Written evidence submitted by the IFC Forum (TAX0034)

The International Financial Centres Forum (the “Forum”) is a member-funded, not-for-profit organisation.  The Forum advocates responsible cross-border financial intermediation in support of trade and investment as a means of promoting economic growth and enhancing development prospects.  Members of the Forum include professional service firms and businesses headquartered in Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Guernsey and Jersey with offices in a number of the other leading international financial centres.[1]

The Forum welcomes the opportunity to respond to the Treasury Select Committee’s inquiry on UK tax policy and the tax base.  We explain the benefits that the British offshore centres, and their tax bases, bring to the UK economy, and we also outline the high regulatory standards in these centres and the wider role of IFCs.

1.                  EXECUTIVE SUMMARY

1.1.             The UK economy derives considerable benefit from the financial centres hosted by the Crown Dependencies and Overseas Territories (CDOTs).  These centres support many British jobs, increase financing available for investment in the UK, upstream bank deposits to UK financial institutions, increase the rate of return to pensions and other savings in the UK and increase UK tax revenues as a result of these activities.

1.2.             The CDOTs have high regulatory standards and participate proactively in tax information exchange.  Evaluations by independent standard-setters and academic studies indicate that the CDOTs generally have exemplary regulatory standards in terms of both system design and practical application.

1.3.             The CDOTs service an international institutional clientele seeking access to high-quality, British-based legal institutions to facilitate the investment of funds from multiple jurisdictions and across international borders.  Being tax-neutral, they reduce the costs of this and thus provide an invaluable service to investors, both big and small.  Analysis by HM Treasury in 2009 showed that the CDOTs do not offer significant opportunities for firms to avoid or evade UK corporate taxation.[2]

1.4.             Profits from intellectual property rarely flow directly from the UK to the CDOTs.  IFCs do not have double taxation agreements with major jurisdictions, such that outbound royalty payments generally attract significant withholding tax.  As a consequence, such flows generally go to other centres, such as Benelux, which benefit from the EU Interest and Royalties Directive and double tax treaties.

2.                  BENEFITS TO THE UK ECONOMY

2.1.             CDOTs contribute significantly to the British economy:

2.1.1.        Bermuda is the world’s foremost hub for reinsurance services, with Bermuda reinsurers providing 23% of Lloyd’s capacity: an increase of $10bn a year.  The close ties between the UK and Bermuda contribute to the UK’s position as capital of the global insurance industry, with Bermuda reinsurance firms employing 5,500 people directly in the UK.  Bermuda-domiciled companies invest heavily in the UK, supporting an estimated 69,000 jobs in the United Kingdom.[3]

2.1.2.        Cayman Islands is the domicile of over half of the world’s, and 69% of the UK’s,[4] hedge funds by assets under management.  These hedge funds also employ 10,000 people in the UK directly, and pay £6bn per year in taxes across Europe.[5] Furthermore, the majority of hedge fund assets are held by pension funds, insurance companies and other institutional investors, with just 13% coming from high net worth individuals:[6] meaning hedge funds contribute greatly to savings returns for ordinary Britons, including workplace pensions.  Note that pension funds are generally tax exempt, so they would have no incentive to go to a tax-neutral centre to avoid UK tax.  Such funds patronise the CDOTs because they value their British legal traditions and institutions, and their efficient and well-regulated environments, which contribute to overall pension returns.

2.1.3.        Guernsey’s funds industry is one of the largest in the world, and channels £24.6bn of inward investment into the United Kingdom.[7]  British fund managers earn £1.1bn a year in fees from Guernsey-based funds: with £842m of those fees coming from outside the UK.[8]  These funds are heavily geared towards investment in infrastructure, with 55% of all infrastructure investment from Guernsey funds being invested in the UK. [9]

2.1.4.        Jersey is a large gateway for investment from around the world into the United Kingdom. The UK’s banking sector is supported by £120bn of additional funding from banks in Jersey.  Overall, Jersey supports an estimated 180,000 jobs in the United Kingdom and adds £9bn to the UK’s economy. [10]

2.2.             The CDOTs also contribute to the UK’s tax base, stimulating demand for professional services in London and elsewhere in the United Kingdom.

3.                  REGULATORY STANDARDS IN IFCS

3.1.             The CDOTs have high regulatory standards and engage proactively in information exchange programmes.  As the UK Government recognised in the communiqué of the Joint Ministerial Council in December 2015, “it is not appropriate to refer to the Overseas Territories as ‘tax havens’.”[11]

3.2.             The CDOTs trade on their reputation for high levels of compliance with international regulations.  Their unique selling point is their use of British-inspired laws, courts, and legal and professional services sectors in tax-neutral environments (see 3.3 below).  It is consequently in the interests of CDOTs to prevent tax evasion or money laundering occurring in their jurisdictions.  IFC Forum supports the CDOTs’ commitment to all international standards in these fields, such as those developed by the Financial Action Task Force (FATF) and the OECD Global Forum. 

3.3.             FATF sets the global standard (‘FATF Recommendations’) for fighting money laundering and terrorist financing.  The CDOTs have been assessed as highly compliant with FATF Recommendations and more compliant than many OECD member jurisdictions.  For example, the requirement under FATF Recommendation 24 to track corporate beneficial ownership is a key part of reducing corporate tax evasion and a live political issue.  Chart A below notes compliance with this requirement in FATF’s latest round of assessments.

3.4.             Academic studies also confirm that the CDOTs have some of the highest regulatory standards in the world.

3.4.1.        The Global Shell Games[12] report tested standards in practice by sending 7,500 email requests to corporate service providers in over 180 countries around the world, attempting to establish companies without the proper compliance documentation required by the FATF Recommendations.  It found the world’s highest compliance rates in the Cayman Islands (100%), Jersey (100%), BVI (94%), and the Isle of Man (94%), with the U.S. state of Delaware (6%) with the worst compliance rate.  The United Kingdom was mid-way between the two.  See chart B below.

3.4.2.        The World Bank’s report The Puppet Masters found that 100% of company service providers in the CDOTs required photo ID upon company incorporation[13] – a vital step to prevent avoidance or evasion of taxation and money laundering – and cited Jersey’s zero-tolerance approach to breaches of this requirement approvingly.[14]

3.4.3.        All British IFCs have committed to implementing the OECD’s Common Reporting Standard for the automatic exchange of tax information.  They are all in the group of early adopters – the first group of jurisdictions in the world to implement CRS – with information beginning to be exchanged in 2017.

4.                  ROLE OF IFCS

4.1.             IFCs exist to facilitate the use of developed, specialised, high-quality legal institutions.  By being tax-neutral jurisdictions (see 4.3), they reduce the cost of accessing these legal institutions, and thus reduce the cost of investment across international borders.

4.2.             The international consensus is that income should be taxed where value is created.  IFC Forum agrees with this and believes that all properly-levied taxes should be paid in full.  IFC Forum unreservedly condemns the use of foreign jurisdictions to evade domestic taxation and applauds efforts to make tax records available to law enforcement and tax authorities in other countries through tax information exchange agreements and now the OECD Common Reporting Standard, as noted above.

4.3.             CDOTs cooperate proactively with all jurisdictions, including the United Kingdom, to ensure that tax is paid where it is due.  No tax credits are required in the United Kingdom or other developed countries for profits attributed to corporate subsidiaries in IFCs, as no liabilities arise.  This is called ‘tax neutrality’, meaning the IFC itself does not add an additional tax burden, nor does it reduce the tax burden otherwise owed onshore.  This makes IFCs attractive as conduits for global capital flows, but unattractive as venues for tax avoidance or evasion.

5.                  INTELLECTUAL PROPERTY FLOWS

5.1.             As the digital economy grows, royalty flows from intellectual property will increase in importance to the global economy.  As a knowledge-based economy, the United Kingdom is itself one of the largest beneficiaries from intellectual property royalties.  In 2013, the UK was the sixth-largest recipient of international royalties and licence fees, behind the United States, Netherlands, Japan, Switzerland, and Germany. Until the 1990s, the UK was the second-largest.[15]

5.2.             Flows of certain types of income, including intellectual property, from the United Kingdom are subject to a withholding tax of 20%.  The EU Interest and Royalties Directive prohibits withholding taxes between EU Member States, allowing payment to other EU members without incurring a withholding tax.  Tax treaties also generally reduce or eliminate withholding on royalties.  As the CDOTs lack tax treaties, it would be highly unusual for such payments to be paid directly to them, as this would incur the consequent withholding tax.

5.3.             The United States dominates global intellectual property exports, with U.S. companies receiving 39% of cross-border royalty and licence fee payments.[16]  At the end of 2014, Apple held $181bn in cash and short-term securities outside the U.S.: the largest cash pile of any company in the world.  However, as Apple has stated,[17] this is not due to the tax policies of the United Kingdom or of CDOTs, but due to the tax policies of the United States.

April 2016