Memorandum from the Society of Trust and
Estate Practitioners (STEP)
INTRODUCTION
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:
— 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.
CASE STUDY—DELAWARE—FATF
AND FEDERAL
EVALUATIONS OF
US STATES' STANDARDS
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 (http://levin.senate.gov/newsroom/release.cfm?id=265861).
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 (http://obama.senate.gov/press/080501-obama_joins_lev/).
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".
CASE STUDY—BERMUDA—REGULATOR
RESPONDS POSITIVELY
TO MIXED
IMF/FATF REPORT
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.
WHY ARE
LOW-TAX
IFCS GOOD FOR
THE UK ECONOMY?
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.
CONCLUSIONS
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
RECORD OF COMPLIANCE WITH FATF RECOMMENDATIONS
ON ANTI-MONEY LAUNDERING AND COMBATING THE FINANCING OF TERRORISM—OVERVIEW
Recommendation
| Assessment | Australia
14.10.05
| Bahamas
23.11.07 | Bermuda
29.01.08
| Cayman
23.11.07 | Denmark
22.06.07
| Gibraltar
02.05.07 | Ireland
17.02.06
| Singapore
29.02.08 | UK
29.06.07
| USA
23.06.06 |
| | % | %
| % | % | % |
% | % | % | %
| % |
The FATF 40 | Compliant
| 24 | 27 | 18 |
29 | 16 | 24 | 33
| 23 | 49 | 31 |
| recommendations | Largely compliant
| 29 | 18 | 20 |
49 | 33 | 41 | 24
| 65 | 25 | 57 |
| and 9 special | Partially compliant
| 27 | 49 | 33 |
20 | 35 | 33 | 33
| 8 | 20 | 4 |
| recommendations | Non-compliant
| 20 | 6 | 29 |
2 | 16 | 2 | 10
| 4 | 6 | 8 |
| |
| | | |
| | | |
| |
RECORD OF COMPLIANCE WITH FATF RECOMMENDATIONS ON ANTI-MONEY
LAUNDERING AND COMBATING THE FINANCING OF TERRORISM—BREAKDOWN
Recommendation | Assessment
| Australia
14.10.05 | Bahamas
23.11.07
| Bermuda
29.01.08 | Cayman
23.11.07
| Denmark
22.06.07 | Gibraltar
02.05.07
| Ireland
17.02.06 | Singapore
29.02.08
| UK
29.06.07 | USA
23.06.06
|
| | %
| % | % | %
| % | % | %
| % | % | %
|
Legal Systems | Compliant
| 36 | 67 | - |
33 | - | 33 | 33
| - | 100 | 33 |
| 1-3 | Largely compliant | 67
| - | 67 | 67 |
100 | 33 | 67 |
67 | - | 67 |
| Partially compliant | -
| 33 | 33 | - |
- | 33 | - | 33
| - | - |
| Non-compliant | -
| - | - | - |
- | - | - | -
| - | - |
| Preventative | Compliant |
18 | 14 | 14 | 18
| 18 | 27 | 27 |
18 | 38 | 27 |
| measures | Largely compliant |
5 | 9 | 9 | 50
| 14 | 32 | 18 |
68 | 18 | 55 |
| 4-25 | Partially compliant |
36 | 68 | 23 | 27
| 32 | 41 | 37 |
5 | 32 | 9 |
| Non-compliant | 41
| 9 | 54 | 5 |
36 | - | 18 | 9
| 14 | 9 |
| Institutional and | Compliant
| 22 | 45 | 33 |
56 | 22 | 22 | 22
| 33 | 33 | 33 |
| other measures | Largely compliant
| 56 | 22 | 22 |
33 | 33 | 67 | 45
| 45 | 45 | 45 |
| 26-34 | Partially compliant |
22 | 33 | 45 | 11
| 45 | 11 | 33 |
22 | 22 | - |
| Non-compliant | -
| - | - | - |
- | - | - | -
| - | 22 |
| International | Complaint |
83 | 50 | 33 | 67
| 33 | 33 | 83 |
50 | 83 | 33 |
| co-operation | Largely compliant
| 17 | 33 | 50 |
33 | 50 | 17 | 17
| 50 | 17 | 67 |
| 35-40 | Partially compliant |
- | 17 | 17 | -
| 17 | 50 | - |
- | - | - |
| Non-compliant | -
| - | - | - |
- | - | - | -
| - | - |
| FATF Special | Compliant |
- | 11 | 11 | -
| - | 11 | 22 |
11 | 56 | 33 |
| recommendations | Largely compliant
| 56 | 33 | 11 |
67 | 44 | 56 | 11
| 89 | 33 | 67 |
| 1-9 | Partially compliant |
33 | 45 | 56 | 33
| 56 | 22 | 56 |
- | 11 | - |
| Non-compliant | 11
| 11 | 22 | - |
- | 11 | 11 | -
| - | - |
Sources:
Australia: 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)
Bermuda: 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)
Denmark: 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)
Ireland: 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)
UK: 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
IMF ASSESSMENTS OF THE SUPERVISION AND REGULATION OF FINANCIAL
SECTOR
| Assessment |
Andorra
2002 | Aruba
2002
| Cook Islands
2004 | Dutch Antilles
2004
| Liechtenstein
2003 | Monaco
2003
| Vanuatu
2003 | The 3 Crown
Dependencies
2003
|
| | %
| % | % | %
| % | % | %
| % |
Banking | Compliant |
47 | 50 | 20 | 63
| 63 | - | 35 |
63 |
| Largely compliant | 43
| 30 | 36 | 30 |
20 | 100 | 12 |
34 |
| Materially non-compliant |
7 | 10 | 28 | 7
| 17 | - | 17 |
2 |
| Non-compliant | -
| 3 | 36 | - |
- | - | 28 | -
|
| N/A | 3 |
7 | - | - | -
| - | 8 | - |
| Money | Compliant | 66
| 72 | 24 | 50 |
58 | 63 | - | 81
|
| laundering | Largely complaint
| 24 | 14 | 37 |
50 | 39 | 22 | 18
| 19 |
| Materially non-complaint |
- | - | 12 | -
| - | - | 82 |
- |
| Non-compliant | -
| 14 | 21 | - |
- | - | - | -
|
| N/A | 10 |
- | 6 | - | 3
| 15 | - | - |
| Insurance | Observed |
| 15 | | 29 |
59 | | 6 | 70
|
| Largely observed |
| 60 | | 65 |
23 | | - | 26
|
| Materially non-observed |
| 10 | | 6
| 6 | | 65 |
2 |
| Non-observed |
| 5 | | - |
- | | 24 | 2
|
| N/A | |
- | | - | 12
| | 6 | - |
| Securities | Implemented |
| | |
| 23 | 50 | |
81 |
| Broadly implemented |
| | | | 33
| - | | 8 |
| Partly implemented |
| | | | 23
| 17 | | 11 |
| Not implemented |
| | | | -
| - | | - |
| N/A | |
| | | 20
| 33 | | - |
June 2008
| |
| | |
| | | |
|
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ABOUT STEP
AND ACKNOWLEDGEMENTS
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
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and Domestic Capital Formation, by, University of Toronto, April
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International Taxation and Public Finance, 11, 419-34.
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and the Cost of Capital," Scandanavian Journal of Economics
98, 445-452. Back
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244
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on Homeland Security and Governmental Affairs, U.S. Senate, Company
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April 2006. Available at www.gao.gov/new.items/d06376.pdf. Back
245
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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."Back
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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