NEWS
Apr-20-2009 Offshore Financial Centres - their regulation and treatment
By: Matthew Corbin BSc. (Hons), Dip (ITM) TEP - Director
Following the recent G20 meeting it appears that Offshore Financial Centres (OFC) are once again in the firing line from their bigger onshore brothers. British Prime Minister Gordon Brown and U.S. President Barak Obama seem intent on allocating blame to these OFC’s for the current financial crisis.
What G20 and their leaders fail to realise, or own up to, is that the current financial crisis stems from their own backyard and not further afield. The cause of this matter was never due to tax avoidance or OFC’s. However, raising tax rates and chasing after legitimate tax avoidance seems to have become the most published means of raising revenue to recoup Government ‘bail out funds’.
Centres with low tax regimes, or tax havens as they are popularly and incorrectly termed, are portrayed as the wild and lawless playgrounds of thieves, drug dealers and criminals in general. They are stigmatised as such, singled out and criticised simply for having lower taxes and in some cases more advantageous domestic legislation than other countries. Member countries of the Organisation for Economic Co-operation and Development (OECD) and other jurisdictions with more punitive rates of tax have to say this to justify their own high domestic tax rates. They also allege that the OFC’s are not sufficiently regulated, which is somewhat of a joke given the current state most onshore financial institutions find themselves in at the present time.
Let’s have a look at the two topics in more detail:
Taxes
Taxes are used by governments to pay for the building of roads, provision of health care, education, sanitation, policing and emergency services, etc. The OECD would have you believe that the higher the tax rate the better the infrastructure and services a country can provide. Consequently if a country has low taxes, then this must equate to low government spending and thus poor public services and infrastructure. However OFC’s tend to be well developed and their inhabitants well cared for.
How can this be?
The simple fact is that G20 nations and other countries within the OECD who maintain high tax regimes do not make best use of the taxes they collect. There is wastage, overspending, lack of public accountability and fundamentally flawed policies relating to public spending.
Using Hong Kong as an example of an efficient low tax regime at risk of being considered a non-cooperative ‘tax haven’ given the recent OECD guidelines, it has accumulated substantial budget surpluses over the past 20 years and is in the enviable position of having one of the highest levels of reserves per capita.
Hong Kong has an effective individual tax rate of 15%, a corporate tax rate of 16.5%, no value added taxes, no capital gains taxes and no inheritance tax or death duties. Clearly this is a well managed and an efficient government spending its tax dollars wisely and responsibly. Can the other OECD members make similar claims about their use of their taxpayers’ money?
With billions of US dollars in tax surpluses why should Hong Kong, or other OFC’s, come under pressure from G20 or the OECD to increase their tax rates?
Regulations
Internal and external regulations are potentially points of conflict with the OECD and OFC’s. The OECD seems intent on ensuring that external regulation of OFC’s will enable them to obtain tax information relating to their citizens. One of the OECD’s major concerns is banking secrecy and how this inhibits their ability to gain information from tax authorities. OFC’s on the other hand are more interested in looking at internal regulation and compliance; in most cases the offshore regulations imposed by OFC’s being more stringent that those imposed on onshore service providers.
OFC’s continue to maintain and ensure that their financial services business operate in a professional and internationally acceptable manner. OFC’s tend to have a consolidated financial services commission (dealing with banking, corporate, trust, insurance and investment or fund related activity) that ensures persons and companies providing financial services are suitably regulated, qualified, appropriate and adhere to all necessary regulatory and legal measures associated with the services they provide. At a basic level OFC’s, like their onshore counterparts, have to adhere to local legislation refusing business that is connected with money-laundering, drug trafficking, funds that originate from the proceeds of crime and terrorist financing. One only needs to try to open a bank account to fully appreciate the extent of the regulatory rules implemented by banks in Hong Kong and other OFC’s.
Banking secrecy laws, as have existed in Switzerland for hundreds of years and more recently in Singapore, are something that everyone should aspire to benefit from. Governments with high tax regimes demonise banking secrecy and try to use its potential ability to assist terrorist financing and drug dealing as excuses for its abolition. In reality this is nothing more than them trying to increase tax and collect more and more money from their citizens globally.
How many unsolicited calls and pieces of mail do you receive each month? Someone somewhere has your telephone and address stored on a computer and is selling this information to marketing companies who are intent on invading your privacy and disrupting your day. Would you not wish to keep this information private and out of the hands of these people?
Record numbers of bank details and credit card numbers are being sold on the black market from our banks' back offices and overseas services locations. Banking secrecy legislation would ensure that banks are severely punished for failing to ensure this personal data is kept confidential and out of the hands of criminal gangs and fraudsters.
Following the terrorist attacks on 11th September 2001 (911) it has, and continues to be claimed, that OFC’s need to be closed down to avoid terrorists using them for the storage and laundering of funds. However, the reports into the funds used for the attacks, published by the US government, clearly indicate that the funds were transferred through banks in Germany, the UK and even New York in the USA. No mention is made of OFC’s or their use. It appears that the OFC’s were too well regulated to accept these funds. It seems to me that it is the onshore financial institutions that require better regulation and supervision.
As an individual or as a company we should have the right to legally reduce our tax obligations to a minimum. If we are not committing any crimes then we should also have the right to total privacy relating to our personal affairs.
Read what Roddy Sage has to say about this in his blogpost, 'Hong Kong is NOT a Tax Haven'