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Western EuropeJuly 27 2010

UK offshore centres fight 'tax haven' label

The UK's offshore financial centres do not deny that they have accommodating tax regimes, but they baulk at the label 'tax haven' and all the negative connotations that tag brings. Writer Charlie Corbett
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UK offshore centres fight 'tax haven' label

Question: What is the difference between a tax haven and an international financial centre? Answer: It depends on where you live. If, for example, you lived at number 11 Downing Street between June 2007 and May 2010, and your name was Alistair Darling, then your definition would be vastly at odds with the residents of any one of the UK's Crown dependencies.

Mr Darling, the former UK chancellor of the exchequer, who lost his job when the governing Labour party lost the general election in May 2010, made few friends in the UK's offshore community when he launched an unprecedented attack on their tax status at the height of the downturn.

In December 2008, Mr Darling instituted a wide-ranging review of the role of UK offshore financial centres in the downturn and their impact on the world economy. The so-called Foot Review was put in place to "investigate financial supervision and transparency, fiscal arrangements, financial crisis-management and resolution arrangements and international co-operation".

For many, however, it was a thinly veiled attack on the UK's Crown dependencies by a government looking for a convenient scapegoat. Just weeks before the review was mooted, the then chancellor had attacked the Isle of Man (IoM), in the wake of the Icelandic banking crisis, and called for a "long, hard look at the relationship between this country and the IoM tax haven sitting in the Irish Sea".

Mr Darling's comments enraged the residents of the IoM, who do not see their territory as a tax haven at all, but it also sent a chill down the spines of the other UK offshore centres, in particular the Channel Islands. The comments were seen as playing populist politics to the then political zeitgeist that looked to blame tax avoiders for the worst sins of the financial crisis.

"And to make sure people can't avoid paying their fair share, we and other countries are cracking down on offshore tax havens," added Mr Darling in September 2009. "We've already demanded details of more than 100,000 offshore accounts. This will mean billions [of pounds] of extra unpaid tax returning to our country."

Convenient Whipping boys

However, the UK's offshore centres argue that they do not fulfil any of the commonly accepted criteria that would put them in the category of tax haven, with all the negative connotations that go with the phrase. "We are a convenient whipping boy because we're small and can be picked off," says Peter Niven, chief executive of Guernsey Finance, the body that represents the island's financial services community.

His sentiments are shared by most in the financial community, in both the Channel Islands and the IoM. They argue that while some offshore centres do indeed deserve investigation for their tax status and transparency standards, this is not the case for the UK's Crown dependencies.

Bob Moore, chief executive of Butterfield Bank in Guernsey, says that every review of the island carried out over the last decade or more has concluded that it was in the top tier of financial transparency. "The calibre of our regulation stands up to any comparison," he says.

"We provide services that allow clients to be tax compliant but in a way that manages complex requirements... and yet we need to continue to make it clear to our partners that we are good international citizens."

Nick Verardi, the local group head for the corporate and commercial team at offshore legal specialists Appleby on the IoM, says that much of the criticism directed at the UK's offshore financial centres is "misguided and ill-conceived".

"We've had two International Monetary Fund reviews, OECD [Organisation for Economic Co-operation and Development] scrutiny and the Foot Review," he says.

"The levels of regulation when it comes to anti-money laundering and knowing your customer are tougher here than in the UK. We do pay lower tax, but we can live within our means."

Despite the apparent cleanliness of the UK offshore centres' consciences, however, there is a need to communicate this to the rest of the world. Nik van Leuven, the director-general of the Guernsey Financial Services Commission, believes that financial centres such as Guernsey will only survive if they are accepted internationally as quality jurisdictions.

"We were initially an easy target for the ignorant, the prejudiced and the mischievous," says Mr van Leuven. "All Guernsey can do in those circumstances is to be evidently good at what it aspires to and also to inform. Much of the prejudice arises from misinformation or even no information at all."

Michael Weldon, head of supervision for the IoM's Financial Supervision Commission, believes communication is the key. "The IoM has a good relationship with the UK regulators and has dialogue with them on a regular basis," he says. "The racy business was not being done here. We have a very hands-on approach to regulation and visit the banks regularly with a 'tick and bash' approach."

Oiling the wheels

Much of this focus on the role of UK offshore centres in the financial crisis tends to detract from their indirect contribution to the UK economy through their status as financial intermediaries. Mr Niven says that Guernsey sees itself as a conduit for channelling money into the UK.

"We oil the wheels for the UK economy and not the other way around," he says. A recent report by accountancy firm Deloitte backs this assertion. It estimated that $340bn a year is fed into the UK banking system as a result of offshore centres.

But what impact has the recession had on this figure and how has the financial crisis affected the UK's offshore centres? At first glance, it is hard to see how the economies of centres so heavily dependent on financial services could not be devastated by the downturn. About 40% of Guernsey's gross domestic product (GDP) is made up of financial and professional services and, if support services are included, this figure shoots up to 60% to 70%. The figure for the Isle of Man is somewhat smaller, with 35% of GDP coming from financial services, but it is still a considerable proportion.

In terms of fund flows, the recession has hit offshore centres hard. Recent figures from Jersey show that its financial services sector in general saw profits fall from more than £1.5bn ($2.3bn) in 2008 to just £809m in 2009. It is a similar story in Guernsey. "Like other UK offshore centres, Guernsey was riding a massive wave up to 2008," says Mr Niven. "But funds flows dropped off by 70% to 80% as a result of the recession."

Ian Bancroft, chief executive of financial services company Cayman National on the IoM, admits that fund management was one area that was hit hard by the recession with "quite a contraction in growth" in 2008/09, but stresses that, overall, the impact of the downturn on the island was muted compared with other parts of the world.

"The IoM did not enter a recession and it's unlikely that it will," he says. "We've had 26 years of continued economic growth." The IoM's GDP growth fell from more than 7% in 2007 to 2% by 2009, but, according to Mr Bancroft, is expected to rise to 4% in 2010.

cp/95/Nik van Leuven  Image Guernsey.jpg

Nik van Leuven, director-general of the Guernsey Financial Services Commission

Diversification push

Looking ahead, it is clear that the UK's offshore centres will need to diversify their economies away from a reliance on financial services. Not only will this strategy bolster their economies in case of another financial crisis, but it might help to stave off much of the criticism directed at them by governments across the world.

The IoM has worked hard to develop niche industries such as e-commerce and computer gaming technology, as well as a thriving ship and aircraft registry. Mr Verardi is particularly proud of the island's recent foray into aircraft registry. He says that 10 private jets were registered to the island in May alone and the IoM currently has 125 aircraft registered to it.

"We've stolen a march on other offshore centres. We've always had a very successful shipping registry and this by association helps the island through spin-off services," says Mr Verardi. The argument is that those keeping their aircraft and yachts on the IoM will keep their financial interests there too.

Eyes east

Other offshore financial centres have their eyes firmly focused towards the east.

"About 80% to 90% of our investment flows come from London. China is a marketplace we need to cultivate to make sure that not all our eggs are in one basket," says Guernsey Finance's Mr Niven. "We need to be in markets that are positively growing, such as the BRICs [Brazil, Russia, India and China]. Historically, the island has sat back and 'let it come'. That is not the case now."

Alan Bougourd, managing director of Skipton International bank in Guernsey, agrees on the need to look east. "The ultimate goal is to move up the chain in terms of more private banking and looking overseas towards jurisdictions such as China and India. We only need a tiny slice of that business," he says.

Ultimately, however, the biggest challenge for the UK's offshore financial centres is improving their image overseas. The Foot Review is seen by many as going a long way to exonerate them from accusations of tax evasion and fraud. Former bank regulator Michael Foot, the author of the report, said that many of the assumptions about the offshore jurisdictions were untrue, "including the notion that they are key in facilitating large-scale tax evasion and that they suck large sums of financial services business from cities such as London".

"The recent Foot report did not substantiate any of [the] Labour [party's] accusations and it made clear the positive benefits of the Crown dependencies in helping to provide liquidity to UK plc," says Mr Bancroft. "We might not be perfect, but we're not devils either," he adds.

Mr Bougourd, who alongside his job at Skipton International is head of the Guernsey International Business Association, finds it frustrating perpetually defending the island's reputation.

"We spend an awful lot of time explaining to people the difference between a tax haven and an international financial centre," he says. "We constantly have to deal with the perception that we're here to do ill." But now that Mr Darling has vacated the Treasury, will the new UK chancellor of the exchequer, George Osborne, be prepared to listen?

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