Following the release of OIL's Offshore 2020, Jonathon Clifton considers the future of the Offshore Financial Industry.
OIL’s Offshore 2020 Market Research and White Paper has now entered its fifth year.
Since 2010, OIL has facilitated dialogue and debate surrounding the key trends and issues facing the industry. This year, approximately 300 ‘c-suite’ industry stakeholders participated, spread around the globe and across all segments of the industry: regulators, private bankers, lawyers, corporate service providers, industry associations and accountants.
This time 12 months ago, the industry was facing perhaps its greatest threat in decades – an existential threat you could say. The ICIJ had published the so called ‘offshore data leaks’, a handful of international banks were making it increasingly difficult to open bank accounts using key offshore jurisdictions, the moral debated raged about successful multinationals not paying their “fair share” of tax, regardless of the legal soundness of their approach, and the issue of tax transparency and public registries of beneficial ownership were debated at the highest levels at the G8 summit.
A year on and a sense of optimism has begun to return. The pervading mood is that, despite the negative publicity of the past 12 months, the facts remain that the offshore industry is integral to the concept of globalisation and continues to play a crucial role in the global, financial supply chain.
Five years into the initiative, we have witnessed a handful of trends beginning to emerge and feel that it is time we do some “crystal balling”. We have debated which of these trends can be extrapolated through to 2020 and which will fade out. Some of the predictions will be obvious and some you may disagree with, but hopefully they all will provoke thought and dialogue about the direction the industry is heading and the opportunities available for those willing to embrace change.
Offshore in 2020 - The Predictions
The offshore industry will be better regulated, more globally integrated, more transparent and generally more robust than what it was in 2010. Hardened by the regulatory pressure of recent years, the industry will be better equipped to cope with unforeseen challenges than ever before, resulting in change being seen through the prism of opportunity, not just threat. In short, the industry will be bruised by a decade of external pressure being forced upon it, but confident in its rightful place within the global financial supply chain.
Growth & Development
Corporate service providers within the industry will consolidate with this phenomenon driven by two factors. Firstly, increased regulation will push up the cost of doing business – investment in the infrastructure and an increase in headcount goes hand-in-hand with heightened compliance. Secondly, by 2020, Global Private Equity Firms will have held stakes in the industry for approximately 15 years. Backed by this capital, all the major players will have made a number of strategic acquisitions with the industry displaying similar characteristics to the international tax and accounting industry.
A ‘Big 4 Corporate Service Providers’ will have emerged providing true global scale. In addition, a large number of single jurisdiction operators will have carved out successful niche positions for themselves. A handful of major players will end up listed on global stock exchanges, reinforcing the move towards a more transparent, better regulated industry.
Automatic Exchange of Tax Information
Many of the key principles of the US Foreign Account Tax Compliance Act (FATCA), and the broader automatic exchange of tax information, will be adopted by the majority of the G8 nations but fall short of a full take up by the G20. We will see China, Russia, India, Indonesia and Saudi Arabia all pushing back to varying degrees. The “Westerners arguing with other Westerners” mind-set will prevail and those not part of the debate will develop FATCA-free channels for economic engagement.
After approximately six years in existence, causing significant upheaval for jurisdictions, financial intermediaries and other industry stakeholders, FATCA is unlikely to break-even. The cost of implementation and ongoing management will exceed the additional revenues it generates for the US and other governments. As global economic conditions continue to improve (the 2008 GFC will be 12 years in the rear view mirror), questions will be asked as to whether the cost of ‘running’ has created an additional burden for the tax payer. There will be much irony about a piece of legislation, designed to plug tax leakages, which will actually add to the very issue (government debt) it was designed to counteract.
Public Registers of Beneficial Ownership
In spite of calls to do so, initially led by David Cameron, public registers of beneficial ownership are not adopted broadly. Some European Union countries will implement such registers, with varying degrees of success and consistency. In the UK itself, there will be numerous exemptions to the public aspect, due to legitimate privacy and security concerns. Central registers of shareholders, (not beneficial owners), become the global standard.
China will be the major growth driver for new business within the industry. Several, complementary factors will be driving this. Among them: State-owned enterprises and private companies will increasingly branch out overseas across all segments of the economy, China’s base of high net worth individuals increases at a rate far outpacing the growth in western markets, and the Renminbi becomes increasingly convertible leading to a further wave of Chinese capital heading into the global economy.
This all amounts to a greater, more integrated involvement of China into the global economy. The opportunity will no longer be limited to Greater China-based service providers alone. Service providers across the entire spectrum of the value chain (Legal, Accounting and Corporate Services) will be actively looking to China to drive future business growth. All major jurisdictions will be far more proactive with their engagement with China, with the attempt to create a niche for themselves.
Increased compliance burdens will see business move to (or stay within) jurisdictions that are either historically better regulated or invest in the relevant infrastructure to get themselves there. Survival depends not only on compliance but also on creating a defensible market position, whether it involves catering to a high-end niche or a large volume of customers.
From an Asian perspective, the so-called Big Four jurisdictions – the British Virgin Islands (BVI), the Cayman Islands, Hong Kong and Singapore – will retain their dominance. While the BVI and Cayman’s effective ‘monopolies’ on international business companies and funds / capital markets vehicles, respectively, may erode over time, it is difficult to envisage their demise.
Hong Kong, Singapore, Luxembourg and Malta will continue to grow in importance as mid-shore jurisdictions, offering a combination of traditional offshore benefits and onshore credibility, enabling clients to build substance.
By 2020, a handful of new mid-shore jurisdictions will be emerging in Africa and the Baltic States attempting to capture a slice of the new world economy. Even more interesting will be the emergence of Cloud-based corporate service providers, which will challenge the existing, sovereign based compliance requirements.
The Offshore Debate
The moral debate over the use of offshore structures will not have disappeared, but its severity will fluctuate based on the health of the global economy and the emergence of other potential targets for politicians. NGOs with a stated vested interest in the demise of the offshore industry will continue to be well-funded and co-ordinated and will continue to be the mouthpiece for a broader political cause. As a result, the industry will be more co-ordinated and more assertive in its approach to public relations and lobbying relevant stakeholders. Vested interests will not be easily shifted, but a true industry body involving the financial centres and private business will have emerged. The work of the IFC Forum, STEP and other associations will have played an important step in allowing this to occur.
Due to significant reputational risks created by negative publicity, a handful of high-profile multinationals will agree to pay a higher rate of tax than legally required in their jurisdictions of incorporation. Beyond that, the majority of global businesses will continue to utilise the bilateral or multilateral infrastructure – such as double tax treaties – to facilitate cross-border operations. Further to the BEPS initiative, there will be greater country-by-country reporting by multinationals. This will result in a higher tax spend by multinationals in some countries, and in some business sectors, but implementation will be inconsistent, with countries still keen to attract business with tax incentives. Progress will be made towards a consensus on how to tax online businesses – but new opportunities will arise and multinationals will continue to have the ability, resources and the leverage to restructure and take advantage.
Asset protection and wealth management will be the primary driver for using offshore entities at an individual level. As developing economies mature across Asia, India, the Middle East, Africa and Latin America, an entirely new, first generation of individuals and families will utilise the range of legitimate wealth protection strategies that have been employed by their western counterparts for generations. This will continue to fuel the growth of the industry in 2020.
The concept of globalisation will have been established in modern economic terms for approximately 40 years. While not perfect, the outlook of an interconnected and interdependent world with free transfer of goods, services and capital cross border will be largely understood as the best way to grow global economies.
China and other non G8 nations will play a much larger role in this global economy than any time since the mid 1800s. To enable globalisation, an economically efficient trading and investment infrastructure is required; the ‘electrical wiring’ or the ‘plumbing’ so to speak.
We believe that globalisation will continue to evolve and with that so will the offshore industry. Put simply, you can’t have one without the other. Offshore financial centres enable globalisation and by 2020, this concept will be better understood.
 OIL’s ‘Offshore 2020’ white paper is the only independent, annual industry wide market research that exists. Engaging senior industry stakeholders from regulators, industry associations and service providers it takes a temperature check of the key issues and developments facing the industry and in 2014, approximately 300 respondents took part in the survey. For a copy of the full report please vist www.offshore-inc.com
Jonathon Clifton Jonathon Clifton is Managing Director, OIL Asia with P&L responsibility for the region. He is a member of the Group’s Global Executive Committee and speaks regularly at international conferences on the future state of the offshore industry. He has over 18 years of experience in a range of strategic business development, consulting, client relationship and corporate strategy roles in a career that has taken him throughout Asia Pacific.