Offshore Financial Centers Flourishing

The term 'offshore' has more than four letters, but it's become a
dirty word to some. Offshore jurisdictions are often seen as nothing
more than tax shelters and they're regularly called 'tax havens', in
a disparaging way, in the main stream media. However, offshore
financial centers (OFCs) play a crucial role in the global economy,
ensuring that democratic nation states remain free and fair markets.
They do this in two main ways: 1) By allowing individuals legally to
avoid punitive, uncompetitive tax regimes; and, 2) by allowing
multinational companies to lower legally their effective worldwide tax
bills by having a group holding company incorporated in a 'tax neutral'
offshore jurisdiction – thus benefiting all of their 'onshore'
shareholders.

The products and services that OFCs offer to individuals have attracted
the most attention to date and the traditional benefit of going offshore,
namely privacy through banking secrecy, has been severely eroded in many
jurisdictions. Despite this, the top offshore havens have been growing
rapidly and attracting increasing amounts of capital from North America
and Europe through the growth of products and services they offer to
corporate and business clients.

Example: a Statistics Canada report (March 2005) indicates that Canadian
direct investment in offshore financial centers has soared eight fold
since 1990 to CDN$88 billion (US$73 billion) in 2003. 'From 1990 to 2003,
Canadian enterprises invested substantial and growing amounts in countries
known as 'offshore financial centers', many of them in the Caribbean,'
StatsCan said. 'These centers include countries that are often referred to
as tax havens as well as those which have important financial sectors,
such as Switzerland, but also Ireland'. The largest increases went into
Barbados, Bermuda, the Cayman Islands, The Bahamas and Ireland.

Consequently, offshore jurisdictions increasingly have come under attack
for their corporate products and services, particularly from a group of
multi-national organizations, such as the Organization for Economic
Co-operation and Development (OECD) and the Financial Action Task Force
on Money Laundering (FATF). In addition, the UK government commissioned
an independent review of financial regulation in its Overseas Territories
in 2000 by KPMG. It sought to assess the extent to which the UK's OSTs
complied with international standards and good practice in the way they
regulate their international financial sectors.

Over the last four years, Bermuda, BVI, Cayman and Gibraltar have
implemented virtually all the KPMG recommendations with a slew of new laws
and a substantial upgrade of their regulatory bodies. Britain's Crown
Dependencies – Guernsey, Jersey and the Isle of Man - have mirrored the
changes in the UK OSTs and made equivalent improvements in their own
regulations and regulatory bodies.

The EU's savings tax directive is another example of an initiative that has
been forced onto the offshore financial centers over in recent years,
although it has been delayed significantly by opposition from the US,
Luxembourg, Switzerland and the OFCs. As a result of extended negotiations,
the proposed implementation date for the EU tax directive has been postponed
several times. And there are rumors the effective date may be postponed again,
from July 1, 2005 to January 1, 2006.

Continued EU wrangling with Switzerland over the meaning of some provisions
reportedly is delaying implementation and, understandably, no offshore center
wants to be the first to implement the directive.

The OECD, FATF et al attacks have had major ramifications for the offshore
world. One example: jurisdictions like Niue have agreed to get out of the
offshore finance business altogether (a move that only can be welcomed by
legitimate OFCs) and Liechtenstein is making major adjustments to its
constitutional arrangements in order to be better able to respond to such
attacks in the future.

Some eurocrats are convinced that all these initiatives have put the offshore
financial centers off balance and that most of them soon will be wiped out.

They are wrong.

In our view, the EU and the OECD have wasted a monumental amount of time and
resources pursuing the offshore financial centers. In the final analysis, the
changes implemented by the offshore jurisdictions as a result of these attacks
have actually made them stronger and more relevant, not weaker.

In particular, the leading offshore financial centers have:
* established new and/or entrenched their existing zero/low tax regimes;
* substantially enhanced their reputations, adopted better regulations
  and strengthened regulators;
* extracted important benefits in return for imposing greater regulation
  (e.g. international recognition for their stock exchanges, acceptance
  of banking secrecy laws, and in some cases EU treaty exemptions); and
* been given a seat at the table at global tax forums going forward –
  with equal negotiating status under the 'level playing field' concept.

Whilst these attacks have strengthened some of the OFCs, they have had the
exact opposite effect for some of the multilateral bodies involved in the
process (especially the OECD), because the whole process has attracted
negative attention to them and opened them up to more global criticism.

The leading offshore financial centers have weathered the storms rather
well. In part that's been due to the resistance of the US and the larger centers,                                                                 such as Switzerland, but also because the offshore financial centers managed                                                                       to establish acceptance of the level playing field concept.

Therefore we see continued growth in corporate business in the well regulated,
leading offshore financial centers such as Bermuda, BVI, the Caymans, Guernsey,
Isle of Man, Jersey, Luxembourg and Switzerland.

But many of the smaller, newer centers, in the Caribbean and the Pacific
particularly, will struggle to get business in today's tougher climate.

Good luck!