Grant Stein, Walkers highlights the part IFCs play in the global movement of wealth and examines the 'vital role' that IFCs play in the global economy
Crucial players in the global economy, small International Financial Centres, or IFCs, act as conduits to the free and efficient movement of capital.
Enhancing global prosperity and benefiting both G20 and developing nations alike, small IFCs such as the Cayman Islands, Bermuda, the Channel Islands and the British Virgin Islands have made a significant contribution to raising global standards in recent decades, increasing per capita GDP in the domestic economies of many G20 countries by stimulating investment and creating employment. As stable and efficiently -regulated jurisdictions, highly regarded in terms of transparency, as well as committed and cooperative partners in compliance legislation, these small IFCs are salient participants in the international financial network.
Acting as the ‘plumbing’ in the global financial system, those IFCs perform a range of pivotal functions, essential to economic growth, commerce and the retirement plans of people all over the world.
IFCs provide tax neutral platforms which attract global capital and provide for the smooth passage of financial flows where in other circumstances, uncertain or multiple-layered onshore tax rules, investor-unfriendly legal systems and cumbersome banking infrastructures would make a transaction or investment unattractive. Where deals are unattractive, investment into a particular jurisdiction becomes inhibited. Where IFCs are present, they provide efficient intermediaries for cross-border capital flows and corporate transactions, fuelling global economic growth.
Funds established in IFCs act as efficient portals for collective investments which maximise returns on pensions and other pooled funds in a manner which does not benefit one investor over another. These tax neutral platforms are highly appealing to business because not only are they subject to robust legal and regulatory infrastructures, they also have the required financial services expertise to attract capital from various jurisdictions. It should be clearly understood that investors participating in a fund domiciled in an IFC do not avoid paying tax. All investors in offshore hedge funds are still required to make a full tax declaration to their home tax authorities. Tax neutral platforms simply reduce the risk of multiple layers of taxation, which can occur where investments cross borders since onshore tax systems are rarely integrated with foreign regimes.
Confusion also exists surrounding which countries are IFCs, with nations like the UK, The Netherlands and modern economies such as Singapore and Dubai included in the mix with the more traditional offshore jurisdictions. With no real consensus on what really constitutes an ‘IFC’ and more typical commentary tending towards the use of terms such as 'Tax Haven' it is perhaps no great surprise that the true economic contribution of IFCs is not fully understood by international policymakers or the mainstream media.
In the years that immediately followed the global financial crisis, many G20 politicians and media commentators had looked to the IFCs to apportion some blame for their own economic problems. While these actions may have been understandable for political reasons, strong evidence exists that shows IFCs were not a factor in the economic crisis. For example, in the March 2009 Turner Report, commissioned by the UK Government, Lord Turner concluded: "It is important to recognise that the role of offshore financial centres was not central in the origins of the current crisis".
In order to ensure that global policymakers fully appreciate the vital role that small IFCs play in terms of economic development and providing liquidity and efficiencies to the capital markets, the IFC Forum was established in 2009. The IFC Forum is a non-profit organisation aiming to help inform the public debate on small IFCs, as well as to commission research and correct the many misconceptions which surround the activities of IFCs. Its membership comprise private sector organisations in the international financial services sector, operating in financial centres such as London, Dubai, Hong Kong, Singapore, Dublin and Sao Paulo as well as many of the UK's Crown Dependencies and Overseas Territories. Our view was that such misconceptions can be countered to a greater degree through communication and cooperation within the offshore world, which has faced these accusations for many years but only responded in a disparate manner. Traditionally the individual offshore financial centres may have regarded each other as competitors, with the principal centres moving towards their own areas of specialisation.
Today, however, it is clear that the interests of the principal IFCs are aligned at a higher level, while the trend towards more complex multi-jurisdictional transactions has also reinforced the need for greater collaboration. The advantages of this approach are significant. When the IFCs can speak together with one voice, benefits can accrue to all our jurisdictions. Furthermore, by working together, IFCs can ensure that all market participants can see and appreciate the symbiotic relationship IFCs have with both developed and developing countries. One of the primary objectives of the IFC Forum is to facilitate an objective empirical assessment on the economic benefits of IFCs to the wider global economy. Further information on our activities can be found at www.ifcforum.org.
In the context of this debate and calls for so called ' tax havens' to be shuttered, the IFC Forum recognises and shares the legitimate concerns of governments around the world over the potential for tax leakage through tax evasion. We warmly welcome and support any attempts to challenge the illegal use of financial centres – large and small – for tax evasion purposes. Our concern, however, is that many politicians, perhaps confused by some NGO produced facts and figures that do not stand up to proper analysis, have tended to conflate tax evasion – which is illegal anywhere – with the provision of tax neutrality which is essential for pooling funds for international investment.
As mentioned previously, a key part of the IFC Forum's mission is to demonstrate how small IFCs have a positive impact on the global economy. In that vein and focusing in particular on the effect on exports, the IFC Forum appointed Europe Economics to conduct an assessment into the impact of capital invested from large EU countries into small IFCs. Europe Economics[i] examined patterns of foreign direct investment from the three main EU economies: Germany, France and the UK to some of the more significant IFCs such as the Cayman Islands, Bermuda, the British Virgin Islands, Jersey and Guernsey. They concluded that the argument that money leaving jurisdictions for small IFCs is 'lost' to the onshore economy is unfounded. In fact, the research demonstrated that capital flows into small IFCs are invested, resulting in greater benefits for the economy where the investment initially stemmed from, through generation of higher exports. Furthermore, the research showed that when adjusting for the size of economies, FDI into small IFCs is more export promoting than into other countries. Policy makers and NGOs, therefore should re-evaluate their approach to IFCs, because taking Europe's three largest economies as examples, capital leaving for IFCs like Cayman and Jersey is invested efficiently. Rather than being lost, it generates exports, returning an overall benefit to those European countries. This endorses similar research that already exists in relation to the Canadian and US economies, showing unequivocally that capital flows from the G7 countries through IFCs result in benefits for the domestic economies of those G7 countries. There is no reason to believe that the same would not apply in relation to all developed economies.
In addition to enhancing the economies of advanced nations, numerous academic studies have highlighted the benefits that IFCs provide to developing nations. A recent study by Professor Jason Sharman of Griffith University in Brisbane, Australia[ii], found that IFCs help domestic and foreign investors in developing countries access the kind of efficient institutions which are necessary to drive growth but which are often unavailable locally. Typically the local infrastructure in developing countries doesn't have the critical mass required to seriously drive growth forward. IFC platforms provide an efficient method by which capital from developing nations can access the stable investments in developed nations and at the same time allow investors in larger countries to efficiently invest in the emerging markets. The capital flowing through IFCs also provides alternative sources of liquidity for small and medium sized enterprises, which represent an important driver for jobs and productivity, so badly needed in the developing world.
Further to the improvements associated with growth and employment all around the world, the presence of IFCs in the global economy creates tax competition which has clearly brought its own benefits in keeping tax rates as low as possible. The corporate tax systems of large countries aim to raise funds domestically and were never designed to assist efficient trade, finance and commercial interaction with other complex tax systems. It is the tax neutral platforms of the IFCs that lubricate the interfaces between these systems, facilitating efficient trade and investment, which has underpinned the leap in global living standards in recent decades. Very careful consideration should therefore be given to any policies which threaten to rip out the ‘plumbing’ connecting larger developed countries to smaller IFCs in terms of the impact on jobs, trade and economic growth.
Grant Stein is the Global Managing Partner for Walkers, the global offshore law firm of choice for investment banks, international law firms, collateral managers, and other financial institutions. Based in the Cayman Islands with offices in the British Virgin Islands, Dubai, Hong Kong, Jersey, London, and Singapore, Walkers provides clear, concise and practical advice based on an in-depth knowledge of the legal, regulatory and commercial environment in the Cayman Islands, the BVI, and Jersey.
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