Bahamas to introduce 15% VAT - but financial services to be exempt

The Bahamas is to introduce VAT in its 2014 budget.  From 1 July 2014 the government will impose a 15% sales tax to offset reductions in hotel occupancy tax and import duty as a result of the country joining the World Trade Organization.

The Bahamas is facing an increasing budget deficit, a stagnant economy and high unemployment.  In addition to the imposition of VAT, the country’s finance minister plans to cut government spending by 10% and introduce a range of austerity measures. 

A broad range of goods and services will be subject to the new tax, which is described as a consolidation of the country’s finances, but there will be some exemptions, including for the provision of financial services.

The changes are expected to affect around 3,800 local businesses which will have to file VAT returns and pay the tax they collect from customers on a monthly basis, based on the proposed threshold for the VAT regime of $50,000.

Isle of Man agrees a mini-FATCA with the UK

The Isle of Man government last week broke ranks with the Channel Islands by agreeing a deal with the UK government relating to the automatic exchange of information regarding British individuals holding assets in the Isle of Man, in what has been dubbed a mini-FATCA.

Much of the press commentary surrounding the development focuses on measures that have been put in place to secure a voluntary disclosure of illicitly held assets prior to the commencement of the automatic exchange of information in 2016: individuals who have assets in the Isle of Man which have not been properly disclosed to the UK tax authorities will have until September 2016 to come forward and settle outstanding tax bills, plus interest and penalties, before their details are passed to HM Revenue & Customs, under a disclosure facility agreed as part of the deal.  Those who utilise the disclosure facility will be unlikely to face prosecution but will pay a penalty charge of 10% of unpaid tax up to 2009 and 20% for later years. Those who do not use the disclosure facility and who are subsequently found to have held assets in the Island without declaring them for tax could face a penalty of up to 200% of the unpaid tax, or prosecution.  The disclosure regime has been designed specifically to achieve as much voluntary disclosure as possible, given that HMRC is struggling with resources on cases where prosecution is involved, and follows similar initiatives in relation to Liechtenstein and Switzerland, although those territories have not signed up to a FATCA-style automatic disclosure regime.

The agreement from the Isle of Man is a coup for Chancellor George Osborne, who is making tax transparency a focus of the UK’s G8 presidency, and he will doubtless use it to bring further pressure to bear on other territories to do the same thing.

However, to date the Channel Islands have resisted following suit, despite pressure from the UK.  The reason is not so much an objection to the principle of automatic exchange of information (there is now a general acceptance that it is a question of when, rather than if, automatic exchange of information will happen and few people would argue against the principle of trying to prevent tax evasion) but an objection to certain countries being forced to do it before others.  The fact of the matter is that any FATCA-style agreement will result in increased costs of compliance for the financial businesses which operate in the affected territories – even if those businesses do not conduct any business which relates to the illicit holding of assets offshore.  So businesses operating in the territories which are early adopters of FATCA-style agreements will face higher operating costs which they will either have to pass on to their customers (likely to result in a loss of business to less regulated jurisdictions – from all customer groups, and not just those involved in any illicit activity) or to absorb the costs themselves, resulting in a drop in margins (not easy when businesses already face difficult trading conditions).  To witness a movement of perfectly legitimate and fully disclosed business from the Channel Islands to a less regulated jurisdiction would be a real own-goal for the UK government, and could cause serious harm to the Channel Islands. 

The Isle of Man government appears to have taken a view that notwithstanding the risks, it will be the first-mover in order to try to ensure that it stays in favour with the UK government.  The Channel Islands governments can be expected to try to secure some more concrete assurances from the UK regarding the future and its support for the Crown Dependencies before agreeing to do likewise.

Axiom Legal Financing Fund Receivership - Further Info

As reported earlier this week, Cayman Islands’ judge the Honourable Mr. Justice Foster QC, granted an order appointing Grant Thornton as receivers for the Axiom Legal Financing Fund.  In so doing, Justice Foster rejected a proposal by City Equities to take over the running of the Fund in a bid to trade out of its current difficulties – a proposal which was opposed both by the Fund’s directors and by the Cayman Regulator, CIMA, due to perceived conflicts of interest. 

The City Equities proposal had aroused a great deal of suspicion from investors due to the fact that it is under common ownership with Tangerine Investment Management (“Tangerine”), the Fund’s former investment manager, which was sacked when the Fund’s many problems came to light.

The Fund’s directors supported the appointment of Grant Thornton following shareholder preference, despite having initially preferred the appointment of KPMG.

Justice Foster also ordered that Tangerine must pay 60% of the Fund’s costs of the receivership application.

And so it seems that the wheels are set for the winding up of the troubled Fund.  It remains to be seen how much can be salvaged for the investors who backed it, and whether any action will be taken against those responsible for its demise.

Cayman Islands maintain Aa3 credit rating

Rating agency Moody's Investors Service has re-affirmed the Cayman Islands' credit raring at Aa3 with a stable outlook, citing a relatively low debt burden and high income levels. 

The rating was justified because of Cayman’s high per-capita income (of $53,253 per head) despite the recent deterioration of the fiscal accounts and debt to GDP having risen from 8% in 2007 to 24.9% today (still a very low debt burden compared to many other economies). 

The ratings agency, suggested there was limited potential for upward ratings movement, because of the islands’ narrow economy and its susceptibility to weather-related shocks

Axiom Legal Financing Fund Receivership approved by Cayman Court

The Axiom Legal Financing Fund was yesterday ordered into receivership by a Cayman Islands court, which rejected a "rescue bid" by a company connected with its former investment manager, Tangerine Investment Management.  More to follow.

Merger of 2 Guernsey Trust Companies announced

Following a recent trend of consolidation in the offshore fiduciary business, two Guernsey private-client focused trust companies, Aquitaine Group Limited and Goethe Management Limited, have merged under the Aquitaine brand.

The combined business has 22 employees and operates from St Peter Port. 

Aquitaine’s new Chairman is Chris Legge, a former managing partner of Ernst & Young and director for many years of Monument Trust Company.  

Guernsey’s fiduciary industry remains highly fragmented and I would expect to see further consolidation in the future as trust companies seek economies of scale and critical mass – issues which are becoming increasingly important at a time when international regulation becomes ever more complex.

Hawksford acquires Key Trust

Hawksford, the Jersey-headquartered trust company which started life as Rathbone Trust, has acquired private client fiduciary business Key Trust Company Ltd.

This is Hawkfsford’s fourth acquisition since receiving PE backing from Dunedin in 2008.  In the last two years Hawksford has been busy on the expansion path, and has acquired Trustcorp Jersey Limited, L-S&S GmbH, a Swiss boutique private wealth law firm, and the funds business of Standard Bank Dubai.

Hawksford claims to be the largest independent trust company in the Channel Islands with revenues in excess of £20 million.

Latest Cayman stats show mixed picture for fiduciary industry

Figures released by the Cayman Registry show that the Island continues to face difficult trading conditions, but there are pockets of good growth.

Company formations were down slightly from 9,064 in 2011 to 8,971 in 2012, but the total number of active companies on the register rose by 1% to 93,611 (not far off the 2008 peak), as companies were dissolved at a slow rate than they were incorporated.

At first glance the number of funds registered increased dramatically (17%) but this is an artificial rise caused by the new requirement to register master funds.  If these are stripped out of the equation so that like is being compared with like, then the picture is considerably gloomier, with the number of funds dropping by 2% to 8,950.

There was also a decline in the number of banks and trust companies in the Island, down 3.4%.

Captive insurers remained stable increasing by 2 to 741.

Bright spots in the figures included registered private trusts, which increased by 12 to 77, and exempted limited partnerships (often used in fund structures), whose registered numbers grew 13% in 2012 (to almost 13,000) following similarly strong growth in 2011 .  

Irish economy is on the mend

After a torrid few years, it seems that there is light at the end of the tunnel for the Irish economy. 

The Troika (the European Commission, the European Central Bank and the IMF) has just completed its review of progress in Ireland since the country’s bailout, and has concluded that the Government’s adherence to a tough austerity programme is working, and the country is enjoying a period of sustained economic growth which has been sustained since 2011.

Growth is forecast at just over 1% in 2013 and at above 2% in 2014, a level which many other countries would envy at present.   Of course, it isn’t all plain sailing - continuing high levels of unemployment and weak balance sheets remain matters for concern, and the Troika warn that continuing growth is dependent to a material degree on the financial health of Ireland’s EU trading partners – something which remains precarious at present.

Nevertheless, Ireland has met all of its targets to date, and is on target to exit the bailout programme as planned.

Vistra bolstering Swiss capabilities through acquisition

Vistra, the rapidly growing provider of trust, fiduciary, corporate and fund services, which forms part of the OV Group, has announced yet another acquisition.

The latest target is Althea, a small three-year-old Geneva based trust company. Fabrizio Patanè, Managing Director of Althea, will join Vistra Switzerland’s Board.

At the same time, Vistra has purchased all of the remaining shares in Centrapriv Group, the Zurich based fiduciary and corporate consultancy company in which it has invested in 2010, acquiring 50% of its shares.

Vistra now employs over 60 staff across its Geneva, Zurich and Zug offices.

Cyprus bailout remains unresolved

The debate over whether Cyprus will be bailed-out of its current economic crisis rumbles on, without any clear resolution.  This is a dangerous state of affairs given that the Island will face economic collapse if it cannot bring a resolution before June of this year, when it faces a Euro 1.4 billion bond redemption.

It was June 2012 when the Island, which accounts for just 0.2% of the Eurozone’s economy, first requested help, but the route to resolution since then has been far from smooth. The reasons for the delay are a mixture of political and financial. 

One of the biggest issues is quite simply how a bailout can be structured in such a way that it does not set the Island on an inevitable path to future collapse, due to the size of the debt burden.  Little public information has been given regarding the size of the bailout required, but it is believed to be in the region of Euro 17 billion spread over 4 years, 10 of which would be used to recapitalise the Island’s ailing banks, and the remainder for other Government spending requirements.  However, it is believed that a bailout of this magnitude would push the country’s public debt burden from its current level of 84%, to a huge 140-150% of GDP in 2016 and there are real fears that this is an unsustainable level which would lead to future bankruptcy.  If this is the case, and the bailout would do nothing other than postpone the inevitable, then some would argue that there is no point accepting the help now, together with all of the strings and conditions (for example regarding privatisations and significant cut-backs in the public sector) which would inevitably be applied.

It has been suggested in recent days that part of the package that is being negotiated at present includes a write-down of private creditors’ holdings of Cypriot bonds, or a write-down of uninsured bank deposits, so that private investors/depositors share some of the financial pain and the size of the external bail-out which is needed can be reduced. Whilst on the face of it these may seem like sensible suggestions, they have been the cause of great consternation and are very controversial.  Domestic Cypriot banks hold the majority of Cypriot government bonds, and so writing those bonds down in order to raise funds to prop up the banks simply does not make sense.  On the other hand, making bank depositors take some of the pain raises concerns that it would lead to panic in other EU countries experiencing financial difficulties that they too could take similar action in the future if their financial position deteriorates.

From the Island’s perspective, a far more palatable result would be to extend the life of the bailout to give it more time to pay, as was done in the case of Greece, but it is far from clear that this would be acceptable to the Troika, and the reasons are to a large extent political.

At a time when politicians are moralising publicly about tax avoidance, it is seen as politically difficult to prop up an economy which is based to a large extent on tax avoidance (even if we assume the tax avoidance is entirely legal) and where the majority of the depositors in Cypriot banks are extremely wealthy Russians.  Whilst the Eurocrats may have sympathy with ordinary Greek families losing their life savings as a result of a Greek bank collapse, there is little sympathy for Russian oligarchs who may face a similar prospect in the event of a Cypriot collapse.  In Germany in particular, where Cyprus is routinely portrayed in the press as a haven for Russian money laundering, there are very few political votes to be won in supporting the territory, and an important election looming in September means that few German politicians are willing publicly to back a bailout for fear of an electoral backlash.

So what is the most likely outcome of the current very difficult situation?  Despite the fact that many would argue that Cyprus can be allowed to fail without the contagion spreading to other EU territories, I doubt that there are many EU countries who would want to take that risk, and so the pressure to agree a deal will be enormous.  The Germans will need to be seen to have won concessions to ensure that Cyprus becomes more open and transparent in its financial dealings in the future, to lessen the chances of it being used as a money-laundering centre.  Russia, which already lent Cyprus 2.5 billion euros in 2011, may also be persuaded to extend the repayment date for that loan from 2016 to 2022, and to put its hand in its pocket once more.  This would enable the Troika’s contribution to the bailout to be reduced, which would go some way to assuaging concerns that EU money is being used to prevent wealthy Russians from losing their cash. Cyprus, for its part, is going to have to agree to some painful measures to shore up its finances, including a sale of some state assets and the removal of key protections for public employees. If these measures could be combined with a slightly longer time frame for the EU bailout cash, keeping the debt ratios lower, then Cyprus just might be able to come out the other end of this situation intact.  But there is a lot of talking still to do and the clock is ticking.

Axiom Legal Financing Fund - CIMA takes a stance

The various stakeholders caught up in the Axiom Legal Financing Fund fiasco show no signs of agreeing a route forward any time soon, but last week saw the Cayman Islands Monetary Authority (“CIMA”) taking a visible role for the first time.

The Fund’s directors believe that the fund should be put into receivership, and would prefer KPMG to carry out that function.

These plans are opposed by Tangerine Investment Management (“TIM”) - the company which was sacked as the fund’s manager last year, following serious allegations of mismanagement and possible fraud – who do not want the fund to be wound up at all, but to be allowed to trade out of its present difficulties. 

The beleaguered investors (or at least some of them) are believed to have been convinced by the directors that receivership is the most appropriate course, but disagree as to who should conduct the receivership, favouring Grant Thornton over KMPG due to perceived conflicts of interest relating to KPMG.

Taylor Moor, who promoted that fund, have vocally lobbied for it being liquidated rather than being put into receivership, in the belief that a liquidator will have greater flexibility and will be better placed to investigate what has gone wrong with the fund to bring it to such a sorry current state, but agree with the other investors that Grant Thornton are best placed to take the role.

In the meantime, City Equities Limited (“CEL”), an FSA regulated company who has no official standing in the situation at all, is calling on the fund’s investors not to wind up the fund, but instead to allow CEL to take over its investment management function, in the belief that it can make a success of the business.  An optimistic view in the circumstances one might think, but they are reported to be offering to pull off this feat of management brilliance by charging significantly lower fees than the fund was hitherto bearing. But the plot thickens further.  CEL is reported to be owned by BVI company Otterswick Limited, which also owns TIM, and both companies are represented by BVI law firm, Forbes Hare.  Although the beneficial ownership of the companies involved is not a matter of public record, it is hard to avoid the conclusion that they are all owned by the same individual(s) – in all probability Tim Schools, who is himself facing investigation by the Solicitors Regulation Authority in the UK. 

After months of public silence on the matter from CIMA, the Cayman regulator has finally put its head above the parapet and taken a stance in the sorry saga, saying that it will oppose CEL’s bid to take over management of the fund because of the perceived conflict of interest, but that it has no objection to the appointment of Grant Thornton as receiver.  It is difficult to see how CIMA could possibly support CEL’s bid in the circumstances.

The hearing of the application took place on 31 January 2013 and 1 February 2013, but the judge has reserved judgment for the time being and so investors will have to wait a little longer before they learn the outcome of their fund’s future.

What do Google and Monty Python have in common?

What have you read in the last month about Google’s contribution to the British economy?  Chances are you will have seen many articles about the moral offensiveness of its tax arrangements, which have led to it paying virtually no corporation tax in the UK. 

You have probably seen politicians and Richard Murphy finger-wagging and lecturing on how such terrible abuses of the system must be stopped because these horrible companies are leeching money out of the UK economy.  After all, why should we allow big business to do business in the UK if they aren’t prepared to pay their way through the tax system?  We should all be outraged shouldn’t we?  Shouldn’t we?

What you probably didn’t see, because it was pretty much buried in the press, was a report that Google is planning to consolidate its United Kingdom offices in a brand new one-million-square-foot development near London’s King’s Cross Station, at a cost of a reported £1 billion.  Yes, one million square feet of brand new building. That should be a big story – by any standards it is a massive investment in the UK that will bring with it many, many thousands of much-needed jobs in the construction industry, from high-flying architects, designers, lawyers, accountants, project managers, health and safety officials, building labourers, painters and decorators.....I think you get the message.  In these current times, when employment is still far too high and there are precious few businesses investing in the UK, surely this should have been trumpeted as a good news story.  But it passed barely without a mention.  Why?  Because it doesn’t quite sit comfortably with the anti-globalisation/anti-capitalist rhetoric which politicians of all shades are so completely wrapped up in at the moment?  Because it might require an admission that it is facile to dismiss companies such as Google as “leeches” when in fact they contribute in so many ways.  Perhaps it is partly that by minimising their UK tax bill through perfectly legal tax planning, Google have amassed the financial strength to make such a massive investment.  And perhaps it is because of our existing tax laws that they have chosen to make that investment in the UK.  There is a danger in the present heated debate of throwing the baby out with the bath-water.  There is nothing wrong with having a legitimate debate about what this country’s tax laws should be, but it is playing with fire to publicly castigate companies for doing things which are perfectly legal without balancing the argument with a proper acknowledgement of what they contribute.

It all brings to mind the wonderful Monty Python sketch in the Life of Brian, “What did the Romans ever do for us?” so in tribute to that masterwork, here’s my new 21^st century take on it:

Reg:                They've bled us white, the bastards. They've taken everything we had, not just from us, from our fathers and from our fathers' fathers.

Stan:                And from our fathers' fathers' fathers.

Reg:                Yes.

Stan:                And from our fathers' fathers' fathers' fathers.

Reg:                All right, Stan. Don't labour the point. And what have they ever given us in return?

Xerxes:            Employment.

:

Reg:                Oh yeah, yeah they gave us that. Yeah. That's true.

Activist:           And the technology to transform every aspect of our lives!

Stan:                Oh yes...technology, Reg, you remember what it used to be like....

Reg:                All right, I'll grant you that employment and the technology to revolutionise our world are two things that Google have done...

Xerxes:            And the massive investment in construction.....

Reg:                (sharply) Well yes obviously the investment... the investment goes without saying. But apart from the employment, the technology and the investment...