Once a tax haven, always a tax haven? Vanuatu tried some years ago to be the exception which proves the rule, but found its exit was in reality a revolving door.
Never in the premier league as a tax haven, and notwithstanding taxation incentives and structural initiatives such as its Foundation Act 2009[i], in a 2019 assessment by the IMF Vanuatu remains:
a small island developing state and low-income country. Its income per capita is US$3356, with the economy dominated by tourism, construction, and agriculture. […] Vanuatu is the world’s most at-risk country for natural disasters, as measured by the UN World Risk Index.[ii]
The traditional Vanuatuan economy is still driven by “traditional Melanesian values and practices that have sustained lives for generations [focussing on] non-Western economic practices” and emphasising “traditional resource management, production and exchange practices that are not counted in conventional economic indicators such as GDP […] non-cash values that support livelihoods, and metrics such as traditional wealth items instead of currency”.[iii]
The traditional Vanuatuan economy is far from the whole economic story of these islands, and the development since 2013 of the Vanuatu oil field[iv] may herald a significantly more diverse future. The connection between the discovery of these exploitable reserves and the attempt by Vanuatu to cease its tax haven status can be the subject merely of speculation.
In 2016, Vanuatu, which up to that point had actively promoted its offshore services, declared itself no longer to be a tax haven and proposed to abandon its zero corporation tax rate in the belief that reliance on passive foreign investment would be a major exposure to the local economy. Vanuatu hoped that foreign direct investment would be forthcoming if the economy were sound, the legal system effective, and if Vanuatu could provide a good environment for investment.[v]
To what extent these positive characteristics would distinguish Vanuatu from its competitor jurisdictions in mainstream investment centres, and how eager investors would be to invest in a burnt out tax haven economy, remained to be seen.
Perhaps it was in fact beyond the administrative capacity of the Vanuatu authorities to do so (which sets its role as a tax haven in a worrisome light, and points to the ghettoisation of administrative resources within the self-contained finance sector). This was certainly the view of the Vanuatu Chamber of Commerce and Industry:
PIT [personal income tax] and CIT [corporate income tax] are the most complex and impose enormous challenges for both public and private sector in a low‐developed country with scarce human capital. It is questionable whether a country where three quarters of the population live without electricity will be able to perform administrative, planning, avoidance, and enforcement activities associated with exponentially increasing tax complexity. […]
As a tourism‐dependent economy (estimates of up to 60% GDP), Vanuatu could benefit from maintaining a consumption‐based tax system as by doing so it would shift a large share of tax burden on foreign visitors rather than local community. Implementation of income taxes would be counter‐ productive as it would mostly affect profitable businesses which create value for tourists, while poor‐performing entities would remain unaffected.[vi]
The point was moot however. No taxation reforms were subsequently introduced. The Vanuatu Foreign Investment Promotion Agency[vii] fulfils its mission and promotes Vanuatu as a low tax jurisdiction “with no taxes affecting individuals other than import duties (at varying rates), there is effectively no corporate and personal income tax in Vanuatu”.[viii]
Unchanged, Vanuatu did not stand out in a crowded offshore market. And then it decided to sell not products, but itself. Failing tax havens have been known to offer citizenship, at a price. There is undoubtedly a huge demand on the part of wealthy members of the global finance community to have the ability to choose their residence and citizenship, to future-proof their lifestyles in a fearful and changing world.[ix] But the trend, in Europe at least, is away from purchasing passports. Ireland’s Immigrant Investor Programme, established in 2012, under which an applicant was required to invest a minimum of €1 million for a minimum of three years and which was popular with citizens of the People’s Republic of China, was discontinued almost overnight on 15 February 2023[x], swiftly followed by Portugal on 16 February 2023.[xi] Enter the tax havens.
Vanuatuan Passports went on the market. The Vanuatu Citizenship Programme was established by the government in 2017 offering honorary citizenship in return for an investment (described as a “donation”) of US$130,000.[xii]
Whatever the good intentions of the Vanuatuan government may have been to benefit its people, this atavistic tax haven offering has not been well received globally, and is wide open to abuse.
A controversial “golden passports” scheme run by the Pacific nation of Vanuatu saw more than 2,000 people, including a slew of disgraced businesspeople and individuals sought by police in countries all over the world, purchase citizenship in 2020 – and with it visa-free access to the EU and UK, the Guardian can reveal. […]
Marketed by agencies as one of the fastest, cheapest and most lax “golden passport” schemes anywhere in the world, the development support program grants unfettered, visa-free access to 130 countries including the UK and EU nations. Vanuatu also operates as a tax haven, with no income, corporate or wealth tax.
Experts have warned the scheme is ripe for exploitation, creating a back door for access to the EU and UK and allowing transnational criminal syndicates to establish a base in the Pacific, and Vanuatu’s taxation laws make the country an attractive site for money laundering. […]
Vanuatu issued roughly 2,200 passports in 2020 through these programs – more than half (around 1,200) were to Chinese nationals. After Chinese, the most common nationality of recipients was Nigerian, Russian, Lebanese, Iranian, Libyan, Syrian and Afghan. Twenty people from the US, six Australians and a handful of people from Europe were also among those who applied.
The citizenship-by-investment (CBI) scheme is not illegal and many countries around the world offer CBI programs. There are many legitimate reasons for applying, including improved freedom of movement or tax-free offshore banking privileges.
However, security experts warn that the ease with which people can buy passports from the country, as well as the travel it permits, could make it an attractive scheme for members of transnational criminal syndicates, allowing them a legitimate base in the Pacific. […]
The sale of passports is the largest source of revenue for the Vanuatu government, [and] accounted for 42% of all government revenue in 2020.[xiii]
The European Union is the first to strike a fatal blow. On 8 November 2022 the Council of the European Union decided to fully suspend the EU’s visa waiver agreement with Vanuatu, a waiver which since 2015 had allowed citizens of Vanuatu to travel to the European Union without a visa for stays of up to 90 days in a 180 day period. The suspension is effective from 4 February 2023. The Council gave its reasons:
A partial suspension of the agreement had already been adopted on 3 March 2022. Following the partial suspension, the Commission started a dialogue with Vanuatu on 12 May to address the EU’s concerns. However, since then the country has failed to engage in any meaningful way and the circumstances that led to the temporary suspension still persist.
Based on careful monitoring and assessment of Vanuatu’s investor citizenship schemes, the EU has concluded that they present serious deficiencies which could pose a risk to the EU, notably due to:
Once a tax haven, always a tax haven? Vanuatu has found it impossible to diversify or to escape its tax haven past. It is trapped in a revolving door, and has staked almost everything on one product relationship. Will its gamble pay off?[xv]
[ii] International Monetary Fund, Asia and Pacific Dept, ‘Vanuatu: 2019 Article IV Consultation - Press Release; Staff Report; and Statement by the Executive Director for Vanuatu’ (IMF Staff Country Reports, Volume 2019: Issue 162) 4 <https://www.elibrary.imf.org/view/journals/002/2019/162/002.2019.issue-162-en.xml> (accessed 28 March 2023). Confirmed in current data on Vanuatu available from The World Bank <https://data.worldbank.org/country/VU> (accessed 28 March 2023)
[iii] Luke Drake, Hanna Marianne Liunakwalau, Hango Hango Community Association Port Vila, ‘Locating the traditional economy in Port Vila, Vanuatu: Disaster relief and agrobiodiversity’ Asia Pacific Viewpoint, Volume 63, Issue 1: Surviving Well: From Diverse Economies to Community Economies in Asia Pacific, April 2022 80 to 96, at 81 <https://onlinelibrary.wiley.com/doi/epdf/10.1111/apv.12333> (accessed 28 March 2023)
[iv] JX Nippon Oil & Gas Exploration Corporation, ‘First Oil from Finucane South Field, North West Shelf, Australia’ (JX Nippon Oil & Gas Exploration Corporation, 24 May 2013) <https://www.hd.eneos.co.jp/english/newsrelease/jx/pdf/20130524e_01_01_0920492.pdf> (accessed 28 March 2023) and Oil & Gas Industry Today, ‘Vanatu Oil & Gas Companies News Topics’ (Oil & Gas Industry Today) <http://oilandgas.einnews.com/category/oil-gas-companies/vanuatu> (accessed 23 March 2023)
[v] Vanuatu Revenue Review, ‘Tugeta Yumi Bildim Vanuatu: Overview of Consultation Paper: The case for Revenue Reform and Modernisation (Revenue Review, September 2016)
[vi] Vanuatu Revenue Review, Consultation Feedback (Vanuatu Chamber of Commerce and Industry, November 2016) 4 <http://www.fca.vu/wp-content/uploads/2019/03/Consultation_Feedback_Text_November_2016_VCCI_PDF.pdf> (accessed 28 March 2023)
[vii] A government agency established originally in 1998 and now operating under foreign investment legislation Act No. 25 of 2019 <https://investvanuatu.vu/about/who-we-are-2/> (accessed 28 March 2023)
[viii] <https://investvanuatu.vu/untapped-potential/low-tax-jurisdiction/> (accessed 28 March 2023)
[ix] ‘Record-Breaking Demand for Alternative Residence and Citizenship’ (Business Wire, 8 December 2022) <https://www.businesswire.com/news/home/20221208005062/en/> (accessed 28 March 2023)
[x] ‘‘Golden Visa’ programme to be scrapped’ (RTÉ News, 14 February 2023) <https://www.rte.ie/news/business/2023/0214/1356617-immigrant-investor/> (accessed 28 March 2023)
[xi] Barney Jopson, ‘Portugal joins clampdown on ‘golden visas’ for wealthy’ Financial Times (London, 16 February 2023) <https://www.ft.com/content/3a5b00a0-fb24-4216-9c7e-4fb1413e1f88> (accessed 28 March 2023)
[xii] Agencies authorised by the Vanuatuan Government include Citizenship Invest <https://www.citizenshipinvest.com/en/about/> and Global Citizenship Investment <https://www.vanuatu-citizenship-program.com/about-gci.html> (accessed 28 March 2023). Vanuatu is far from being the only state offering to sell passports. Citizenship by investment is offered by Saint Kitts & Nevis, Dominica, Saint Lucia, Grenada, Antigua & Barbuda, Malta and Turkey (as advertised by NG Global Citizens Limited, formed in 2021 and based in Nevis) <https://www.ngglobalcitizens.com/global-citizenship?scrollto=what-is-citizenship-by-investment> (accessed 28 March 2023). The OECD has identified over 100 citizenship and residence by investment schemes, classifying as high risk those which give access to a low personal income tax rate on offshore financial assets and do not require an individual to spend a significant amount of time in the location offering the scheme. <https://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/residence-citizenship-by-investment/> (accessed 28 March 2023)
[xiii] Euan Ward and Kate Lyons, ‘Citizenship for sale: fugitives, politicians and disgraced business people buying Vanuatu passports’ The Guardian (London, 15 July 2021) <https://www.theguardian.com/world/2021/jul/15/citizenship-for-sale-fugitives-politicians-and-disgraced-businesspeople-buying-vanuatu-passports> (accessed 28 March 2023)
[xiv] Council of the European Union Press release 8 November 2022 ‘Vanuatu: Council fully suspends visa free travel agreement’ <https://www.consilium.europa.eu/en/press/press-releases/2022/11/08/vanuatu-council-fully-suspends-visa-free-travel-agreement/> (accessed 28 March 2023)
[xv] On the upside, Vanuatu, along with Australia, New Zealand, Iceland and the Solomon Islands, is best placed to survive a nuclear winter and help reboot a collapsed human civilisation: Charlotte Graham-McLay and Tess McClure, ‘Australia and New Zealand best placed to survive nuclear apocalypse, study finds’ The Guardian (London, 9 February 2023) <https://www.theguardian.com/world/2023/feb/09/australia-and-new-zealand-best-placed-to-survive-nuclear-apocalypse-study-finds> (accessed 28 March 2023)
Advocate Paul Beckett
Paul is a Lawyer and Academic, specialising in company, commercial and trust law; banking and fund management; cryptocurrencies and the blockchain; fraud, bribery, white collar crime, anti-money laundering and financial services regulation; commercial arbitration; business immigration; and domestic and international human rights (civil, political, economic, social and cultural rights). Recent publications include 'European Cross-Border Estate Planning' (Isle of Man chapter) (Sweet & Maxwell, London, first published 1995, current edition 2022), and 'Digest of Commercial Laws of the World' (Isle of Man chapter, co-author) (Thomson Reuters, USA, 2016, current edition 2022). His latest book is 'An Anatomy of Tax Havens: Europe, the Caribbean and the United States of America' (De Gruyter, Berlin. Published 6 November 2023). Upcoming is 'Beneficial Ownership and Legal Responsibility: Concealment, Avoidance and Impunity' (Routledge, London/New York. In preparation, publication due Spring 2024).