Collateral damage

A littleover a week ago the British parliamentarian, Sir Eric Pickles – a cabinet member until May of thisyear and a former Chairman of the Conservative Party – told the London Guardian that the British Prime Minister, David Cameron, was determined to havethe BVI and the Cayman Islands adopt public registers of beneficial ownershipeither “through legislation, guidance or naked pressure”.

Hischaracteristically direct remarks followed a recent message sent from London toboth Cayman and the BVI, instructing their governments to present animplementation plan by November.

What theUK wants is for its overseas territories to develop a central public registerof names of those who have the controlling interest of companies and trustsregistered in the islands. The UK’s aim is to try to curtail tax evasion, moneylaundering and other activities by individuals, criminals and those who pose athreat to international security. The theory is that this will enable the discoveryof the beneficial owners of offshore companies: information that the BVI andothers say is already accessible under existing arrangements.

In aresponse, the BVI Premier made clear to the local media that he would not berushed. The country’s approach would be ‘deliberate’. While consideration willbe given to the recommendations of the British government, Dr Smith said that theconcerns of the industry, the BVI, “and the wider industry in Hong Kong, andother parts of the world where BVI companies are used,” will also be taken into account.

He alsoobserved that financial services contribute about 60 percent of hiscountry’s GDP. Far frombeing the ‘notorious tax haven’ that had been suggested by international pressuregroups, the BVI, he said, was listed as one of the best in the world, and was wellregulated and run, withall activities well within the laws of the countries the islands work with. “This is why we signtax information arrangements with every country that we do business in,” he said

Primier Smith’sremarks were little different, other than in context, from those made recently bythe Prime Ministers of Barbados, Antigua and ministers from other Caribbean nationsthat also find their valuable offshore financial services industries under attack,and like the BVI and Cayman have been erroneously labelled as ‘tax havens’ bythe European Union and by a number of states of the US.

Barbados’ Prime Minister, FreundelStuart, was particularly strong in his response, recently condemning what hedescribed as the “the unjustified attacks of powerful nations that change therules at will to satisfy the demands of their own onshore interest groups andconstituents”.

That said, the claim that that the BVI, Cayman and othersare in popular parlance ‘taxhavens’ reflects concern among many governments and electorates that most ofthe world’s multinationals are diminishing their tax liability by taking theirprofits in no-tax offshore financial centres.

Whilewhat they and the offshore centres involved are doing is perfectly legal, the observationsof two US think tanks, Citizensfor Tax Justice and the USPublic Interest Research Group are concerning. The two organisations reported that US multinationalcompanies were holding over US$2.1 trillion in accumulated profits in ‘tax havens’, that 56 Fortune500 companies wouldappear to be paying on average just 6.3 per cent in taxes, and that this was enablingthem to take ‘a freeride at the expense of taxpayers.’

In thisrespect the G20 group of major economies unveiled on October 5 a fifteen point packageof measures drawn up by the Organisation for Economic Co-operation andDevelopment (OECD). These aim to changerules dating back decades on how cross-border commerce is taxed by increasing transparency, closing loopholes andrestricting the use of offshore financial centres by taxing economic activities where they takeplace and where value is created.

The OECD believes that the amount of untaxed moneymoved annually into offshore centres is in the US$100 billion to US$240 billionrange and such profit concentration is resulting in significant losses in taxrevenues.

But beyond this, the process of what is formally knownas ‘base erosion and profit shifting’ hasbecome so political an issue that the response to corporate tax avoidance is likely to figure increasinglyin elections in many parts of the world including the US and Europe.

As the EuropeanEconomic Affairs Commissioner, Pierre Moscovici, recently observed, ‘electoratescannot stand anymore paying their fair share of taxes, and contributing tofiscal consolidation while companies, especially multinationals, avoid tax’.

Whether what is now being proposed comes to passremains to be seen as it will be up to each G20 government to eschew excessive taxcompetition and develop and implement the necessary legislation andregulations, which are even then only likely to be as strong as in the weakestjurisdiction.

The independentCaribbean and the overseas territories have observably prospered from offshorefinancial services. They have expandedand diversified their products and outreach – for instance in the BVI’s case intoChina though a Hong Kong office – and have been at the forefront of a process thatBarbados’ former Prime Minister Owen Arthur recently described as ‘reimagining’the Caribbean economy.

Notwithstanding, the problem for the Caribbean is that it is faced with deploying factual andpragmatic arguments about its own development against those in much largernations who, with some justification, are emotionally and philosophicallyengaged in a national debate about taxation, social equity and domesticpolitics.

Ultimatelythis makes the issue one of sovereignty; and who has the right to manage aworld in which legal jurisdictions no longer have much relevance to fungible internationalcapital, and in which companies and individuals are able legally to take advantageof even the slightest global variations in tax and other rules.

It isalso about the political implications of the growing social inequality that hasemerged in developed and advanced developing nations, largely because economicglobalisation has primarily benefitted those with access to capital and marketsthough vehicles such as hedge funds, high frequency trading, dedicatedcommunications, tax arbitrage and switching citizenship.

The Caribbeanunfortunately stands at the crossroads of these unresolved conflicts, actualand philosophical. As with commodities and freer trade before, it seems again likelyto be about to suffer collateral damage in the global process of rebalancing.

DavidJessop is a consultant to the Caribbean Council and can be contacted at

david.jessop@caribbean-council.org

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