Offshore Financial Centres - Treasury Contents

Memorandum from the Society of Trust and Estate Practitioners (STEP)


  1.  Well run low-tax international financial centres (IFCs) are essential complements to "onshore" economies such as the UK. It is no accident that the world's leading IFCs are clustered around New York and London.

  2.  Leading economists[240] have shown how low-tax centres reduce the user cost of capital for companies and individuals, making it cheaper to export goods and services, and to facilitate inward investment into the UK as well as overseas investment. This in turn makes it cheaper to employ people, gives companies easier access to overseas markets—accessing new demand, and allows companies to reinvest profits in the UK.

  3.  The special affinity of the Crown Dependencies and Overseas Territories towards the UK is a major advantage in directing inbound business for the City and the UK economy as a whole. The global appeal of these territories as intermediaries for structuring insurance, funds and private banking activities means that they facilitate collection and direction of significant investment of global capital into London markets.

  4.  It may be that other EU member states are conscious of the considerable advantage enjoyed by the City of London from its relationship with the Crown Dependencies and the Overseas Territories. If so, the UK might wish to guard against external efforts to drive a wedge into this symbiotic relationship. The Netherlands defends its territories in Aruba and Netherlands Antilles fiercely by making sure they are on the recent EU white list for example.

  5.  Is it true that any jurisdiction can succeed in financial services simply by affording confidentiality with no tax? Given the incentives and this apparently easy formula, why is it that more small countries have not done so? Low taxes are a necessary but not sufficient condition in creating successful IFC.

  6.  The reality is that global consumers demand much more from their financial centres than low or no tax and secrecy. Consumers seek well governed centres with market confidence in their regulation, low levels of corruption as well as competent and trustworthy professionals and courts. These elements, particularly good governance and high regulatory standards, are key reasons for the success of the Crown Dependencies and many of the Overseas Territories.

7.  What is an international finance centre?

  8.  The terms "tax haven" and "offshore centre" are often used in a pejorative way to describe the low-tax IFCs. "Offshore" is a concept more appropriately defined not by whether a financial centre is surrounded by coastlines or mountains, but rather by whether the client resides outside the jurisdiction providing the particular financial service.

  9.  IFCs play a substantial commercial role facilitating tax-neutral transactions (often conceived in London and New York). These are not activities confined to the traditional IFCs; such offerings are also common in the major developed countries. Consider, for example, the Eurobond market based in London which provides a tax-neutral platform for international debt issuers. New York, London and Tokyo control, between them, nearly 60% of the global market for offshore banking and capital markets services. Taking into account the additional similar activity in other OECD member states such as Switzerland and Luxembourg, OECD jurisdictions already control 80% of the international market for offshore financial services.

  10.  The "onshore"/"offshore" divide is too simplistic. Many jurisdictions compete for globally mobile capital, individuals and companies by providing tax incentives. Places like the Netherlands, Ireland, the UK, Spain, Germany, and France offer special concessions on tax.Many EU countries can be used as conduits via their holding company regimes and extensive tax treaty networks. Places like New Zealand provide incentives for non-resident trusts to locate themselves there with a special tax regime. Delaware also offers incentives for corporations to headquarter in the state. Clearly so-called "onshore" states can be used in tax planning. These surprising examples show how most jurisdictions already compete for capital and readily facilitate tax planning for both corporate and individual investors from other jurisdictions.

11.  What makes a low-tax international finance centre successful?

  12.  Why do people use offshore centres? They do so because they have a use for them. But this is not enough. Good low-tax IFCs succeed because they focus on:

    —  tax neutrality;

    —  balancing confidentiality with transparency;

    —  financial and legislative innovation;

    —  political stability, legal certainty and investment in people and infrastructure; and

    —  a focus on a good international reputation.

13.  Balancing confidentiality with transparency

  14.  Confidentiality is important for those clients who are concerned about their own financial privacy and security. This can take the form of wishing to maintain high levels of confidentiality for privacy or commercial reasons to preventing kidnapping of individuals who fear their personal information will be sold or misused by domestic institutions. This is a common concern for clients from Latin America, Africa and the Far East. For example, it is understood that the UK government has suspended information exchange under its tax treaty with Mexico to reflect tax data security concerns there. Middle Eastern and CIS clients are often concerned about political stability.

  15.  Closer to home in April the Italian Government posted the earnings and taxes for the entire country on a website, causing an outcry: "Before being blacked out at the insistence of data protectors, vast amounts of data were downloaded, posted to other sites or, as eBay found, burned on to disks."[241]

  16.  The Financial Times subsequently reported criticism that the initiative would help the mafia find targets for extortion and robbery. It is also of concern to clients that employees with access to private data have sold-on such data and compromised clients. This report from the Strategic Forecasting Terrorism Intelligence Report of January 9, 2007, highlights typical concerns:

  17.  "In additional to industrial espionage, there have been several well-publicized cases in which Indian workers have stolen information—such as bank account numbers, PIN numbers for automatic teller machines or birthdates and Social Security numbers (from American customers) for criminal purposes. In perhaps the most notable of these cases, a worker at an Indian call center allegedly sold the bank account information of 1,000 British customers to an undercover reporter at $7.68 per account. The call worker boasted that he was able to steal and sell up to 200,000 accounts each month."

  18.  There are important exceptions to confidentiality. In Cayman, for example, confidentiality is disapplied if certain conditions are met. These include investigations in connection with offences committed or alleged to have committed in Cayman or, if outside Cayman would have been an offence if committed in Cayman.

  19.  There are legitimate concerns that excessive secrecy can lead to abuse. A point comes when excessive secrecy prevents legitimate tax collection. The balance between confidentiality and risking abuse is maintained by enforcing the rule of law and having effective risk assessment and robust AML rules. The CDs and the OTs have balanced these concerns by regulating corporate and trust service providers and requiring them to beneficial ownership data. This contrasts with many EU Member States and the USA, which generally have not effected regulation to the same standards.

20.  The importance of reputation and good governance

  21.  Multinational corporations seek country platforms which stress political and economic stability and have a sound reputation for good governance. Few, if any, truly successful finance centres will have high levels of corruption. Indeed, research by leading economists shows that states in which tax is used to attract foreign capital have significantly higher levels of good governance, as political stability and good governance are foundation stones for attracting capital[242].

22.  Political stability, legal certainty and investment in people and infrastructure

  23.  It is occasionally said that the Crown Dependencies, Bermuda, the BVI and Cayman have benefited from the result of being, and continuing to be, one of the leading groups developing modern financial services legislation. The corollary of this is that, over the years, this group has attracted many of the leading international banks, trust companies, accountancy firms and other such financial service providers and that the local law firms have been able to attract a high numbers of very experienced and qualified international lawyers. It is fair to say that, to a large degree, these jurisdictions now compete with the major onshore financial centres when it comes to the type of international services provided and the quality of the professionals providing such services.

  24.  They are also remarkably politically stable as it could be counterproductive to establish a trust, for example, in a politically unstable jurisdiction.

  25.  In Cayman, for example, the corollary of having such an established trust industry is that many of the leading international trust cases have been litigated in Cayman and Cayman's courts system is an internationally recognized forum for the resolution of such disputes. Indeed, it is not unknown for trusts to be re-domiciled to Cayman precisely because of the possibility of a dispute and the need to settle it as appropriately and efficiently as possible.

  26.  Like in any major finance centre, there is a need to invest in quality people. This is particularly important when dealing with modern financial services. It is also necessary to ensure, for example, that modern communications are effective.

27.  Financial and legislative innovation—non-resident trusts and companies

  28.  Whilst levels of taxation and confidentiality are important in establishing an IFC they are a necessary but not sufficient cause of success. An offshore trust or company, for example, has many uses beyond tax neutrality.

  29.  Flexible legal arrangements and corporations are available in IFCs. It is useful therefore to examine in some detail why families and corporates use such structures and these are set out in below.

30.  Trust Relationships

  31.  A trust creates a legally enforceable relationship such that the trustee holds the assets of the trust subject to certain obligations of a fiduciary nature. This provides settlors with the comfort of knowing that the assets of the trust should be utilized in the best interests of the objects of the trust and that, if the trustee does not comply with its obligations, recourse may be had to the courts for a remedy.

  32.  If it is necessary to seek a remedy from the courts, there is an extensive body of binding and persuasive international case law stretching back many hundreds of years. This provides settlors and those who must apply trust law an invaluable resource in terms of how trust law is likely to be interpreted by the courts and the certainty that goes hand in hand with this.

  33.  Whilst, in order for a trust to be valid, it must, as a minimum, create an "irreducible core of obligations" and that its provisions, property and objects must be sufficiently certain, a trust is an extremely flexible planning tool. Indeed, this is one of the key reasons they are often chosen over other possible structuring arrangements, such as a company.

  34.  It is noticeable that the rise in the use of trust has closely mirrored the increasing globalization of families. Such families often have assets in a number of jurisdictions. A trust located in a suitable jurisdiction will often serve as the ideal way of holding such assets, administering them holistically and avoiding, for example, multiple probate applications upon the death of the settlor.

  35.  Sensibly, a settlor should ensure a smooth transition of family assets through the generations by establishing, and being involved in, succession planning arrangements during the settlor's lifetime rather than simply leaving all his assets to the next generation under a Will or other such testamentary arrangement. This may be of particular importance in the case of a family business where the avoidance of disruptions in management and control can be a crucial consideration. Trusts facilitate business continuity, particularly family businesses, by minimizing disruption in management control, for example on the death of owner-manager.

  36.  It is not unreasonable for individuals to wish to have an appropriate level of confidentiality concerning their financial and other such affairs. The motivation may extend to such concerns as the avoidance of media attention and that of potential kidnappers. Indeed, it is not uncommon for offshore trusts to contain specific provisions to deal with kidnap situations.

  37.  Given all their advantages, trusts are increasingly used in commercial situations. Such uses include (but are certainly not limited to) pension trusts, unit trusts, employee benefit trusts schemes, share voting trusts, trusts for use in corporate/aircraft finance transactions, trusts to hold the voting shares of corporate funds to avoid consolidation and other such issues and trusts. The value of UK trusts used in a commercial context runs into several trillions. Mutual funds in places such as Jersey benefit the UK economy as they bring large sums to the UK.

  38.  Although trusts are an invention of the common law, trusts are increasingly popular with clients in civil law jurisdictions. Italy has recently adopted trust law, Switzerland has recognised trust law, and France has a similar arrangement, La Fiducie.

39.  Why create a trust in Cayman?

  40.  Cayman imposes stringent legal requirements on trust companies which offer trust services to the public, both in terms of their obtaining the necessary license to do so and in terms of ongoing monitoring. Accordingly, those involved in establishing Cayman trust structures can expect that the trustee will properly carry out its role as such and that, in the unlikely event that any issues arise with the trust company itself, there will be an appropriate regulatory framework in place to deal with this.

  41.  Again, there is occasionally a misconception amongst the less well informed that it would in some way be beneficial for Cayman to do less than its fair share in implementing measures to combat the laundering of the proceeds of crime and the funding of terrorism. In fact, the reverse is true and Cayman has had robust laws and regulations in place to implement such measures going back at least a decade or so (see Table 1 for breakdown of Cayman CFATF findings). This has done much to enhance Cayman's reputation and thus to assist it in attracting welcome high quality business (and to dissuade unwelcome business).

  42.  Cayman has developed innovative offshore trust legislation, usually in response to the needs of international trust advisors and their clients. The equivalents of Cayman's exempted trusts, STAR trusts, reserved powers trusts are, by and large, unavailable in most onshore jurisdictions.

43.  Why create a company in the British Virgin Islands?

  44.  The British Virgin Islands introduced in 1984 the BVI International Business Companies Act. After twenty years, the legislation was completely reviewed and updated, resulting in the BVI Business Companies Act of 2004 ("BVI BC Act").

  45.  The BVI BC Act has been well received by international practitioners, and a leading UK QC has commented that it was reviewed extensively and favourably by those involved in the consultation process leading up to the introduction of the new UK company legislation. The BVI BC Act is at the forefront of modern company law. By way of example, innovations include:

  46.  the abolishing of old-style capital maintenance provisions, and concepts of authorised capital. Shares in a Business Company represent an entitlement to benefits such as dividend and voting rights and not a fraction of the capital. Accordingly there are no constraints as to the need to maintain capital;

  47.  A new solvency test for distributions, which can only be made if after the directors have determined that immediately after the distribution, the company will satisfy the statutory solvency test;

  48.  Statutory footing is given to a variety of directors duties;

  49.  The provision of modern minority shareholder rights;

  50.  The new concept of a "reserve director" to avoid succession problems in the event of the death of a sole shareholder/director;

  51.  Allowing a director of a wholly-owned subsidiary to act in the best interests of its holding company even though the contemplated act may not be in the best interests of the company itself;

  52.  Financial assistance is permitted in connection with the acquisition of a company's own shares;

  53.  All BCs are required to have registered agents in the BVI which are required by law to retain copies of registers of shareholders and directors in their offices in the BVI.

  54.  Filing with the BVI Registrar of Corporate Affairs is accomplished on-line, 24 hours a day. Insolvency legislation has also been fully brought up to date. Corporate service providers licensed and regulated by the BVI Financial Services Commission for almost 20 years.

  55.  Existing market reputation as one of the world's premier provider of competitively priced, flexible, corporate vehicle. The IMF 2004 Report concluded that "the regime for registering and maintaining [BVI companies] meets or exceed most best practices".

56.  The importance of international reputation

  57.  A successful IFC seeks to maintain a good international reputation based on objective assessments. That is why the major finance centres in the Crown Dependencies and Overseas Territories are well regulated by comparison to other international finance centres.

  58.  Major IFCs have focused on international standards and peer comparisons as they relate to anti-money laundering legislation and regulation and have proved highly responsive to any criticism based on objective criterion. The same cannot be said for many EU member states who have not implemented the 2nd Money Laundering Directive let alone the 3rd.

  59.  Effective international regulation is vital to disrupt cross border crime. If international regulation is weak in any of the major cross border finance centres then there is a strong danger of regulatory arbitrage. STEP therefore believes that effective regulation on the basis of a level playing field is the best way to minimize crime.

60.  Comparisons with international regimes

  61.  Table 1 shows a comparison of some of the latest FATF assessments of key centres. Note that there have been no recent comparable reports on the Crown Dependencies.

62. Table 2 shows a comparison of the latest IMF assessments. The IMF conducts a Financial Sector Assessment Programme (FSAP) to ensure adequacy of supervision and the availability of relevant data. Its recent progress report mentions that "the compliance levels for OFCs are on average better than in other jurisdictions assessed under the FSAP". Moreover, "on average, OFCs meet supervisory standards superior to those of other jurisdictions" Source: OFCs, The assessment program, A progress report (IMF 25 February 2005), paras 5-6. An up-to-date report on the BVI is imminent.

63.  Industry seeks objective assessments from credible sources

  64.  Industry also seeks credible sources of information on regulation in order to make judgments on how to risk assess jurisdictions for the purposes of anti-money laundering. IMF and FATF are generally considered to be the most credible sources of information on AML country risk. It is also important that where weaknesses have been identified that there is a willingness from government to tackle the problems identified.

  65.  There is considerable concern amongst industry that some international membership groups are incapable of providing objective analysis of AML risk. The OECD and the EU have recently been critisised for producing reports in these areas which do not appear to take account of inadequacies within their own membership. STEP would recommend that AML regulation is rationalised so that organizations can rely on objective reports on applied international standards from credible sources.

  66.  Moreover there is concern that the US states which provide competitive services are not only failing to meet core FATF obligations on beneficial ownership but that they are not committed to making such changes in the future. By contrast it is held that the Crown Dependencies and the BVI, Bermuda and Cayman are committed to improving AML regulation and being good global citizens (see case studies on Delaware and Bermuda).

67.  "EU" Whitelist—lists which lack credibility confuse industry and increase risk

  68.  The EU member states have released a contentious list that implies that it creates an objective list of which countries have an equivalent regime to the EU. Unfortunately the list is not objective, there is no single "EU regime" for AML/CTF, and inclusion on the list gives a significant economy benefit. Moreover the simplified due diligence permitted for companies in those third countries on the list offers opportunities to money launderers if jurisdictions on the list do not actually have stringent AML laws. This is of great concern to STEP and members who rely on credible sources to inform their AML risk regimes.

  69.  An "equivalent country" is a country with legislation that contains comparable anti-money laundering provisions to the EU. Briefly, third country equivalence status affords the following advantages to such countries, in respect of credit and financial institutions:

    —  Allowing simplified due diligence between firms in the UK and equivalent third countries.

    —  Allowing reliance on third parties in equivalent third countries.

    —  Allowing in certain circumstances financial institutions, lawyers and accountants to inform another firm in the third country in their network that a suspicious transaction report has been made.

  70.  The list is not drawn up according to an objective set of criteria. It would be an obvious starting place to use the FATF and IMF reviews as a methodology for determining equivalence. That has clearly not been used. Of third countries it is noticeable that Russia, Netherlands Antilles and Aruba are on the list as well as the USA while UK Crown Dependencies may, or may not, be considered as equivalent by Member States. The Cayman Islands, the British Virgin Islands, and the Bahamas are not on the list. Russia remains something of an unknown quantity as it has not been recently reviewed by the FATF/IMF and some US states have recently been censured by the FATF for failing to disclose any corporate beneficial ownership information whatsoever. This failure has caused three Senators, including Senator Barack Obama to introduce a Bill to the Senate compelling beneficial ownership data to be unveiled.

  71.  According to the Financial Times, one British official who works on anti-money laundering said the decision to include Russia while excluding the Cayman Islands was "outrageous" and seemed to reflect a historic suspicion of the Caribbean territory.

  72.  It is not useful to those professionals putting together country risk assessments to suggest that regimes can be equivalent with EU standards as there is no single standard. Although the list assumes that all EU member states are equivalent this is clearly not the case. In fact the UK is one of a small number of member states that has implemented the 3rd Money Laundering Directive. The European Commission has decided to pursue infringement procedures against 15 Member States for failure to implement the Third Anti-Money Laundering Directive in national law. The Commission will send formal requests to Belgium, Czech Republic, Germany, Greece, Spain, Finland, France, Ireland, Luxembourg, Malta, the Netherlands, Poland, Portugal, Sweden and Slovakia. These formal requests take the form of "reasoned opinions", the second stage of the infringement procedure laid down in Article 226 of the EC Treaty. If there is no satisfactory reply within two months, the Commission may refer the matter to the European Court of Justice. The Directive should have been implemented by 15 December 2007.

  73.  Clearly the EU Whitelist is not only discriminatory against certain jurisdictions that are not included on the list that will suffer economically as a result but also creates space for those seeking to launder money. This should be of great concern to us all.


  74.  A key concern in the regulation of the global financial system is the ability to track (ultimate) ownership of companies and similar structures. Following articulation of programmes to ensure this goal by the OECD and the Financial Action Task Force at the turn of the millennium, UK Overseas Territories and Crown dependencies required their corporate company service providers to track beneficial ownership interests in companies established by them for clients.

  75.  In order to ensure that these obligations would be carried out in practice, the Overseas Territories and Crown Dependencies also adopted laws to regulate their service providers and expanded their financial services commissions to ensure full supervision capability. Many of these regulated service providers are STEP members. Accordingly, in the UK Crown dependencies and overseas territories the public authorities have, and routinely exercise, effective access to information regarding beneficial ownership of companies established for clients by local service providers.

  76.  The United States has a well-deserved reputation as a large and well-regulated financial services market. The federal government has apparently committed to adherence to international standards for tracking ownership of companies. However, the constitutional split of powers in the United States means that corporate regulation is conducted at state level and the States do not observe international standards agreed (and promoted) by their federal government. In consequence, it is possible to establish anonymously owned tax-free companies in the form of single member LLCs in nearly every state in the United States. As these companies are not taxed unless they conduct "effectively connected" trade or business in the US, they are widely used internationally by foreign clients as they have no US reporting obligations from a tax or corporate point of view.

  77.  The Financial Action Task Force conducted a peer review of US compliance with their 40+9 Recommendations in 2006[243]. The July 2006 FATF report on the US noted that State corporate service providers are "actively marketing the States as locations where anonymity [for corporate ownership] can be assured". Commenting on risks posed by US state reluctance to adopt the new transparency standards the FATF concluded as follows:

  78.  "In discussions with the state authorities, it was clear that there was a realization of the threats posed by the current "light-touch" incorporation procedures, including the failure to obtain meaningful information on individuals who effectively control the entities. However, the states primarily see this activity as a revenue-raising enterprise, and the company formation agents represent a powerful lobby to protect the status quo. Therefore, any proposals to enhance the disclosure requirements have not progressed."

  79.  This FATF view was supported by an April 2006 report by the US government auditor, the General Accountability Office,[244] which notes that "most states do not require companies to provide ownership at formation or in periodic reports".[245] That report also notes that law enforcement officials are concerned that the use of shell companies established in the United States enables individuals to conceal their identities and conduct criminal activity.

  80.  An additional US government report published by the US Treasury Department in January 2006[246] contains (in chapter 8) a review of US shell companies and trusts, noting that German, Eastern European and Russian law enforcement agencies have expressed concern that regional criminal organisations are abusing Delaware shell companies to promote money laundering.

  81.  At the time the FATF conducted its evaluation in 2006, these and several other US government reports supported FATF concerns about routine use of anonymously owned US companies by foreign criminals. In the event, the FATF imposed a two year deadline on the United States to address these issues. That period expires in July 2008; no state action has been taken to date.

  82.  US states have now incorporated more than three million LLCs ( By contrast, the number of international companies established in BVI is approximately 800,000. Of course, a number of US tax-free corporations would be used for ordinary domestic US purposes by individuals who may be taxable in their own right; however, as the States do not track beneficial ownership they are unable to determine the split between domestic and foreign ownership of these structures. It is certainly clear to international practitioners STEP that anonymously owned US companies are ubiquitous in the global financial services industry.

  83.  Expressing concern about the failure of the US states to make any progress on the FATF deadline for tracking corporate ownership, a bill was introduced in the US Senate at on 1 May 2008 (sponsored by Senator Carl Levin and Senator Norm Coleman and Senator Barack Obama) to require US States to take action on tracking corporate ownership ( However, no check on state compliance with the requirement is planned under the terms of the bill until 2012. It is also uncertain whether the federal government has the constitutional power to take the action proposed and of course political support for the bill is unclear. Accordingly, effective US action on defaults is uncertain, and not imminent.

  84.  The British Overseas Territories and Crown Dependencies are concerned that if standards comparable to their own are not also adopted in those countries calling for change then they will continue to suffer from adverse competitive impact as business migrates from these well-regulated smaller centres to OECD countries promoting but ignoring the emerging transparency standards.

  85.  Substantial gaps in the world regulatory system such as the continuing ability to establish anonymously owned companies in the United States also mean that the regulatory programme designed by the supranationals is destined to be ineffective; business dislodged from one centre simply moves to another country. STEP believes that if these standards are seen as important they must be uniformly adopted to be effective, including particularly in the countries calling for standards in other countries to be upgraded. STEP has promoted adoption of a "level playing field" for the regulation of financial services since 2001 when it published "Toward A Level Playing Field, Regulating Corporate Vehicles in Cross-Border Transactions".


  86.  On 29 January 2008 the International Monetary Fund (IMF) published the findings of its assessment of Bermuda under the Offshore Financial Center Assessment Program (OFC). Bermuda received a mixed report, but responded with an impressive array of proposed changes to its AML regime.

Post-mission changes

  87.  June 2007, saw the passing of an amendment to the POCA and amendments have been proposed to the Proceeds of Crime Regulations, along with a new Financial Intelligence Act 2007 to establish an administrative Financial Intelligence Unit (FIU), as well as amendments to the Criminal Justice (International Cooperation) (Bermuda) Act 1994 (CJICBA).

  88.  Furthermore in May 2008 the Bermuda National Anti-Money Laundering Committee (NAMLC) issued a consultation paper on further changes to the AML regime. These changes include:

  89.  a Draft Anti-Money Laundering and Anti-Terrorist Financing (Supervision and Enforcement) Act 2008 which makes provisions to establish appropriate supervisory authority for the financial institutions and professionals to monitor and ensure compliance with the proposed Proceeds of Crime (Anti-Money laundering and Anti-Terrorist Finance) Regulations 2008.

  90.  Draft Anti-Terrorism (Financial and other measures) Amendment Act 2008 which primarily expands the definition of terrorism and addresses other identified deficiencies relating to disclosures.


  91.  The overwhelming consensus amongst economists who have examined this area is that low-tax finance centres provide significant economic benefits to higher-tax economies like the UK. It is common for newspapers to criticize major firms or "non-doms" for using holding companies or trusts to mitigate their tax liability. Leading economists have shown how low-tax centres reduce the user cost of capital for companies and individuals, making it cheaper to export goods and services, as well as investing abroad. This in turn makes it cheaper to employ people, gives companies easier access to overseas markets, and allows companies to reinvest profits in the UK. Offshore trusts provide a place for non-doms to invest in the UK in a tax neutral way where income and gains are charged to tax when remitted to the UK.

  92.  There is general understanding among the public that Direct Investment Abroad (DIA) is good for "onshore" economies. As studies of the effect of direct investment abroad show, such investment is coupled with higher economic growth in the parent country (eg, the UK), lowers the cost of employment and creates jobs. Recent economic discussion has focused on DIA through low-tax jurisdictions and whether this is "good" for onshore economies. The simplistic view is that investment in low tax jurisdictions creates a tax revenue loss in onshore countries like the UK and therefore "hurts Britain" and only helps the original investors.

  93.  According to a major recent study by Professors Hines, Desai and Foley[247], there is no evidence that low-tax centres divert activity from high-tax centres within the same region, and, in fact, the opposite appears to be the case. Instrumental variables analysis indicates that low-tax centre and high-tax centre activity within a region are complementary, as the establishment of low-tax centre operations is associated with expansions of activity outside of low-tax centres.

  94.  Where low-tax jurisdictions help deferral of home-country taxation of income earned elsewhere, or where affiliates in low-tax areas offer valuable intermediate goods and services to affiliates in high-tax areas, investment in high-tax states is encouraged.

  95.  How does deferral work? Suppose a subsidiary may either reinvest a profit of £100 at a rate of return of 10% after foreign corporation tax or distribute the profit to its parent. If the subsidiary repatriates the profit to its parent the parent pays a tax of say 10% of the dividend to its home state. If the profit is temporarily reinvested abroad and then paid out with the addition of a 10% return after a year, the parent will at that time receive a net income of 110-110/100 x 10 = £99. If the profit is immediately repatriated the company would (net of foreign and repatriation taxes) end up with £90. If the parent country was resident in a state which levied no repatriation tax the result would be the same meaning that this tax is neutral towards the subsidiaries investment and distribution policy.

  96.  The ability of low-tax IFCs to offer a tax neutral platform for investment also serves to attract investment from third countries, offering clear advantages to investors as demonstrated above. The Chartered Institute of Taxation recently estimated that UK resident non-domiciliaries invested between £75 billion and £125 billion in the UK economy through trusts and companies that facilitate the deferral of tax.

  97.  The economic literature demonstrates that the proximity of low-tax IFCs strengthens this positive relationship, further boosting the UK economy. Tax neutrality attracts investment from other sources for example through mutual funds, unit trusts, and banking services. All of these services take place in low-tax IFCs but invest in the UK and other higher-tax centres. By increasing inward investment to the City of London and other financial services providers in the UK, international investment in these high value added services is made possible by low-tax IFCs. The banking sector is the largest contributor to UK tax revenues and much of the trade on which this tax is paid is attracted to London by adjacent low-tax IFCs.

  98.  Another major area of debate is about whether low-tax centres speed processes of tax competition—driving our tax rates down. Tax competition between higher taxing countries has not been shown to be accelerated by low-tax IFCs[248].

Limits on tax planning—what are the implications of low- tax centres for HM Government's policy?

  99.  Non-discriminatory anti-avoidance legislation also has a legitimate role in countering some tax planning. There is a balancing act between promoting economic growth and gathering tax revenues.

  100.  If low-tax centres, and therefore tax planning, are economically beneficial for the UK, should all anti-avoidance legislation be repealed? Clearly there is a balance to be struck between curbing abuses which involve the creation of wholly artificial arrangements and allowing no tax planning at all. So far, the European Courts of Justice have drawn the line that taxpayers, be they corporates or individuals, have the right to structure their business to pay less than the very maximum amount of tax due but that they are not permitted to set up "structures" that constitute wholly artificial arrangements. As the European Courts of Justice noted in Cadbury Schweppes a tax system may contain provisions to counter abuse of the system but:

  101.  "|the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality with a view to escaping the tax normally due on the profits generated by activities carried out on national territory."[249]

  More recently, the European Courts of Justice, said in the Halifax ruling on VAT:

    "| taxpayers may choose to structure their business so as to limit their tax liability"[250].

  102.  This means that individuals and corporations can relocate to other member states within the EU in order to be taxed at a lower rate. However, this principle also means that companies can take advantage of incentives that the Government creates in order to pay less tax. This can have significant economic benefits to the UK economy.


  103.  Clearly international businesses and people are globally mobile as is their capital. It is important to maintain the UK's attractiveness as a destination for such globally mobile capital and important to recognize the role that low-tax centres play in making the UK attractive to that capital, those businesses and those individuals. It is crucial to balance fairness with competitiveness.

  104.  A company setting up a treasury company in a low tax IFC is not creating something that is wholly artificial even if it is doing so with tax in mind. Anti-avoidance legislation such as CFC rules, transfer pricing rules, and anti-treaty shopping measures are limited because it is recognized that some ability to plan makes it more attractive to do business in the UK. Other countries also recognize this by limiting the reach of their anti-avoidance measures. Tax planning and related "anti-avoidance legislation" is part of the competitive advantage of the UK in attracting international citizens and capital. It is important anti-avoidance legislation is framed to maintain UK competitiveness.

  105.  When HM Treasury examines UK anti-avoidance rules they must continue to in the context of UK competitiveness and the impact on foreign investment and capital formation.

  106.  The CDs and leading OTs have a critical role to play in establishing and administrating many of the structures which actively support UK business and the City of London.

Table 1


%% %%% %%%% %

The FATF 40
Compliant 242718 29162433 234931
recommendationsLargely compliant 291820 49334124 652557
and 9 specialPartially compliant 274933 20353333 8204
recommendationsNon-compliant 20629 216210 468


Assessment Australia
% %%% %%% %%%

Legal Systems
Compliant 3667- 33-3333 -10033
1-3Largely compliant67 -6767 1003367 67-67
Partially compliant- 3333- -33-33 --
Non-compliant- --- ---- --
PreventativeCompliant 18141418 182727 183827
measuresLargely compliant 59950 143218 681855
4-25Partially compliant 36682327 324137 5329
Non-compliant41 9545 36-189 149
Institutional andCompliant 224533 56222222 333333
other measuresLargely compliant 562222 33336745 454545
26-34Partially compliant 22334511 451133 2222-
Non-compliant- --- ---- -22
InternationalComplaint 83503367 333383 508333
co-operationLargely compliant 173350 33501717 501767
35-40Partially compliant -1717- 1750- ---
Non-compliant- --- ---- --
FATF SpecialCompliant -1111- -1122 115633
recommendationsLargely compliant 563311 67445611 893367
1-9Partially compliant 33455633 562256 -11-
Non-compliant11 1122- -1111- --


FATF / GAFI, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism (14.10.05)

The Bahamas: CFATF, Mutual evaluation / detailed assessment report, on Anti-Money Laundering and Combating the Financing of Terrorism (23.11.07)

IMF—Detailed assessment report—Money Laundering and Combating the Financing of Terrorism (29.01.08)

Cayman: CFATF—mutual evaluation / detailed assessment report—Anti-money Laundering and Combating the Financing of Terrorism (23.11.07)

FATF / GAFI, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism (22.06.07)

Gibraltar: IMF, Assessment of financial sector supervision and regulation (02.05.07)

FATF / GAFI, Third mutual evaluation /detailed assessment report—Anti-Money Laundering and Combating the Financing of Terrorism (17.02.06)

Singapore: FATF / GAFI, Third Mutual Evaluation Report, Anti-Money Laundering and Combating the Financing of Terrorism (29.02.08)

FATF / GAFI, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism (29.06.07)

USA: FATF / GAFI, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism (23.06.06)

Table 2


Assessment Andorra
Cook Islands
Dutch Antilles
The 3 Crown
% %%% %%% %

Compliant 47502063 63-35 63
Largely compliant43 303630 2010012 34
Materially non-compliant 710287 17-17 2
Non-compliant- 336- --28-
N/A3 7--- -8-
MoneyCompliant66 722450 5863-81
launderingLargely complaint 241437 50392218 19
Materially non-complaint --12- --82 -
Non-compliant- 1421- ----
N/A10 -6-3 15--
InsuranceObserved 1529 59670
Largely observed 6065 23-26
Materially non-observed 106 665 2
Non-observed 5- -242
N/A --12 6-
SecuritiesImplemented 2350 81
Broadly implemented 33 -8
Partly implemented 23 1711
Not implemented - --
N/A 20 33-
June 2008


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STEP would like to thank the following for their assistance in preparing this submission. Errors of omission or commission are the fault of STEP alone. Thanks to: John Riches, Richard Hay, Richard Frimston, Gary Envis, Warren Whitaker, Chris McKenzie, Andrew Miller, Leigh Nicol, Professor Jim Hines, H

l€ne Anne-Lewis, David Harvey, Keith Johnston, Jacob Rigg, Rosemary Marr, Stephen Platt, Craig Carr, Elizabeth Wilkinson.

STEP would like to thank the Chairman and members of the House of Commons Treasury Select Committee for the opportunity to comment on the issues involved.

The Society of Trust and Estate Practitioners (STEP) is a unique professional body providing members with a local, national and international learning and business network.

STEP provides education, training, representation and networking for its members, who are professionals specialising in trusts and estates, executorship, administration and related taxes. Members advise clients on the broad business of the management of personal finance.

Full members of STEP are the most experienced and senior practitioners in the field of trusts and estates.

240   Hejazi, Walid and Peter Pauly, (2002). Foreign Direct Investment and Domestic Capital Formation, by, University of Toronto, April 2002. Industry Canada Working Paper.
Mintz, Jack (2004J). "Conduit Entities: Implications of Indirect Tax-Efficient Financing Structures for Real Investment", International Taxation and Public Finance, 11, 419-34.
Weichenreider, A. (1996a). "Transfer pricing, Double Taxation, and the Cost of Capital," Scandanavian Journal of Economics 98, 445-452. 

241   Economist, 8 May 2008 Back

242   Besley, T. Principled Agents? (Oxford, 2005). Back

243,3343,en_32250379_32236982_35128416_1_1_1_1,00.html Back

244   GAO Report to the Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S. Senate, Company Formations: Minimal Ownership Information is Collected and Available, April 2006. Available at Back

245   I bid at page 4. Back

246   US Treasury, U.S. Money Laundering Threat Assessment, December 2005. Available at Back

247   Desai, Mihir, Foley C. Fritz, Hines Jr, James R., "Chains of ownership, regional tax competition and foreign direct investment," in Herrmann H., and Lipsey, R. (eds.) Foreign Direct Investment in the real and financial sector of industrialised countries (Berlin, 2003). Back

248   There is a widespread assumption that tax competition means that one jurisdiction must follow another in cutting rates and that competition causes a race to the bottom. There are two problems with this theory. Using game theoretic approaches the "race to the bottom" theorem presumes that games are non-cooperative. Secondly, it is possible that where a high-tax jurisdiction cannot lower tax rates for reasons of political economy then the proximity of low-tax jurisdictions can actually help inward investment into high-tax countries. In addition, the literature suggests that low-tax centres allow other jurisdictions to maintain high capital tax rates without suffering dramatic reductions in foreign direct investment (FDI). 
Firstly, it must be noted that the concept of tax competition is not wholly borne out by the empirical literature or theoretical debate9. Theories of tax competition, predicated generally on capital mobility and fixed labor markets, suggest that tax rates on capital should be declining and that more open and integrated economies should have lower capital (corporate) taxes. Hansson and Olofsdotter9 examine the empirical literature and conclude, "The results of previous studies seem inconsistent, and provide only weak empirical support for the predictions of the tax competition theory." Slemrod9 notes, "there is no consensus in the political science literature that openness, liberalization, or globalization has led to reduced taxation of capital income, including use of the corporate income tax, although lower corporate taxes were sometimes pursued as a policy package with financial liberalization."

249   Cadbury Schweppes plc v. Commissioners of Inland Revenue, C-196/04para 55. Back

250   See Point 85,AG's Opinion, Halifax plc and others v. Customs and Excise Commissioners [2006] 2 W.L.R. 905 Court of Justice of the European Communities 2004 Nov 23; 2005 April 7; 2006 Feb 21 Back

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