Friday, July 09, 2010

The Appleby Message: Not Digestible

The law firm of Appleby provides offshore legal, fiduciary and administration services. Appleby and its Group Managing Partner, Peter Bubenzer in Bermuda, issued in June 2010 an article entitled “OFCS [Offshore Financial Centers] in the Crosshairs --- But Not Alone in Their Struggle to Survive.” Since Appleby operates from many offshore financial centers: Bahrain, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, London, Mauritius, Seychelles and Switzerland, the article merits a reply. Our full reply, prepared by a senior adviser to TJN, can be downloaded here. What follows is a summary.

First, the Appleby article states that “One of the issues raised in more recent onshore discussions has been the absence of tax in the major OFCs. Of course this is not true, as most have, for their small size, relatively sophisticated infrastructures, which are funded by taxes or fees,” such as for example, in Bermuda custom duties and payroll taxes. However, the real issue is that OFCs permit foreign persons to use those financial centers free of tax: free of income taxes and all other taxes. The fact that purely local activities within the OFC might be subject to customs duties and payroll taxes, is really not relevant to the role of OFCs.

Second, the Appleby article states that “The sovereign right of countries to determine their tax system seems to be overlooked in many discussions on OFCs’ own tax structures.” True, countries have the sovereign right to determine their own tax systems. But those tax systems should not encourage nor facilitate residents of other jurisdictions to evade taxes in their country of residence and violate the tax system of their country of resident.

Third, Appleby refers to “tax competition” and argues that “[tax competition] is still alive and well in the onshore world (examples are the differential tax rates among the various States of the United States of America or the different tax rate that people across the European Union).” However, the states in the United States and the countries in the EU provide different tax rates for activities within their respective jurisdictions. The offshore financial centers provide tax free benefits primarily to non-residents and foreign corporations who/which have no real economic activity within the respective jurisdictions, and which in many cases are not permitted to do business locally. Offshore financial centers, all of which are “financial secrecy jurisdictions,” do not merely provide tax competition. Because of the confidentiality those jurisdictions provide, they facilitate and encourage tax evasion/tax fraud.

Fourth, the Appleby article states that “Many OFCs have now been added to the OECD “White List,” each having entered into a considerable number of TIEAs [Tax Information Exchange Agreements] or DTTs [Double Tax Treaties].” However, the OECD requires that a jurisdiction enter into only twelve (12) such agreements in order to be on the White List. Twelve such agreements is hardly “a considerable number.” Further, some low tax/zero tax jurisdictions have entered into such agreements with (1) other low tax/zero tax jurisdictions, or (2) jurisdictions which have hardly any economic activity or personal wealth (such as the Faroe Islands and Greenland, and those insignificant agreements count for OECD purposes, toward the minimum of twelve. Read more here

Fifth, the Appleby article, in discussing automatic exchange of information, states “At present, the only automatic TIEAs that I am aware of consist of arrangements between the USA and Canada, and those partial arrangements that exist under the Savings Directive implemented in the European Union.” This clearly is a misstatement. The Tax Justice Network prepared a memorandum in December 2009, entitled “Memorandum on Automatic Exchange of Information and the United Nations Tax Committee” which indicated that at least some information is exchanged automatically:
(a) Between Mexico and the United States
(b) Between Mexico and Canada
(c) Between Australia and New Zealand
(d) Between the Nordic countries (Denmark, Faroe Islands. Finland, Iceland, Norway, Sweden), according to their Convention on Mutual Assistance in the Tax Matters
(e) By Australia, Canada, Denmark, Finland, France, Japan, Korea, New Zealand, Norway, Sweden, United Kingdom, pursuant to income tax treaties (See the March 2000 OECD report, Improving Access to Bank Information for Tax Purposes, page 40.)

TJN believes that in the ten years since that report was issued, at least several other countries are exchanging information automatically pursuant to applicable income tax treaties or in other agreements administrative assistance.

Further the United States enacted in March 2010 the Foreign Account Tax Compliance Act (“FATCA”). When FATCA enters into effect, it will in effect require all foreign financial institutions and other foreign entities which invest in the United States their own funds or their clients’ funds, to provide automatically to the U.S. Government information about U.S. persons with financial accounts at those foreign financial institutions or other foreign entities.

Sixth, the Appleby article states “It should be noted that the major OFCs do not receive financial and or grants from onshore governments or global monetary institutions.” Presumably the author was not referring to major OFCs like London, Luxembourg, Zurich and such-like which rank among the top ten secrecy jurisdictions on TJN’s 2009 Financial Secrecy Index. But for the record we would note that the Cayman Islands, which continues to resist British government requests that it adopts a more sustainable tax regime, including direct and land taxes, has its considerable external debt guaranteed by the U.K. taxpayer, see here.

Seventh, the Appleby article states that the “global economic crisis did not have its origin in the offshore world.” However OFCs contributed to the global financial crisis: special purpose entities and special purpose vehicles in tax free offshore financial centers were treated “off balance sheet” by major financial institutions, and much of the shadow banking activity that underlies the build-up of unknown systemic risks was driven by opportunities to use complex offshore structures for tax and regulatory arbitrage.

Eighth, the Appleby article does admit that the offshore/world has facilitated “crude tax evasion, such as hiding assets by non-declaration or under-reporting to onshore tax authorities.”

Ninth, Appleby states “OFCs view themselves as responsible financial centers providing a base for companies and individuals seeking, with proper advice and disclosure onshsore, to structure their affairs as tax efficiently as the applicable onshore and offshore laws allow. The majority of offshore work in the major OFCs consists of providing services to companies and individuals who are operating in full compliance with their own tax laws, and these OFCs would not want it any other way.”

When a company is organized in an offshore financial center (or other financial secrecy jurisdiction), the local government authorities generally do not know whether the owners of that company “are operating in full compliance” with the laws of the jurisdiction of residence of those owners. Normally the Appleby office in the offshore financial center (or other secrecy jurisdiction) would act only as registered agent of the locally organized company, and therefore that Appleby office would not really know of the activities and the assets of that company.

Also, TJN researched in 2005 the amount of assets held by individuals in jurisdictions outside their country of residence and not declared by them in the country of residence (TJN, “The Price of Offshore”). Tax justice Network’s conservative estimate: US$11.5 trillion, which results in an annual loss of tax revenue for governments of about US$255 billion. TJN believes that the US$11.5 trillion figure has increased substantially since then, resulting from additional undeclared income on such undeclared assets, and substantial additional capital flight.

Tenth, Appleby states that “it has been suggested that the offshore world must move to the automatic exchange of tax information rather than the present treaty-based request system, with its checks and balances too protect the legitimate rights of taxpayers that exist in all civilized countries. In the context of the worldwide system of automatically exchange tax information, where there is a global standard applicable to all, it must be right to expect such rules to apply to OFCs. In the absence of an equal application of such requirement onshore and offshore, requiring it solely for the OFCs would clearly be unfair and discriminatory.” That statement merits two comments: First the “request system,” that is, exchange of information/upon request which is the official OECD promoted policy, is not effective exchange of information. Under the “request system,” in order for a government (“Requesting Government”) to make a valid request for information of another government (“Requested Government”), the Requesting Government in effect must already know substantially all of the information being requested. That is why the number of effected requests has been minimal. An attorney for several offshore financial centers, including some jurisdictions where the Appleby Group has offices, noted that “Bermuda [where Appleby was originally, and still is, headquartered] has had such arrangements [exchange of information upon request] with the US for twenty years, and over that time [Bermuda] has effected less than fifty exchanges [of information]. (Richard Hay, “Beyond a Level Playing Field: Free (R) Trade in Financial Services.”) Offshore financial centers and onshore financial centers support exchange of information upon request because such method is not effective exchange of information.

Eleventh, Appleby states that “A number of these [offshore financial centers] jurisdictions, for example the Cayman Islands, have been subject to an examination (by the General Accounting Office of the USA [GAO]) as to their co-operation in the effective use of their agreements and were declared to be fully co-operative.”

The report of the U.S. Government Accounting Office, GAO, cited in the Appleby statement indicates (pages 5 and 37) that the United States has used only “a small number of times” the Tax Information Exchange Agreement (ITEA) between the United States and Cayman since it went into effect in 2004, to exchange information related to civil and criminal tax investigations.

Twelfth, Appleby states “… noted in Transparency Internationals published lists, the world’s worst offender according to its assessment of global transparency was the state of Delaware in the USA.” Two Comments: Tax Justice Network, not Transparency International, prepared the Financial Secrecy Index published in December 2009, referred to in the Appleby statement. Also as noted in the FSI, many jurisdictions suffer from the lack of financial transparency and TJN readily acknowledges that secrecy is endemic, but not all countries make it their business to actively attract deposits and other financial assets of non-residents whose primary goal is tax evasion.

For the record, nine out of the twelve Appleby offices are located in jurisdictions which are in the top twenty financial secrecy jurisdictions according to TJN’s Financial Secrecy Index.

In summary, the Appleby statement is not “digestible.”


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