Offshore Financial Centres - Treasury Contents


Memorandum from Deloitte

1.  About Deloitte

  1.1  Deloitte is one of the largest professional services organisations in the world, and one of the Big Four auditors. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. As of 2007, Deloitte member firms employed approximately 150,000 professionals in over 140 countries, of whom around 10,000 are in the United Kingdom (Deloitte & Touche LLP) delivering audit, tax, consulting, risk management and financial advisory services.

  1.2  Deloitte professionals advise Governments and others on the creation and development of competitive financial centres, as well as a range of clients on location and other business decisions.

  1.3  Among the British Crown Dependencies and British Overseas Territories Deloitte member firms have offices employing a total of around 650 people in Guernsey, Isle of Man, Jersey, Bermuda, British Virgin Islands, Cayman Islands and Gibraltar.

  1.4  Deloitte do not have offices in Anguilla, Falkland Islands, Pitcairn Islands, South Georgia and South Sandwich Islands, Turks and Caicos Islands, Antarctic Territory, British Indian Ocean Territory, Montserrat, Saint Helena and Ascension Island, Tristan da Cunha, or the military bases in Cyprus (although the Deloitte Cyprus member firm employs around 350 people in the main jurisdiction of Cyprus).

2.  Executive Summary

  2.1  There is continuous competition, much of it healthy, between financial centres, and "onshore" and "offshore" are very much relative terms in categorising different centres and the way they compete.

  2.2  Although many Financial Centres considered to be "offshore" originally developed with a culture of secrecy and by facilitating structures which helped to minimise tax, these factors have more recently played an increasingly smaller role in their success.

  2.3  Many Offshore Financial Centres have already voluntarily taken steps to adopt more rigorous regulatory regimes and remove perceived harmful tax practices. There are a number of reasons underlying these actions but the three, which are probably most worthy of note are:

    —  the need to respond to initiatives by the European Union (EU) and Organisation for Economic Cooperation and Development (OECD) to remove harmful practices;

    —  the need to retain their competitive position (which in our experience requires adequate regulation); and

    —  recognition of the fact that the failure of an inadequately regulated financial business could have a catastrophic economic effect on the Centre itself as well as the wider global economy.

  2.4  Additional action could be taken by these jurisdictions, of varying degrees, to further improve the position. However, this may be best influenced by consensual international initiatives (for example, through the Financial Action Task Force (FATF) or the OECD) more widely rather than through unilateral action/ pressure from the UK.

  2.5  The UK should respond to these issues by supporting such international efforts, by improving its own competitiveness, and by continuing to take proportionate measures to protect its tax base.

3.  To what extent, and why, are Offshore Financial Centres important to worldwide financial markets?

  3.1  Financial Centres arise because most financial activities develop best in "clusters"—financial businesses successfully access more—and more diverse sources of skilled labour, finance, suppliers, customers, trading partners and counterparties by locating their activities closer to other financial businesses, both in the same and in complementary sectors.

  3.2  What makes a Financial Centre "offshore"? There is no single clear definition. The term suggests a financial jurisdiction where legal, regulatory, tax or similar restraints are lower than in "onshore" centres. But this description may hold true of any one Centre in some respects, but not in others. Increasingly, for example, many are seeking to adopt more rigorous regulatory regimes—as weak regulation is increasingly viewed as a competitive disadvantage.

  3.3  So "offshore" and "onshore" are relative terms but all Centres have some legal requirements, however minimal and escaping onerous or uncertain legal, tax and regulatory constraints in other countries has been a major factor in London's rise to dominance, notwithstanding that the UK has extensive requirements of its own.

  3.4  If one had to choose a single criterion, we might define an offshore centre as one that is part of a jurisdiction that has few or no Double Tax Agreements ("DTA") with other countries. This would characterise as "offshore" the territories traditionally viewed as such, but as the UK has a very extensive network of DTAs, would make London very much "onshore". However, this is an oversimplification. Some Centres which might be considered "offshore" have attempted more recently to broaden their network of DTAs, while countries which are generally regarded as "onshore jurisdictions" with established DTA networks sometimes compete by introducing financial centre regimes in their territories with "offshore" characteristics.

  3.5  From a public policy perspective, the motivation to "go offshore", and the competition between jurisdictions which it creates, can have both healthy and unhealthy aspects. To deal with the healthy aspect first, such competition creates an impetus to reduce the "collateral damage" that any legal, regulatory and tax systems impose—prohibitions, compliance costs, uncertainties, impediments to innovation, delays for approvals or clearances, tax costs and penalties. All those create costs and/or uncertainties, reducing levels of economic activity and the benefits to which that gives rise. For example, there is competition between legal systems and very many international commercial contracts are drawn up under English or New York law, which are common law systems offering relative certainty of outcome. They are not the only legal systems which have this characteristic but they have become known and trusted for it and developed a lead in the market—a "cluster effect" again. The consequence is greater legal certainty for the whole global financial economy than if diverse national systems were followed more passively. London and the UK have also benefited from a reputation for less costly but still effective regulation as compared to, say, Frankfurt and New York, and again this competition is to the benefit of the global economy.

  3.6  A very particular example of the importance of offshore centres is in the field of securitisation. For commercial reasons securitisation companies typically have very large volumes of interest income and expense, making no material profit. (Their primary function is not to make profit in their own right but to repackage cashflows to have different risk and security profiles to appeal to different categories of investors). Notwithstanding the current impact of the credit crunch, on balance such activity has been of great economic benefit, for example in reducing mortgage costs faced by homeowners—as the increase in costs as a result of recent market conditions shows.) If the expenditure incurred by such companies is not fully tax deductible against the income, an unfunded tax charge will arise, making the transaction prohibitively expensive. There is no public policy reason to impose such tax (which would in any event raise no revenue, as such transactions would then not occur). However, the complexities of many national tax regimes create a risk of it that can be expensive to address. Jersey in particular historically became an accepted location for many securitisation companies which have benefited from exempt company status there—not to shelter profits, for no material profits arise—but to achieve certainty of treatment. (Jersey gained a position ahead of other offshore centres in this respect largely because of the "cluster effect".) Many "onshore" tax regimes, including Ireland, Luxembourg and more recently the UK have now legislated to give such companies the certainty they need, onshore. This seems a sensible, considered and positive policy (and certainly not a knee-jerk reaction to the position of Jersey) which has accommodated financial innovation without in any sense compromising national tax revenues.

  3.7  The unhealthy aspect of jurisdictional competition is the threat that the desirable and necessary public policy objectives behind jurisdictional rules are frustrated—most obviously in the raising of tax revenues and in combating money laundering. We revert to this below.

  3.8  As well as competing, Financial Centres may perform complementary roles, particularly where one or more of them are "niche players" which specialise in particular fields. For example, Bermuda is very strong in the area of wholesale insurance which can provide an important service to other Centres. Many Centres are locations for funds, much of whose investment management supporting activity may be performed elsewhere ("onshore"). For example, there is a great deal of investment advisory and management activity in London supporting funds located in the Channel Islands or Isle of Man.

4.  To what extent does the use of Offshore Financial Centres threaten financial stability?

  4.1  In general, not much, though there are inherent risks which must be kept under constant review.

  4.2  As a broad statement, it is the activities of large financial businesses, especially those operating globally, which threaten the financial stability of particular jurisdictions rather than vice versa. This is not to be negative about financial businesses, which generally produce great economic benefit—but like any business they entail risks. In the case of many financial businesses, these can, if unregulated, be significant enough to threaten the stability of economic systems of individual countries or areas of the world. This is precisely why such businesses are typically subject to some level of regulation in most jurisdictions, even "offshore centres".

  4.3  On this view, the major risk to an offshore centre of operating an insufficient regulatory oversight of financial businesses is a risk to the offshore centre itself—such a centre will be excessively exposed to risks of financial instability. This is one reason why insufficient regulation is no longer viewed as a competitive advantage for a financial jurisdiction. (Other reasons are that typically an offshore regime will want its regulators to be treated as "equivalent" to onshore regulators in the way onshore regimes are applied to institutions based in that offshore jurisdiction but operating onshore; and will also want to offer a lower level of perceived uncertainty and risk to business counterparties of institutions which it regulates.) In fact, strong regulation is in our experience a competitive advantage—large financial businesses place a large premium on the stability, transparency and effectiveness of a country's regulatory systems and the extent to which it co-operates with other regulators.

  4.4  This analysis leaves open the risk that financial businesses by locating activities in relatively unregulated centres will (even if the lack of regulation in such centres is not in their own best interests) undermine the effectiveness of regulation in more mainstream centres. In general we think this risk is successfully contained in practice by increasing collaboration between regulatory regimes (including, to varying degrees, those of centres characterised as "offshore"), as demonstrated by the increasing number of Memorandums of Understanding signed between national regulators, and the widespread adoption of the Basel Committee's Core Principles for Effective Banking Supervision and increasing sophistication by national regulators in identifying the risks to their economies from the financial activities to which they play host, for example the UK Financial Services Authority's ("FSA's") Financial Risk Outlook. http://www.fsa.gov.uk/Pages/Library/corporate/Outlook/fro_2008.shtml

  4.5  Of course, such containment cannot be guaranteed by general statements: it requires a "Forth Bridge job" of reviewing the risks, implementing the steps necessary to contain it and collaborating with other regulators in doing so. International co-ordination bodies such as Basle and the International Organisation of Securities Commissions (IOSCO) have been effective in identifying risks, harmonising international standards, and continually "raising the bar". However, this need for continuous review and remedial action does not fundamentally arise from the existence of offshore centres, but from the innovative nature of much financial activity. The credit crunch was triggered, for example, by a crisis in sub-prime debt in the United States, rather than (say) the Cayman Islands.

5.  How transparent are Offshore Financial Centres and the transactions that pass through them to the United Kingdom's tax authorities and financial regulators?

  5.1  This is increasingly the case.

  5.2  As far as regulation is concerned, there is an increasing tendency for national regulators, including those based in "offshore centres" as we have defined them, to enter into bilateral "Memorandums of Understanding" between each other enabling them to co-ordinate their approaches. (Clearly this involves a judgment by each regulator that it is appropriate to enter this level of co-operation with the other: where there is insufficient confidence to form this judgment, this may be viewed by the market as a signal that the regulatory environment in the "shunned" offshore centre is not all that it should be and this in turn would be a competitive disadvantage). More widely, our clients have seen examples of co-operation between home and host regulators and co-ordination of their visits. For example a client recently hosted a visit by the United States "Fed", the State Regulator and the UK FSA to discuss their response to the credit crunch. The UK's Financial Services Authority (FSA) is active in entering such bilateral arrangements and in debating with the EC and United States how international regulatory co-operation can be best achieved. National Regulators and their host jurisdictions are also subject to review by international bodies which publish clear reports on compliance with international norms. For example, The International Monetary Fund and the World Bank launched the Financial Sector Assessment Programme (FSAP) in 1999 with the intention of helping countries identify vulnerabilities in their financial systems and determine needed reforms (http://www1.worldbank.org/finance/html/fsap.html). Home regulators from onshore centres will typically take an interest in the activities of any of their overseas branches or subsidiaries, capturing their financial exposures in consolidated returns. Finally, national regulators can impose requirements which in practice are effective extraterritorially—this is particularly so of United States regulators.

  5.3  As stated earlier (paragraph 3.2), many Offshore Financial Centres are adopting more rigorous regulatory regimes as an absence of accepted regulation is increasingly viewed as a competitive disadvantage. In some recent jurisdictions we have seen the adoption of international regulatory norms used as a competitive advantage. For example the regulation of the Dubai International Financial Centre ("DIFC") has a similar feel to the UK system. Its website proudly states "Created by statute and entirely independent of the DIFC, the DFSA ("Dubai Financial Services Authority") is unique. While many regulatory bodies have been formed in response to financial crises, the DFSA has been established as a world-class regulator from the outset." And later, "We are responsible for ensuring that the DIFC is one of the best regulated financial centres in the world." (http://www.dfsa.ae/dfsa/about+us/who_we_are/ )

  5.4  As far as tax is concerned, Her Majesty's Revenue & Customs (HMRC) have been increasingly effective in using domestic UK information powers to identify depositors in offshore savings institutions and where necessary improve the effective enforcement of tax laws. In general we believe information powers are a sensible way to proceed (as compared to, say, attempting to withhold tax at source) because they offer a way of identifying and combatting illegal evasion and are increasingly accepted in principle as a reasonable imposition by the markets, whereas withholding tax is a blunt instrument retaining a standard amount irrespective of taxpayers' circumstances, and can affect and distort the market pricing of financial instruments, and can be avoided in favour of instruments which pay a gross return.

  5.5  The most systematic multinational tax disclosure regime to which the UK is a party is the European Union Savings Directive ("EUSD") which establishes reporting requirements on paying agents in respect of payments of interest to private investors. Certain countries as a transitional measure are allowed to withhold tax instead of report the information to the relevant tax authorities.

  5.6  The UK has entered into agreements effectively extending the provisions of the EUSD either on a reciprocal or non-reciprocal basis with the following countries:

    —  Anguilla

    —  Aruba

    —  British Virgin Islands

    —  Cayman Islands

    —  Gibraltar

    —  Guernsey

    —  Isle of Man

    —  Jersey

    —  Montserrat

    —  Netherlands Antilles

    —  Turks and Caicos Islands

  5.7  There has been some criticism that the EUSD is too narrowly focussed on interest payments, allowing other forms of investment returns to go unreported. The United States operates extraterritorially and with some success a reporting regime on financial institutions (known as "qualifying intermediaries" or "QIs") holding US securities on behalf of clients. This is generally credited with an increase in the US tax take in respect of such securities.

6.  To what extent does the growth in complex financial instruments rely on Offshore Financial Centres?

  6.1  Comparatively little. The reasons why some (not all) financial instruments are complex are varied, but generally speaking all complex structuring is intensive of skilled labour and is developed in the typically larger onshore "clusters" of financial activity such as London and New York. For example, London is the largest centre for derivative instruments such as swaps. An activity, or a role in an activity (whether involving simple or complex instruments) is more likely to be attracted to an offshore centre if the market needs to, or seeks to, avoid specific constraints inherent in onshore legal, tax or regulatory restrictions.

  6.2  As described in section 3 above, this may be a reaction to unintended compliance costs, uncertainties or rigidities entailed in these restrictions, as much as from a desire to frustrate the intention of policy behind them. Unintended consequences are particularly prone to occur in innovative areas of financial markets because the precise products and the issues to which they give rise are harder for policy-makers to foresee. A good example of this historically was the struggle that the UK tax system (which historically divided cashflows somewhat artificially into "capital" and "revenue" items) had in dealing with the explosion of foreign exchange transactions and derivative instruments from the 1980s onwards. The uncertainties and irrationalities of tax treatment of these items led to the creation (often with official acquiescence) of offshore treasury companies (although normally in jurisdictions such as Netherlands or Luxembourg rather than "offshore financial centres" as we have defined them). A more sensible and lasting response has been a slow and sometimes erratic, but nevertheless real, programme of reform of the traditional tax treatment to tax these activities more closely in line with their commercial profit.

7.  How important have the levels of transparency and taxation in Offshore Financial Centres been in explaining their current position in worldwide financial markets

  7.1  Although many Offshore Financial Centres originally developed with a culture of secrecy and by facilitating structures which helped to minimise tax, this has more recently played an increasingly smaller role in their success. This is in part due to the fact that the increasing sophistication of onshore tax rules has meant that there is sometimes little tax benefit to moving offshore. Also, it must be remembered that Offshore Financial Centres are not the only jurisdictions with traditional banking secrecy laws.

  7.2  In addition, it is possible to form an exaggerated view of the benefits of tax haven status by focussing exclusively on the relative ease of moving passive/mobile income flows away from a "host country" which attempts to tax them. This is a factor, but one which is balanced by others. Firstly, such mobile flows can potentially be taxed in the country of residence of the owner of the income, if it effectively charges tax on worldwide income and moves referred to earlier to increase disclosure of such income flows are tending to make this more effective. We accept that this balancing factor will not operate to the extent that people are able and willing to take up residence in low or zero tax countries, and this will be of concern from the standpoint of the perceived fairness of the tax system, but the numbers of people who can really take up residence in the relatively small territories concerned is inevitably limited. A second, and often ignored balancing factor is that the migration of an active financial business is far more difficult—counter-intuitively perhaps more difficult than migrating a typical "heavy industry" activity, because it may well be more labour (and skilled-labour) intensive. For such a move to be economically viable, such a business may require a considerable physical presence in the offshore location, which may not be possible for a variety of reasons (for example, the absence of other financial institutions, housing restrictions, or a lack of infrastructure, schools and other amenities, all of which deter immigration).

  7.3  As in the example in paragraph 3.6 above, the key relevant benefit of a low tax rate can often be the relative certainty that it affords as distinct from any saving in tax. Transparency works both ways. A complex tax system, especially if subject to repeated unexpected change, combined with a relatively high tax rate, can be a competitive disadvantage. Correcting that disadvantage is an opportunity to pull people and activity back to the home country, such as the UK, without adversely affecting its tax base.

  7.4  Another benefit afforded by some Offshore Financial Centres is their more flexible company law, which sometimes has been adapted more quickly to changing commercial requirements than in the UK. This has allowed such jurisdictions to keep apace with commercial advances (for example, products that involve a capital repayment which would not be permissible under UK company law), which in turn has increased their international attractiveness.

8.  How do the taxation policies of Offshore Financial Centres impact on UK tax revenue and policy?

  8.1  We would suggest that UK tax policy should continue to:

    (i) strive to improve the competitiveness of the UK tax system, to the extent that this reduces the unintended costs and uncertainties, and to the extent that this does not entail "beggar-your-neighbour" policies that become self-cancelling once everyone adopts them;

    (ii) adopt proportionate domestic measures to protect the revenue; and

    (iii) engage in international co-operative activity through the OECD, EU and other bodies in order to counteract harmful tax competition.

  These are considered in turn below. As a preliminary general point, the second and third of these recommended lines of action are of course intended to contain the risk inherent in competition between Financial Centres noted in section 3 above that such competition can frustrate the fundamental public policy objective of the collection of tax. In pursuing protection measures one must not lose sight of the fact that ultimately the capacity for extracting tax revenues from individuals and businesses derives from the fact that the UK is an attractive place to live, work and do business (and deeply, rather than superficially so). The more we reinforce this (which has implications for a range of policies from infrastructural improvements, to educational and cultural policies, and receptiveness to positive migration) the greater our capacity to levy taxes successfully and competitively will be. Specific measures of revenue protection, whether domestic or international, need to work with the grain of this underlying truth and not be pursued in "Maginot line" fashion.

  8.2  As far as the competitiveness of the UK tax system is concerned, we applaud many current directions of UK tax policy toward large (including financial) businesses, including:

    —  attempting to measure compliance costs and using the information as a framework for assessing proposals for change and progress against these objectives;

    —  introducing wider use of clearances to give business greater practical certainty over tax outcome;

    —  seeking to align enforcement action with a transparent assessment shared with the taxpayer of the real risks to the revenue;

    —  specific policy changes such as the "Substantial Shareholdings Exemption" introduced in 2002 to facilitate corporate disposals, and the proposed "foreign dividend" exemption; and

    —  limited steps undertaken to align taxable profits with a commercial measure of profit and reduce tax distortions to decision-making.

  8.3  The key areas in which much greater progress is required on this front are:

    —  renewed efforts to simplify the tax system which is over-engineered (even allowing for the range of purposes which it serves). For example, both existing rules and proposals on the table for taxing the foreign profits of UK based companies and banks (whether operating through subsidiaries or branches) impose high compliance burdens, and sometimes irrational tax burdens, with the whole structure of rules being completely disproportionate to the real need which is to protect the UK tax base rather than seeking systematically to tax profits arising elsewhere;

    —  much greater consistency in consulting about change rather than announcing significant changes every six months or so (in the course of Budgets and Pre Budget Reports) without prior warning. Again, transparency works both ways; and

    —  specific measures to encourage activities to be brought onshore. For example, attractive tax regimes could be devised which:

    —  target the catastrophe insurance activities that, to a large extent, are currently undertaken in Bermuda and Switzerland; and

    —  encourage companies to hold intangible assets in the UK.

  8.4  As far as domestic measures to protect the revenue are concerned, the picture is mixed:

    —  On the one hand we welcome the focus from HMRC in recent times on enforcement of legal liabilities through greater use of information powers.

    —  In similar vein, we think that certain areas of anti-avoidance legislation traditionally deployed, such as transfer pricing, are inevitable protections that almost any developed tax system is likely to require.

    —  However, we think that certain areas of traditional anti-avoidance policy risk becoming counter-productive. For example, over-extensive "controlled foreign company" rules can serve to deter multinational businesses from being based in the UK in the first place. And excessive reliance on withholding tax applied to payments abroad can simply undermine the ability of UK businesses to access the international capital markets. The best protection for the revenue is to base the rules as to the application, or otherwise, of tax on real commercial criteria; to apply tax at a reasonable rate to a broad base of activities, so that it is accepted as part of the cost of living and of doing business; and to exploit the increasing willingness of the capital markets to accept and respond to the use of information and reporting powers (as the success of the United States "qualifying intermediary regime—see paragraph 5.7 above -shows) to enforce reasonable liabilities legally due.

  8.5  In the formulation of certain taxation policies and legislation, the UK may need to consider the wider international framework—for example, the need for EU compliance or the incorporation of OECD recommendations and standards. The OECD can, and has had, an influential effect on the taxation policies/ legislation of Offshore Financial Centre jurisdictions (for an example see paragraph 9.2 below. In addition, both Guernsey and the Isle of Man have introduced new tax regimes to remove tax practices categorised as harmful by the OECD; and Jersey will do so from 1 January 2009). Consequently, the UK Treasury and HMRC need to continue to closely work with such organisations to ensure that, where possible, the UK position is taken into account in their output. If this can be achieved, there could be direct benefits for the UK (for example, where there is a consensus view that an offshore tax system contains harmful characteristics, this could be tackled at the root rather than the UK having to introduce complex anti-avoidance legislation which may have unwelcome side-effects such as compliance costs and may be less than fully effective in an attempt to counter its impact).

9.  Are British Overseas Territories and Crown Dependencies well regarded as Offshore Financial Centres, both in comparison to their peers and international standards?

  9.1  Many of these Territories/ Dependencies have taken active steps to maintain their reputation and international standing through, for example, the adoption of anti-money laundering provisions and the entering into of information exchange agreements. For example, Jersey and Guernsey have entered into Tax Information Exchange Agreements with the United States and the Netherlands. These jurisdictions are also in advanced discussions with a number of other territories including Australia, New Zealand and various Nordic countries.

  9.2  Partly in response to international initiatives, and partly in a defensive move to protect their reputations, many offshore financial centres now apply fairly rigorous anti-money laundering regulations to offshore business. This is evidenced by the fact that many of these Territories/ Dependencies are members of the Offshore Group of Banking Supervisors, which is an observer member of the Financial Action Task Force. In addition, although many appeared on the OECD's original list of "Unco-operative tax havens", they all committed to improving transparency and establishing effective exchange of information in tax matters. Consequently, they no longer feature on this list which is now comprised of only three jurisdictions: Andorra, the Principality of Liechtenstein and the Principality of Monaco. More recently, the EU's draft list of approved countries was published on the Treasury website (http://www.hm-treasury.gov.uk/documents/financial_services/money/fin_crime_equivalence.cfm). This will allow companies operating in EU countries the option of waiving some of the checks they would normally carry out on financial transactions carried out with companies abroad to ensure they did not involve the proceeds of crime. Compiled by the EU committee on the prevention of money laundering and terrorist financing, the list comprises 13 countries considered to have money-laundering legislation equivalent to that of EU countries. The list states that the Crown Dependencies, which are not part of the EU, may be considered to have equivalent standards to those of Member States, without specifically approving them. British overseas territories have been excluded altogether. The draft list has been heavily criticised by the Channel Islands, and, for example, Guernsey have put forward the view that they have been unfairly penalised due to their tax policies. We cannot attest to the validity of this specific statement but are of the strong belief that the taxation policies of a jurisdiction should not have a bearing on a review of any its other unrelated policies such as its measures to control money-laundering. Otherwise offshore centres will not be incentivised to take such measures as strongly as they should be. Moreoever, if aspects of their tax policies are considered harmful, this can be addressed in other ways as described earlier in this and in the previous section.

  9.3  In order to maintain their competitiveness the British Overseas Territories and Crown Dependencies need to be well regarded as Financial Centres. As demonstrated by the example in paragraph 9.2, where there is an international consensus as to any perceived weaknesses, and there is clarity surrounding the issue, these jurisdictions have shown their willingness to voluntarily rectify the position.

10.  To what extent have Offshore Financial Centres ensured that they cannot be used in terrorist financing?

  10.1  No international active financial system will be able to ensure it cannot ever be used for Terrorist Financing. A more practical objective would be to limit the use of financial systems and make it increasingly difficult to pass funds to terrorists. However, we have seen the fight against terrorist financing receive a tremendous focus by most financial institutions and by most Financial Centres, partly due to the use of the extra-territorial provisions within the US Sanctions Regime.

  In summary, most offshore centres (Channel Islands, Cayman etc.) have done a great deal, some others have passed laws but done little by way of implementation, and a small minority have done even less.

  In the countries we have recently worked in, this is an area of considerable focus, large financial institutions are implementing global standards and ensuring that these are enforced, laws are being introduced and enforcement regimes strengthened.

11.  What are the implications for the policies of HM Treasury arising from Offshore Financial Centres?

  11.1  As far as taxation is concerned our comments are in section 8 above.

  11.2  The UK has been highly successful in promoting London as an international centre in the last two decades. We have seen a weight of comment by other countries on the effectiveness of the UK regime. For example, in its recent paper the US "THE FINANCIAL SERVICES ROUNDTABLE" compares the UK system to that of the US and is highly complimentary of the UK system. It comments (pages 42 and 43) "Unless these regulatory perceptions are changed, more and more businesses and jobs likely will migrate to other regulatory venues—most notably London—that are viewed as more conducive to doing business while maintaining high, principles-based regulatory standards".

  11.3  In short, it is important that we maintain and develop the "more principles-based regulation" approach of the FSA. It has served the UK well and we should be careful not to lose this in reaction to the Northern Rock episode.

  11.4  The UK Government and the Treasury are also undertaking initiatives which attract business from offshore centres. An example of this is HM Treasury including as one of its objective for Islamic finance the desire to enhance the UK's competitiveness in financial services by establishing London as a gateway for international Islamic finance.

12.  What has been and is the extent and effect of double taxation treaty abuse within Offshore Financial Centres

  12.1  As noted in section 3.4 above, Financial Centres that are considered "offshore" have typically been characterised by being part of jurisdictions which have no, or few, Double Tax Agreements (DTAs). Consequently, they cannot significantly benefit from such agreements, abusively or otherwise.

  12.2  Jersey, Guernsey and the Isle of Man do have DTAs with the UK, which is very much an exception to the general rule. However, the provisions of these Treaties are significantly less comprehensive than the more "standard" DTA which the UK typically negotiates, which we believe militates effectively against the possibility of widespread abuse.

  12.3  The position might in theory change as offshore centres become more assiduous in developing networks of DTAs or countries with such networks develop financial regimes with offshore characteristics, as noted in paragraph 3.4 above. However, the UK tax authorities are in practice alert to the possibilities of abuse of DTAs and are increasingly negotiating caveats and protections in such Agreements.

13.  To what extent do Offshore Financial Centres investigate businesses and individuals that appear to be evading UK taxation

  13.1  Traditionally as a general rule no jurisdiction, onshore or offshore, would enforce others' tax laws. The principal exception used to be that under bilateral Double Taxation Agreements, information which had been collected for the purposes of one country's tax system might be shared with the authorities of the other country. Professional rules of advisers which would not countenance assisting clients illegally to evade tax did not concern themselves with such a client's position under the laws of other countries. This position has changed beyond recognition, principally in the EU because of anti-money laundering rules, whereby (for example) an adviser who suspects that a client had evaded foreign tax would be required to report his or her suspicions to the authorities without "tipping off" the client. A key determinant of how much assistance the UK will get from offshore centres in enforcing its laws against illegal evasion is the extent to which these centres have adopted anti-money laundering rules to EU standards. This is currently a live and disputed issue (see paragraph 9.2 above).

  13.2  As set out in section 5 above, one of the key ways in which the UK Government can determine whether businesses or individuals are evading UK taxation is the sharing of information. It is therefore worth considering some of the enabling measures that have been introduced in the UK, and which could potentially be of benefit if they were to be replicated by the British Crown Dependencies and British Overseas Territories. These measures include:

    —  Exchange of information articles in bilateral Double Tax Agreements ("DTAs")—this is covered elsewhere in this memorandum but it is worth pointing out that the DTAs between the UK, Jersey, Guernsey and the Isle of Man (referred to at paragraph 12.2 above), although limited in scope compared to other DTAs, do contain exchange of information articles. We are aware of cases where substantive information has passed between these jurisdictions and the UK under this article in the DTAs.

    —  The enactment of the EU Savings Directive (Statutory Instrument 2003/3297)—see paragraph 5.5 above.

    —  Section 125, Finance Act 1990 extended the powers in section 20, Taxes Management Act 1970 to allow the issue of a notice to provide documents and information necessary to determine a liability to tax on income or capital in a Member State other than the UK.

    —  The enactment of the EU Mutual Assistance in the Recovery of Debt ("MARD") in section 135 and Schedule 39, Finance Act 2002. MARD is a reciprocal arrangement which allows one EU Member State to ask another Member State to assist in:

    —  obtaining information;

    —  serving legal documents; or

    —  recovering a tax or duty debt;

    where the defaulting taxpayer is living in that other member state.

    —  Section 173, Finance Act 2006 which allowed the UK to bring into effect the OECD 1988 Convention on Mutual Administrative Assistance in Tax Matters. Previously, the UK did not enforce the collection of taxes raised by other jurisdictions outside the EU. Section 173 changed the position by providing a single power to make arrangements with another territory for the exchange of information, service of documents and assistance in tax collection in respect of both direct and indirect taxes. New agreements are brought into effect by Order in Council.

  13.5  In our own business we have, as Deloitte, extensive "client take on" procedures, which reflect among other things our obligations under anti-money laundering legislation and which, we believe, are indicative of such systems put in place by many other organisations. These procedures cover the UK, Jersey, Guernsey and Isle of Man. A centralised, computerised system is used for collating and recording information to ensure that Deloitte meets its "Know Your Client" and client identification requirements. The output of the systems is reviewed by a number of parties within Deloitte, generally ascending based on seniority, to ensure that both our external and internal requirements are met. This system complements our other activities in this area which include, for example, the requirement for all of our client handling staff to be fully aware of the Anti-Money Laundering rules. This is achieved through training and online assessment, which differs between the UK and Jersey, Guernsey and the Isle of Man to reflect the difference in the underlying laws and regulations.

June 2008






 
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