A UK Treasury report has said that its Overseas Territories and Crown Dependencies must improve standards on financial regulation and find new ways of raising tax.
A UK Treasury report has said that its Overseas Territories and Crown Dependencies must improve standards on financial regulation and find new ways of raising tax. The Treasury is concerned that their low tax revenue could result in possible future liabilities for the UK and that the Treasury may have to bail out these jurisdictions. This could have the effect of more depletion to UK coffers, placing more burden on UK taxpayers.
The report was commissioned by the Chancellor of the Exchequer, Alistair Darling, in his Pre-Budget report last year and undertaken by Sir Michael Foot, a former Financial Services Authority managing director; Bank of England executive director and Bahamas bank inspector. Entitled ‘Final report of the independent Review of British offshore financial centres‘, it reviews the opportunities and challenges facing the British Crown Dependencies (Guernsey, Jersey and the Isle of Man) and six Overseas Territories (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Turks and Caicos Islands).
It calls for the offshore centres to reach key benchmark standards covering financial supervision; transparency; taxation in relation to financial stability, sustainability and future competitiveness; financial crisis management and resolution arrangements; international co-operation with regards to anti-money laundering and anti-terrorism finance measures and compliance with international standards on tax information.
The offshore centres have been told to diversify their tax bases to increase tax intake to fend off the effects of the financial crisis. Foot wants them to take more responsibility for their economies.
Financial Secretary to the UK Treasury, Stephen Timms commented: “I welcome Michael Foot’s report which comes amidst a real step change in the international determination to tackle tax and regulatory havens under the UK’s leadership of the G20.“
He continued: “This report sends a strong signal to overseas financial centres that they must ensure that they have the correct regulation and supervision in place, while also ensuring their tax bases are more diverse and sustainable to withstand economic shocks – this is essential to their long term stability.“
One recommendation that will not be welcomed by British expatriates is for UK offshore financial centres to cut back on the protection offered to foreign savers. It recommended that the Isle of Man should consider closing its depositors’ compensation scheme to foreign savers following the collapse of Kaupthing Singer & Friedlander IoM (KSFIOM). In October, one year on and depositors in KSFIOM have only just received up to 24.8% of their money back. In August, the Landsbanki Guernsey Depositors Action Group were informed by the Joint Administrators that savers can expect the return of a further 25% of their money within weeks leaving the depositors to fight for the remaining 45% of their savings. If foreign savers have bank deposits where there is not a protection scheme their funds are at risk from institutional failure.
Foot indicated that some offshore centres like the Crown Dependencies had gone further to raise their standards than the Overseas Territorities. All Crown Dependencies had met the Organisation of Economic Co-operation and Development’s standard for tax transparency.
Some Caribbean islands have been particularly affected by a decline in financial services and tourism. Foot recommended that Anguilla, the British Virgin Islands and the Turks and Caicos improve their financial supervision. He said that several jurisdictions had “a good story to tell, but others had more to do on regulation and tackling financial crime“.
Last September the UK propped up the Cayman Islands to the amount of £38 million when its tax revenue slumped by around 40%. In October the UK sliced £140 million (24%) from the Isle of Man’s £572 million annual budget following the discovery that a 400-year-old revenue sharing agreement had been violated.
Isle of Man’s chief minister, Tony Brown, told the Manx parliament that the UK deal was non-negotiable. “This situation is clearly extremely serious for the island and unprecedented. However, I am confident that we will come through this present situation, albeit that at times it will be extremely difficult for us all; some very difficult decisions will have to be made“, he said.
The report stated: “Decisions taken by some of the Overseas Territories to use increased revenues to raise current and capital public spending, sometimes combined with insufficient attention to data quality and the absence of robust medium-term planning, has left local governments facing difficult short-term choices to restore the public finances.”
The Foot review suggested introducing corporation tax and VAT to improve financial stability. It estimated that companies based in offshore jurisdictions cost the UK government up to £2 billion a year in unpaid tax.
G20 leaders have called for a crackdown on tax evasion using tax havens. Jurisdictions that do not conform by March 2010 could face economic sanctions.
“Even those jurisdictions which are not under immediate fiscal pressure may wish to consider whether existing tax regimes expose them to international pressure which might ultimately have a material impact on their economic sustainability whilst potentially also reducing their ‘tax take’; more than necessary“, Foot said.
Interest and capital gains earned in offshore centres are usually liable to local tax in your country of residence. The credit crunch has put pressure on Governments to increase tax revenue. Some offshore financial centres may not be a wise choice to place substantial savings, particularly where the economy is unstable, financial regulation and supervision is not up to scratch and where there is a likelihood that they may diversify their tax base to increase revenue. A wealth preservation and tax specialist such as Blevins Franks can help you towards protection for your investments in legitimate tax-efficient structures.
By Bill Blevins, Managing Director, Blevins Franks
16th November 2009