Monday, March 09, 2009

Wish you were here - Jersey, 12/13 March

Update March 12 - Event details here

(Update: new data and analysis from Tax Research on Jersey. Click here.)

On 12th/13th March 2009 civil society organisations from across Europe, including some of the largest economic justice coalitions, will be visiting the British Island of Jersey. During this visit they will be holding a public seminar and a guided tour of the financial district of Saint Helier. They will use this as an opportunity to launch specific proposals for an Action Programme to Strengthen International Financial and Fiscal Regulatory Cooperation. These proposals will be circulated to the international media subject to an embargo ending 00h01 on Friday 13th March 2009.

The purpose of this visit, timed to coincide with the meeting of G-20 finance ministers in preparation for the imminent G-20 summit on the global crisis, is to highlight the need for comprehensive measures to tackle the fiscal and economic distortions caused by the offshore financial system. Jersey has been selected as a representative example of a secrecy jurisdiction (our prefered term for the more widely used term 'tax haven') which hosts a large and function offshore financial centre. The terminology we employ is explained at greater length here.

Jersey is a British Crown Dependency. It is not part of the United Kingdom, but the UK government has responsibility for its good governance, and also has the powers to intervene in its affairs. This relationship is explained at greater length here.


Area - 116 square kilometres
Resident population (estimated 2006) - 89,300
Population per square kilometre - 755
Economically active population (2008) - 56,630
Gross national income (2007) £3.7 billion (£41,430 per head of population)
Sectoral contributions: financial services - 53 per cent
Hotels, restaurants, bars, etc -3 per cent
Agriculture, horticulture - 1 per cent
Manufacturing - 1 per cent
Transport, storage, communications - 4 per cent
Public administration - 7 per cent
No. of registered banks (February 2009) - 47
Bank deposits (December 2008) - £206 billion (68% non-sterling)
Funds under administration (December 2008) - £241 billion
Profits recorded by financial sector in 2007 - £1.46 billion
Full-time equivalent employees engaged in financial services - 13,260 (23 per cent of the economically active population)
Employees of trust & company administrators - 5,020
Employees of banks - 5,590
Employees of accounting firms, fund managers - 1,430
Median House Price (2006): £358,000 ($659,900)
Key finance web sites:
Jersey Financial Services Commission (regulator and source of financial data)
Jersey Finance (which promotes the offshore financial centre)
Most commonly heard phrase: We are not a tax haven.

Also - see Richard Murphy's new analysis of Jersey, with a special focus on its banks, here.

Jersey is listed as a tax haven by the Organisation for Economic Cooperation and Development (2000); International Monetary Fund (2000 and 2007); Financial Stability Forum (2000); Financial Action Task Force (2000 and 2002); the US Senate Stop Tax Haven Abuse Act (2007/2009); Tax Justice Network (2005); LowTaxNet (2008); and Hines & Rice (1994).

The insular authorities in Jersey claim that the island is not a secrecy jurisdiction but such denials are standard practice.

Geographically, Jersey is situated less than one hour's flight from the City of London. It operates essentially as a satellite of the City, providing a comprehensive range of judicial, fiscal, regulatory and political services that major banks and accounting firms can provide their clients. For the greater part these services involve exploiting opportunities for either tax arbitrage or regulatory arbitrage.

But Jersey is also used extensively for tax evasion: according to the respected American tax research organisation Tax Analysts:

"At the end of 2006, there were $491.6 billion of assets in the Jersey financial sector beneficially owned by non-Jersey individuals who were likely to be illegally avoiding tax on those assets in their home jurisdictions."

(The Tax Analysts report on Jersey is here.

Tax dodging is a major concern for most industrialised countries, including the European Union and the United States. It is a catastrophe for poorer countries. Poorer countries also suffer massive capital flight through illicit financial flows, almost all of which are routed through secrecy jurisdictions. For these reasons alone, the G-20 leaders must urgently tackle the tax avoidance industry in a comprehensive manner. But the issue is bigger than tax dodging: these places are also centres of regulatory degradation and financial turmoil: and it is poorer countries that will bear the brunt of their harmful activities.

In the submission made by TJN and our associates in 2007 to the US Senate Finance Committee Hearing on tax evasion, we argued that Jersey is a secrecy jurisdiction because:

(a) there is no or only nominal taxation on relevant income of non-residents;

(b) there is a lack of effective exchange of information for tax purposes (the tax information exchange agreements negotiated between Jersey and other jurisdictions follow the ‘by request’ approach and therefore have limited effectiveness either in practice or in their deterrent value);

(c) there is a lack of transparency of the tax and regulatory regimes, there is no public access to information about beneficial ownership of companies, no financial reporting requirement is imposed on tax exempt companies, there is no register of trusts and no information is collected about trusts;

(d) there is no requirement that the activities of non-resident companies have any economic substance in the island, i.e. the island is essentially a ‘booking centre’.

In addition:

Jersey allows for corporate and nominee company directors. This adds to secrecy.

Jersey allows for nominee owners of private companies. This adds to secrecy.

There is no requirement for registration of trusts, which are used as the basis for most tax evasion structures. Worse still, in 2006 the States of Jersey degraded the island's trust law to allow the creation of "sham" trusts. These can serve no legitimate purpose, and therefore we must conclude that the purpose of this law was to encourage tax evasion to circumvent the European Union's Savings Tax Directive. This conclusion is supported by the email correspondence between senior Jersey officials (see here) which was mistakenly circulated to TJN. We have raised this issue with officials in Jersey, but we have never received any explanation for why they have allowed this degradation of the concept of the Anglo-Saxon trust.

Jersey allows for the redomiciliation of companies. This adds an additional layer of secrecy and complexity since a company registered in Jersey can leave at a moments notice and re-appear in another jurisdiction where it will be safe from prosecutors. Or, a company from another tax haven can appear under a different name and continue its operations in Jersey.
Since early 2008, Jersey has allowed for the creation of unregulated hedge funds. Yes, you read that correctly: UNREGULATED hedge funds. More here.
In the 1990s Jersey-based law firms -- especially Mourants and Ogiers -- created specialist divisions concentrating on the writing of the legal instruments used for securitisation of, amongst other things, the collateralised debt obligations at the heart of the sub-prime crisis. These law firms have become world leaders in the creation of these toxic products.

The Jersey authorities publicly acknowledge that tax information exchange requests from other jurisdictions will face strong resistance: in December 2008 Jersey Finance, the marketing arm of the offshore financial centre in Saint Helier, commented on their website that:

The HMRC would not generally be able to compel information to be disclosed by Jersey subsidiaries and/or branches of UK institutions. . . A high threshold therefore exists before the Jersey authorities will accede to a request under a TIEA. For example in the past year, there have been just four requests from the US under the terms of the TIEA. There is no automatic exchange of information under any circumstances and no ‘fishing expeditions’ for information. Strict confidentiality provisions in the agreement preclude any information being passed to third parties without the express written consent of the requested country.

Strangely, the relevant text was removed from the website after we drew attention to it. You can draw your own conclusions on its meaning. We have drawn ours here.

Now given all the wealth that flows through the island's financial centre, one would have thought that this must be amongst the most financially wealthy places in the world. And at face values this appears to be the case. Take a look here at the Central Intelligence Agency rankings of gross domestic product per capita and you will find Jersey in seventh position, with a per capita income of $57,000 (2005). By the way, take a close look at the top 20 in the CIA ranking and you will see that almost all of the jurisdictions listed are secrecy jurisdictions with the exception of oil-exporters like Kuwait, Norway and Qatar. This is amazing statistical evidence of the extent to which the offshore financial economy has come to the fore since financial market liberalisation in the 1980s.

But as we all know, GDP data provides a distorted prism for looking at the world. And this is especially the case in Jersey, where a huge part of the local "value added" consists of profits shifted by banks which in fact is derived from activities in other places and will ultimately leave the local economy in the form of dividends paid to shareholders outside the island. In practice, many islanders have not benefited from the offshore financial centre, and the local economy has been largely crowded out by the rapid growth of that sector: a process we have labelled the Jersey Disease in parallel to the recognised Dutch Disease phenomenom.

To make matters worse, under EU pressure to reduce tax avoidance, the island's authorities changed the corporate tax code to reduce the tax on corporate profits from 20 per cent to zero per cent. This has considerably reduced revenue earnings, leading to the adoption of a regressive General Sales Tax, which is very unpopular. But the revenue income from the GST will not compensate for the loss of earnings from corporate profits: the budgetary position for 2010/11 looks far from healthy. We candidly expect that the GST rate, initially set at 3 per cent, will rise two or three fold in the coming years, exacerbating an already unhealthy divide between the island's millionaire population and those who have to choose between eating or heating.

To summarise: Jersey is a secrecy jurisdiction, which acts as a satellite of the City of London. Its local government processes are largely captive to the interests of major banks, accounting and law firms, and their clients. The UK government is responsible for its good governance and has powers to intervene. Offshore financial centres have played a signficant role in hosting the shadow banking system, unregulated hedge funds, securitisation specialists, off-balance sheet entities, that lie at the heart of the crisis of financial capitalism. Secrecy jurisdictions provide an enabling environment in which lack of financial transparency, judicial secrecy, structural complexity, lax regulation and tax arbitrage combine to foster hidden risks and corrupt practices. Civil society demands that G-20 takes comprehensive measures to close these fiddle factories for once and for all.

PS In February 2009, TJN wrote to Terry le Sueur, chief minister of the island's government, inviting him to speak at the public seminar on the 12th March. We also noted that if he was not available, we would welcome any representative of his Council of Ministers. We have not had the courtesy of a reply from Mr le Sueur (who knows our director, John Christensen, personally) and he has now publicly stated on BBC Radio Jersey (Sunday morning Talkback programme) that he has no intention of discussing with civil society, and neither will his fellow ministers. We have previously commented on Jersey's democratic accountability or lack thereof. This is an example of how secrecy jurisdictions fail to engage with their critics.


Blogger Physiocrat said...

People are obviously using this unlovely setup to run rings round other countries' tax systems. But... a large proportion of the income streams of the outfits that are exploiting these tax havens actually consists of actual or imputed rental income - the economic rent of land.

These revenue streams are ultimately traceable to the holding of land titles. If tax systems are reformed to tie them also to land titles, then the opportunity of avoidance through the use of tax havens is removed. An effective system of land value taxation will neutralise the attraction of tax havens, and it is up to other countries to take the necessary steps to protect their own tax revenue through tax reform.

4:07 pm  

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