End of the tax haven vacation
Offshore regimes have been forced to share client data
From Aruba to the British Virgin Islands, offshore centres have long been favoured by those wishing to hide their assets. However, in the throes of the financial crisis, world leaders looked for others to share the blame and demanded such centres give up many of the features that attracted assets there in the first place.
The Organisation for Economic Co-operation and Development demanded each offshore centre communicate tax information relating to assets held under its jurisdiction with as many other countries as possible and a spotlight was shone on the rules enforced by their regulatory bodies.
City of London minister Lord Myners told Financial News last week that offshore centres would become significantly less important. He said many of the assets they housed would head back onshore and he wanted the UK to pick up most of them.
However, Derek Adler, director at Ifina, a fund administrator working in the British Virgin Islands, said this was unlikely. He said: “Offshore centres have been bending over backwards to comply with the new rules put in place by international regulators. Conditions in the UK would have to change dramatically as they are currently far too restrictive for many investors to consider returning.”
Marc Seimetz, partner at law firm Dechert in Luxembourg, said the country would be among those that would pick up the most business if investors pulled back from non-European Union offshore centres.
Seimetz said: “Luxembourg is the second-largest fund market behind the US. It was quick to implement Ucits and create a working environment in which it could operate, this structure has also become increasingly popular with hedge fund managers.”
Luxembourg
A sure-fire way to upset a Luxembourger is to class their land-locked home state as “offshore”, despite it being exactly that. Luxembourg is the second-largest fund domicile in the world by assets under management, after the US. With a population of under half a million, it is home to €1.7 trillion ($2.5 trillion) in assets.
Claude Kremer, chairman of the Association of the Luxembourg Fund Industry, said: “We do not consider ourselves offshore. We are regulated within the European Union, whereas other financial centres have their own set of rules.”
Luxembourg was the first country in the EU to put Ucits, the undertakings for collective investment in transferable securities directive, into practice in 1988. Its push into the fund domicile and administration sectors before other member states soon collected business from those lagging behind.
Over the past 20 years, funds from as far away as Asia and Latin America have been based in the tiny nation, along with several thousand from Europe and the US. The nation is trying to steal a march on other offshore centres. In 2007 it launched specialised investment funds, aimed at alternative asset managers that may currently base funds further afield.
Cayman Islands
As one of the more prominent offshore financial centres, the Cayman Islands has taken flak from international regulators during the recent crisis due to its allegedly lax attitude to regulation and tax. In May the chairman of the islands’ financial services association wrote an open letter to US President Barack Obama expressing concern over his claims the Caymans were little more than a vehicle for tax evasion.
The Cayman Islands launched on to the international finance scene in the 1960s. It now houses branches of 40 of the largest 50 worldwide banks and hosts more than 9,500 funds under licence with associated legal, audit/accounting and fund administration services. It was one of the first to comply with the instructions from the Organisation for Economic Co-operation and Development to put in place tax information-sharing agreements with other countries.
Isle of Man
The Isle of Man has long been a favourite with high net worth individuals. This year it topped the OECD list of offshore centres willing to share tax information with other nations. It has also pioneered an instant tax information exchange system.
However, John Spellman, director of Government department Isle of Man Finance, said the island’s financial community knew it had to broaden its horizons and adapt to changing economic conditions. He said: “We have had interest from a number of asset managers looking to domicile funds on the island – we already have £33bn in assets under management here.”
Spellman said as a small centre it could adapt quickly and viewed the directive on alternative investment fund management as an opportunity to take more market share.
The Isle of Man enjoyed 7.5% economic growth in 2007 to 2008 and Spellman said it was projected to grow by 2.5% this year, while much of the globe was struggling with recession.
British Virgin Islands
The British Virgin Islands has suffered similar criticism to the Caymans and other Caribbean nations over its perceived lack of regulation of funds domiciled on its shores. The financial crisis did nothing to halt this attack.
At a conference in Zurich last week, Alicia Greene, a director of the International Financial Centre in the BVI, assured fund managers and investors the quality of the regulation in the offshore centre was one of the reasons why they were the second largest hedge fund domicile in the world with more than 3,000 funds and $100bn (€69bn) in assets under management.
Derek Adler, director of Ifina, a fund administration business working in the BVI, said: “Most of the scams that have come to light have not taken place in the offshore centres, but in the US, where regulation is far less stringent and there is little monitoring of what is in place. Offshore centres would never be allowed to get away with the level of regulation we see onshore.”
In terms of tax, the BVI has moved up to the OECD white list, having signed tax data-sharing agreements with 15 countries.
Jersey
Jersey is fighting to keep its share of the fund domicile business that is so lucrative to its economy. Fund managers had favoured Jersey and other Channel Islands as they could pool assets in a tax-efficient environment and access the army of financial service companies set up to look after them.
However, Robert Kirkby, technical director at the Jersey Finance Centre, said the setting up of new funds over the past 18 months had been slow.
“For one thing, the proposed Alternative Investment Fund Managers directive has created a lot of uncertainty but Jersey should obtain ‘equivalence’, meaning funds selling into Europe will be allowed to be based here,” he said. He added that, due to their usually smaller size, offshore centres could adapt to new regulation and bring on business quickly.
When the OECD introduced the white, grey and black lists for international tax-sharing agreements, Jersey qualified behind the Isle of Man as the jurisdiction with the second most links. The island has also been appointed by the G20 to monitor the 50 or so offshore territories and conduct a peer review in terms of regulation and transparency.
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