FATCA Won’t Kill Offshore Financial Centres

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US Foreign Account Tax Compliance Act (FATCA) laws and moves to make cross-border tax more transparent do not spell the end for offshore financial centres, argue industry experts.

Offshore financial centres have laboured under the tax haven tag and have had to come to terms with a new world order due to pressure from the US to sign up to FATCA.

However, many offshore financial centres are halfway houses for expats and businesses who cannot manage their affairs under conflicting rules of different tax regimes.

The argument comes from Andrew Morriss, dean of Texas A&M University School of Law.

Global tax law standards

He explains that although a new global standard for tax law is emerging, three factors will still allow offshore financial centres to flourish.

  • Offshore financial centres like the Cayman Islands, the Channel Islands and Hong Kong are not only tax centres, but also manage business and trading transactions like corporate mergers between US and British companies
  • Investment by organisations based in offshore financial jurisdictions often ends up back in countries like the US and Britain – money in the UK routed through Jersey generated £2.3 billion in tax each year and supports 180,000 onshore jobs
  • Most offshore financial centres have well-established regulatory and legal processes that allow companies to base their administration in a trustworthy place while doing business in countries with less robust and certain financial rules

Morriss points out that investment from China flows through the British Virgin Islands and Hong Kong and investment cash heading for Africa is routed through Jersey.

“These arrangements are not about evading tax but giving investors some degree of certainty about how disputes will be handled by the courts,” said Morriss.

Move to specialisation

“Many of these offshore financial centres work in unique niches and specialise in narrow financial and legal areas. Developments for trusts, investment funds and insurance often arise from these centres.

“The same happens onshore – for instance the US state of Delaware is well-known to have a specialisation in corporate law.”

Morriss sees the future of offshore financial centres as developing even narrower specialities as laws in other countries change.

He gives the example of Jersey revising trust laws to take advantage of court rulings in the UK to stop trusts retrospectively changing trustee decisions in the event of mistakes.

The downside, adds Morriss, is the costs of monitoring and doing business with an offshore financial centre will rise because of the advent of new reporting laws, like FATCA, which cost significant amounts for public and private sector compliance.