgrade the human resources, including resident directors in cases and compliance officers,” he said. “The roles of fiduciary officers are going to be increasingly in demand.”

Ms. Smith, the former director of the IFC, also said she would like to see more BVIslanders become accredited in their financial professions. “I would like to see more [BVIslanders] doing the chartered secretary qualifications, the ICSA qualification, because as a chartered secretary, for instance, you can command not only a large salary but you really would be involved in the industry and be part of the industry in a meaningful way, rather than just being a secretary,” she said.

To keep pace with other IFCs, the government will have to pay internal reform more than just lip service. A recent proposed new labour law that would have capped work permit terms sent shivers through the financial community, which depends on its ability to attract highly qualified expatriates to the territory.

To Ms. Smith, preparing for the future will require long-term planning and strategic thinking.

“I think government has to be proactive, but the government must first know what they want to do, where they want to go, they must know what benefits they will get from it. If it is beneficial for the nation, plan it, get your nationals involved, get your nationals trained, so even if they aren’t able to get at the top level in the beginning they will get involved, she said.

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