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
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);
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 moreand 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 regimesas 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"
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 imposeprohibitions,
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 marketa "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 homeownersas 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 therenot to shelter profits, for no material
profits arisebut 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 frustratedmost
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 benefitbut
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 itselfsuch
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
advantagelarge 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
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 extraterritoriallythis 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."
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:
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
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 difficultcounter-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
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,
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
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
regimesee 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 frameworkfor 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
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 venuesmost notably Londonthat
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
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
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.