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“ Tax Neutrality”: The Continuing Appeal of the Offshore PowerPoint PPT Presentation

“ Tax Neutrality”: The Continuing Appeal of the Offshore. Gregory Rawlings Centre for Tax System Integrity RegNet & RSSS The ANU. Introduction: Tax-Free States High in the Mountains. The Principality of Andorra: Tax Haven located in Pyrenees mountains between France and Spain

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“ Tax Neutrality”: The Continuing Appeal of the Offshore

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Tax neutrality the continuing appeal of the offshore l.jpg

“Tax Neutrality”: The Continuing Appeal of the Offshore

Gregory Rawlings

Centre for Tax System Integrity

RegNet & RSSS


Introduction tax free states high in the mountains l.jpg

Introduction: Tax-Free States High in the Mountains

  • The Principality of Andorra: Tax Haven located in Pyrenees mountains between France and Spain

  • Independent since 1278

  • Constitution agreed 1993

  • Total Bank Deposits 2001: €10 billion

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Wealthy Banks

  • “our banks are very small, but very rich” (Interview, Andorra, December 2003)

  • Zero Taxation

  • Strict Bank Secrecy Laws

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International Tax Planning

  • “Practically we now have zero tax for companies and individuals…“we act principally in international tax planning” (Interview, Andorra, December 2003)

  • Use “completely regulated” jurisdictions

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Elegant Companies

  • it is “more elegant to have a company from Holland these days; it’s a normal country after all”(Interview, Andorra, December 2003)

  • Andorra provides a “useful platform” for activities conducted elsewhere

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If you go to Andorra…

  • “ …if I go to Andorra where there is no tax at all then I wont have to pay any tax at all…it does not work like this”(Interview, Andorra, December 2003)

  • All transactions must be declared

  • Reduction of tax using double taxation agreements

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  • “We are tailors. It’s like a customer who requires a certain suit. The tailor cuts it according to their customer’s needs. We do the same”. (Interview, Andorra, December 2003)

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External Pressure

  • Has always been under pressure

  • Small countries have difficulties resisting

  • Not dependent on finance

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Waiting to See

  • “This is what we are all waiting for…all of us are waiting to see what will happen. The Andorran government will make a decision next year. All of us are waiting to see; Andorra has had no taxation for all these years. It will mean a complete restructuration of the government. Accounts will have to be submitted for the first time…we are not very used to this due diligence requirement”. (Interview, Andorra, December 2003)

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  • Interviews with 30 accountants, lawyers, regulators, fund managers, insurers, bankers, CEOs, legislators and trustees and fiduciaries in Andorra, Guernsey, Paris and Singapore.

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Research Areas

  • The effects of multilateral efforts to regulate OFCs (particularly the OECD’s Harmful Tax Practices Project and the European Union’s Savings Tax Directive)

  • Changes in client response/profile as a result of international initiatives

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Research Areas…

  • The current market for offshore services

  • Motivations for using OFCs

  • Tax planning techniques

  • Future prospects for OFCs and their clientele

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  • Open-ended semi-structured interviews

  • Interviews not taped

  • Primary and secondary level notes

  • Confidentiality and no attribution

  • Snowballing and phone books

  • Observations and recordings from media, social interactions and architecture

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Multilateral Initiatives: A Review

  • OFCs: Pressure to abolish financial secrecy in last 5-10 years

  • Organisation for Economic Cooperation and Development (OECD)

  • 30 Tax Havens in Negotiation

  • European Union

  • Financial Action Taskforce (FATF)

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Impacts of Initiatives

  • Predications that the offshore would decline

  • “The fundamental attractions of OFCs – low or no taxation, banking secrecy, minimal financial regulation and political stability – face significant threat of erosion” (Hampton, 2002: 1662)

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  • Are these initiatives having an effect on the offshore sector and if so how and why?

  • How has business been affected by these initiatives

  • What kind of impacts has this had on local economies and societies

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Research Sites

  • Samoa (2002)

  • Andorra (2003)

  • Guernsey (2003 & 2004)

  • Singapore (2004)

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  • 58% of respondents reported that initiatives were having an impact

  • 19% of respondents reported that initiatives were not having an impact

  • 7% of respondents reported it was too early to tell

  • 15% of respondents said not yet, but they will if fully implemented

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Compliance Costs

  • Increased compliance costs

  • Increase due to implementation of Due Diligence and Know Your Customer (KYC) standards.

  • “Slowing Down Effects”

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Offshore Sectors

  • Trust & Fiduciary

  • Private Banking

  • Funds Management

  • Captive Insurance

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Client Reaction

  • Effects had not adversely undermined profitability or viability of firms

  • Clients undeterred from OFCs

  • Business has increased

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High Wealth Individuals (HWIs)

  • “Bottom end of the market” has declined

  • HWI market almost completely unaffected

  • Institutions (multinationals and large corporates) unaffected

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  • Business has become more competitive

  • Some job loses

  • Increasing number of mergers and acquisitions

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No Undue Concern

  • Causing no major concern in industry

  • Part of a dynamic services sector

  • People must get used to the “ebbs and flows of finance…you hear a lot of doom and gloom”, but it was really an over-reaction (Interview, Guernsey, December 2003)

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Offshore Polarisations

  • Polarisation between OFCs in “developed” and “developing” countries

  • No major impact on “developed” OFCs

    (Guernsey, Jersey, Isle of Man, Bermuda, Cayman Islands and British Virgin Islands [BVI])

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Decreasing Tax Havens

  • Singapore and Hong Kong as competitors

  • Outlook for smaller Pacific and Caribbean jurisdictions “bleak”

  • Decrease in number of tax havens in next ten years

  • Key centres will continue to prosper

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Motivations, Markets and Possibilities

  • Globally mobile capital and globally mobile people

  • Taxation has relative importance

  • Holding property through offshore companies and trusts

  • Estate planning

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  • Concentration of expertise in OFCs

  • “…within one mile of this office you will get more expertise in the setting up and management of trusts than you would anywhere in the world”(Interview, Guernsey, December 2003).

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Offshore Flexibility

  • Offshore pension and superannuation funds

  • Payroll facilities for seafarers

  • Diminishing differences between offshore and onshore

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“Tax Neutrality”

  • “Tax neutrality” remains very important

  • Tax neutrality converges with regulatory flexibility

  • Large multinationals continued to be attracted to OFCs, where subsidiaries and funds can be established in a “benign environment”, not subject to “six different forms” of taxation and regulation (Interview, Guernsey, January 2004).

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“Global Families”

  • Offshore structures continue to work well for “global families” and HWIs

  • “There are the wealthy in this world and they will arrange their affairs, and when they become really wealthy they become itinerant” (Interview, Guernsey, January 2004)

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London as a Tax Haven

  • UK Non Domiciliaries

  • Set up offshore trust before moving to London

  • Property owned by trust

  • Capital payments tax exempt

  • Offshore debit/credit cards entitlements for “UK non-doms”

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OECD Discrepancies

  • US IRS issues “Qualified Intermediary Regime” status to selected offshore firms

  • New Zealand provides for tax exempt offshore trusts for non-residents

  • Portugal establishes OFC on Madeira with EU approval and no blacklisting

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Level Playing Field

  • Differences between OECD countries provide a continuing market for OFCs

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A long way to go

  • One interviewee put it like this: There was no doubt that in time Switzerland and Luxembourg would meet OECD standards. But “the game still has a lot further to go yet”. For example the USA, this interviewee claimed, does not meet many of the standards that the OECD itself is promoting, “they are a very long way from doing anything similar”, he said…cont

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Ongoing Opportunities

  • cont…Although they were drafting legislation to comply with these international standards they faced “massive opposition from corporate interests”. He continued “the concept of a global level playing will take a long time, if ever, to achieve”. In the absence of a level playing “there are still a lot of opportunities” for OFCs (Interview, Guernsey, December 2003)

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  • 100% optimism hope for future of offshore

  • “do I think that this industry will be here in another ten years, yes definitely, do I think that it will provide me with a successful career until I retire, yes definitely…the long term prospects are good” (Interview, Guernsey, December 2003)

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It gets better every day

  • “Oh yes, I think it gets better every day” (Interview, Guernsey, January 2004)

  • “Oh God yeah…who would have thought even ten years ago that there would be millionaires in China who would need their wealth managed”(Interview, Guernsey, January 2004)

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Conclusion: Offshore Niches

  • “There will always be an offshore sector. We are the ball-bearings in the machine of the world’s financial markets” (Interview, Guernsey, January 2004)

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Thank You!

Gregory Rawlings CTSI

“Tax Neutrality”: the continuing appeal of the offshore

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