Death of the offshore centres - a premature diagnosis

It is fashionable at the moment to predict the slow demise of the traditional offshore centres, and the migration of business from them to financial centres with extensive double tax treaty networks, or to pure onshore locations.  Many trust company businesses head-quartered in places such as Jersey, Guernsey and Cayman are opening offices in Luxembourg, Hong Kong and similar locations in a bid to ensure that whilst client structures may migrate from one jurisdiction to another, they need not be lost to the trust company group.  It is not difficult to see why the doom-merchants are nervous – every day the press is filled with “anti offshore” rhetoric and proposals to prevent people from legitimately structuring their affairs through them, such as the UK’s GAAR proposals, the US’s Stop Tax Haven Abuse Act, the closure of QROPs in many locations and the removal by the UK of Low Value Consignment Relief from shipments from the Channel Islands.  Add to this stories of the offshore centres being costly and unresponsive, and it can become difficult to be optimistic about their future.

And yet despite all of this, time and time again the traditional offshore centres, and those based close to the UK in particular (the Channel Islands and the Isle of Man) perform strongly in objective assessments of international competitiveness. 

This week has seen the release of the latest Global Financial Centres Index (“GFCI”) which provides profiles, ratings and rankings for 77 financial centres, drawing on two separate sources of data – instrumental factors (external indices) and responses to an online survey.  The GFCI looks at the relative competitiveness of all of the 77 financial centres, some of which are onshore (such as London and New York), some of which are offshore (such as Jersey and Cayman) and some of which fall into a middle ground which I shall refer to as “quasi offshore” centres – ie countries where the majority of the business conducted there is not for domestic customers but for international clients attracted by low taxes or an extensive double tax treaty network.

According to the GFCI methodology, research indicates that the key factors which combine to make a financial centre competitive can be grouped into five ‘areas of competitiveness’: People, Business Environment, Infrastructure, Market Access and General Competitiveness. In addition to using a wide range of external measures to assess 86 factors within these overarching categories, GFCI also use responses from an online questionnaire completed by 1,890 international financial services professionals.

In the latest report, Jersey has maintained its position as the number one offshore financial centre in the world in terms of its international competitiveness (coming 20^th in the overall rankings), with Guernsey safe in the second spot (28^th) some way ahead of the Isle of Man in third (40^th), Cayman (44^th), BVI (45^th) and Bermuda (46^th).  What is interesting to note is that far from being on a slow decline, most of these jurisdictions have seen their competitiveness scores rise over the last couple of years and so the trajectory is upwards rather than downwards.  This may come as a surprise to those who are predicting their rapid demise.

Another observation is that the Channel Islands also score markedly higher than their “quasi offshore” rivals in Luxembourg (which comes 24^th in the rankings), Netherlands (31^st), Dublin (49^th) and Malta (69^th). 

Although there may well be numerous initiatives in place which would tend to suggest a slow migration of some business away from traditional offshore centres to the quasi offshore centres, it seems the Channel Islands in particular are doing a good job at slowing any such movement by leading the field in terms of competitiveness.  And that is not just my opinion - it is  that of 1,890 professionals working in the field.

Cyprus stares into the Abyss

The future of Cypriot finances has been thrown into greater doubt than ever, and today hangs precariously in the balance. 

Last week, Cypriot Finance Minister Vassos Shiarly stated publicly that he expected to have concluded bailout talks with the troika of lenders (IMF, ECB and European Commission) within a month, and the expectation was that Cyprus would request from the troika a smaller bailout than had previously been mooted, in order to avoid having to concede a 20 page long list of demands from European financiers. 

Details of the strings to be attached to a bail-out were leaked recently, and included an unpalatable series of measures to raise taxes and slash public spending.  As a consequence, Cyprus instead focused on trying to secure a short-term loan from Russia which it believed would come with fewer overt string attached, but which would be based on a 'political' understanding.

Last year, Russia provided Cyprus with a four and-a-half year loan of EUR2.5 billion (around 14% of the country's gross domestic product) after Cyprus was effectively frozen out of international debt markets, and there is therefore a precedent for the Russians helping out the small Island.  In the current round of negotiations it is understood that a further EUR5 billion of loans had been requested and the noises coming out of Cyprus were fairly optimistic in the past week or so that the loan would go ahead, but now it appears that chances of this are fading.  It seems that the Russians are worried about the ability of the Island to repay a loan which represents such a high proportion of its GDP, and sources involved in the negotiations are expressing serious doubts that the loan will go ahead.  This would leave the Cypriot government, which is believed to have enough cash to last only until November, forced to concede the troika’s demands in order to secure EU funds.

Reports of the EU proposals say that under a full European bailout, the nation's wealthy residents would suffer additional taxes on real estate holdings, accumulated wealth, and income and the Island would also face an increase in VAT and extra duty on cigarettes and alcohol.  These would undoubtedly all be highly unpalatable measures for the Cypriot government, and would be made worse by the fact that at the same time the troika would seek a 15% cut in public sector salaries, an end to the “13^th month” end of year bonus and a raft of public sector job losses.   

No doubt frantic attempts will continue over the next weeks to avoid this scenario, but the chances of success seem to be waning.

Volaw and Europlan Merge

Volaw Trust & Corporate Services Limited (“Volaw”) has merged with the Europlan Group (comprising Europlan Financial Services Limited and Europlan Fund Administration Limited).  

The merger completed on 19 September 2012. From that date the combined business is operating under the Volaw brand.

Volaw is considerably the larger of the two merger partners, and the combined business comprises almost 100 employees.

Advocate Ian Strang will continue as Volaw’s Chairman and Robert Christensen as Volaw’s Group Managing Director, with Europlan Chairman Michael Dee and Managing Director Ben Warner joining Volaw’s board.

The two companies have some shared heritage – both were set up by Advocate Michael Voisin; Europlan was established by him in 1974 but sold just a year later; and Volaw was set up by Advocate Voisins law firm, Voisins, in 1982.

Europlan is principally a private client orientated business.  Volaw carries out a mixture of private client and corporate business, with a particular speciality in middle eastern structures.

The merger of the two companies follows a trend for consolidation in offshore fiduciary business and makes the combined business one of the larger independently owned Jersey based trust companies.

Cyprus Qrops get the chop

In a move which may have gone relatively unnoticed over the holiday break, HMRC has delisted all Cyprus-based Qrops (overseas pension schemes) from its published list of approved Qrops, mirroring the fate which befell the Guernsey Qrops industry earlier this year.

QROPS, which were introduced by the UK in 2006, are popular with expats as they offer significant tax and investment advantages when compared with UK pensions.  However, HMRC is now clamping down on what is sees as territories which abuse Qrops regimes – a move which is raising concerns about the future of the industry.  The reasons for Cyprus Qrops being delisted are not entirely clear, and the move has come as a surprise to many practitioners who thought that, as an EU member state, Cyprus would avoid the harsh treatment meted out to Guernsey.

UK & US sign first bilateral FATCA agreement

Last week, the US and UK governments signed the first bilateral agreement to implement the information reporting and withholding tax provisions within FATCA.

FATCA is designed to ensure that the US tax authorities obtain information on accounts held by US persons overseas, or by foreign entities in which US taxpayers hold a substantial ownership interest, with foreign financial institutions (FFIs).  Controversially, FATCA puts the reporting burden on the FFI rather than on the US person, something which has caused an outcry from financial institutions which face a huge operational challenge (and considerable associated costs) to comply with the legislation, and draconian sanctions if they do not - failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income.

In an attempt to reduce the complexity of the reporting task somewhat, the governments of France, Germany, Italy, Spain and the UK agreed a model intergovernmental agreement to implement FATCA, which will permit FFIs to report the information to their respective governments rather than directly to the IRS. The UK has become the first of the 5 jurisdictions to take the next step, and to sign an agreement based on that model.

The agreement is reciprocal in that the US has committed to providing future equivalent levels of information exchange to the UK regarding UK persons who having financial arrangements in the US in the future if required.  There has been talk in the UK in recent weeks of the UK introducing FATCA-equivalent legislation and this provision would assist in the facilitation of that if indeed the UK government decides to go down that path (see previous blog postings on the issue).

An attempt has also been made in the agreement to ensure that the burdens imposed on UK FFIs are proportionate to the goal of combating tax evasion. It specifies certain UK institutions and types of products which are at low risk of being used to evade US tax, such as retirement funds and charities, and exempts them from FATCA requirements.  The nature of the exemptions is such that it will make little difference to most FFIs, but it will come as a relief to those small number who do fall within their scope.

The agreement needs to be ratified by the UK parliament before it becomes effective, but politically it is difficult to see this particular train being stopped. 

Guernsey's revised tax system given green light by EU

Changes to Guernsey's corporate tax regime were approved last week by the European Union's Code of Conduct Group.

Previously, the Island's  Zero-10 tax system, which had been introduced in 2008, had been rejected as harmful by the Code of Conduct Group because of its deemed distribution rules, whereby local residents were taxed on a deemed distribution basis, but overseas shareholders were not.  This offended one of the Code of Conduct Group's principles, which forbids a distinction in treatment between locals and non-locals. The refusal by the Code of Conduct Group to approve the previous regime led to a period of unwelcome uncertainty for a finance industry where certainty of tax treatment is a key component of decisions regarding where to locate companies, and so the news this week will be welcomed by many.

The Island's government voted in June to remove the deemed distribution for local residents (as Jersey had previously done) and as a consequence the Code of Conduct Group has now approved the revised regime as compliant, although formal ratification of the decision will still be some months away.

ATC Fund Services sells Curacao office to Circle Partners

During the summer, ATC Fund Services has sold its Curacao fund administration business to  Circle Partners. The terms of the acquisition are being kept confidential. 

ATC Fund Services’ Hong Kong operation is not included in the transaction and will remain part of the ATC Group.

Circle Partners was founded in 2000 by Erik Kuyl, Sukru Evrengun and Pieter-Jan van der Pols and now has a team of 40 professionals operating from offices in The Netherlands, Luxembourg, Switzerland, United Kingdom, Slovakia, the BVI and now Curacao.