Offshore centers now face a perfect financial storm. In more prosperous times, revenues from the offshore sector, along with tourism, helped fuel these countries’ economies. Their governments emulated more developed nations by borrowing heavily to build up their infrastructure. They also bought votes with social programs and bloated government payrolls.
When the global economy tanked, tourist revenues fell, along with revenues from their offshore sectors. But the social programs and bloated payrolls remained.
Blame Offshore Tax Havens! (Again)
The economic crisis also led to worldwide drop in tax revenues, with the biggest losers big industrialized countries like the United States. Politicians in these countries found a convenient scapegoat to blame for falling tax revenues: dozens of mostly tiny offshore centers.
Using the economic crisis, the world’s richest and most powerful governments had the perfect opportunity to achieve a long-term goal: forcing offshore jurisdictions to enforce their tax laws. They acted through non-governmental organizations they control, such as the Organization for Economic Cooperation and Development (OECD). The OECD has the authority to issue supposedly non-binding «best practices» guidelines. And, the OECD now decrees that «best practices» meant becoming tax collectors on behalf of these rich and powerful governments.
The one-two punch of the global financial crisis and the OECD vendetta has led to unprecedented economic challenges for offshore centers. Some—Gibraltar, Hong Kong and Singapore, for instance—remain in relatively good shape financially. Others, particularly in the Caribbean, are having a hard time paying their bills. The British press, for instance, refers to the Cayman Islands as «bankrupt.»
Could offshore jurisdictions facing the worst challenges actually declare bankruptcy? Not if they can reduce spending, or qualify for additional loans. A condition of additional lending, however, may be to impose direct taxes, such as personal and corporate income taxes.
Here’s a rundown of where the offshore financial crisis now stands.
U.K. Government Declares War on English-Speaking Offshore Centers
It was once official U.K. policy to encourage responsible growth in the offshore sectors of its current and former colonies. But, starting in the late 1990s, the U.K. government began to dismantle the offshore sectors of its former empire.
It was easiest in U.K. overseas territories, where the U.K.
Parliament has the authority to enact binding legislation. In those territories, the British Foreign Office simply threatened legislation that would force those governments to enforce foreign tax laws. To avoid that politically unpopular outcome, the overseas territories enacted the demanded laws on their own.
The most recent crackdown began in 2008, when the U.K. government commissioned an independent review, led by former Treasury official Michael Foot of its overseas territories and «Crown dependencies» with offshore sectors.
The Foot Report observed that the global financial crisis had led to significant financial hardships:
The impact has been pronounced in Anguilla, the Cayman Islands and the Turks and Caicos Islands resulting in depleted public sector cash reserves. Bermuda and the British Virgin Islands have also experienced a decline in government income, but the impact has been less severe. Revenues have held up better in the crown dependencies (Jersey, Guernsey, and the Isle of Man) and Gibraltar.
The report recommended that those jurisdictions facing depleted treasuries should consider spending cuts and imposing direct taxes. Foot suggested that any bailout by the U.K. government be contingent on a viable recovery plan, which presumably could include direct taxes.
Nowhere did the report state the most obvious possible recommendation: that the OECD back off and let these islands play by the same set of rules the OECD gives its own members.
Indeed, many OECD jurisdictions are themselves offshore centers: notably, Luxembourg, Switzerland, the United Kingdom, and the United States (the world’s largest tax haven for non-U.S. resident investors).
The reality is that London is using the global financial crisis to undermine the low-tax regimes in place by arguing that the territories need to «broaden their tax base.»
Hardball Politics
Just to make sure the remnants of its colonial empire got the message, the U.K. government has imposed much tougher standards for loans and loan guarantees.
In 2009, the Cayman government, facing an $82 million budget deficit, appealed to its colonial masters in London for permission to borrow $310 million from banks. Despite the fact that commercial banks had already approved the loans, the British Foreign Office said «no.»
The Cayman government then commissioned a team to conduct an independent review of the islands’ fiscal challenges. The review’s key recommendations were to cut government spending and to privatize most government-run enterprises.
Reaction was swift and furious against the plan. The Cayman government refuses to make significant spending cuts. This makes an eventually bailout likely, with unfavorable terms in respect to direct taxes. The government has also recently enacted legislation that authorizes confiscation of local assets in «dormant» companies and trusts.
Copyright © 2010 by Mark Nestmann.
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