Foot review of OFCs recommends taxation

A review of the long-term opportunities and challenges facing the UK’s offshore financial centres has found that OFCs are beneficial to the UK, but recommends improved planning and the diversification of tax bases to make the Crown Dependencies and Overseas Territories more resilient against future economic shocks.
 
In terms of the current economic crisis the report suggests that the negative impact on public revenues was particularly significant in Cayman, because the sectors most hit by the economic decline, tourism, construction and financial services, accounted for a larger share of the economy in Cayman than in the other analysed jurisdictions.
 
However, the Foot report also singled out the previous Cayman Islands government for its public spending policy, lack of planning and grossly overestimating government revenues.
 
Mr Foot concludes that the global downturn should serve as a reminder to implement more robust economic planning and fiscal control measures, including timely and accurate measures of public revenues and expenditures.
 
Reiterating the position of the UK Foreign Office, Michael Foot recommends that offshore financial centres should develop a diversified tax base.
 
However, any decision to broaden the tax base would have to be considered within the context of international tax competition, he argues.
 
Commissioned by Foot’s Review, Deloitte conducted an evaluation of the role that taxation plays for the business model of offshore financial centres. It also researched the impact the introduction of a corporate tax or a value added tax would have.
 
Using the examples of the Cayman Islands and Jersey in its high-level analysis, Deloitte comes to the conclusion that there was a “compelling case” to introduce VAT to broaden the revenue base.
 
With regard to a corporate tax the accounting firm noted the “substantial direct and follow on impacts” that the reduction of the financial services sector, as a result of taxation, would have for the entire Cayman economy.
 
It finds the introduction of a corporate tax “may lead to an exit of companies where relative tax liabilities exceed the cost of relocation (including loss of benefits from locating in Jersey and the Cayman Islands).”
 
An increase in tax liabilities for domestic and remaining companies in turn could result in reduced investment and output effects, Deloitte writes.
 
Still Deloitte asserts “the downside of a properly-constructed best practice corporate tax system would appear to be relatively limited”.
 
The accounting firm assumes that some multinational companies would be able to offset the tax against domestic tax liabilities.
 
Crucially, however, the report does not suggest whether and how much additional revenue could be generated through new taxes.
 
Deloitte concludes that Crown dependencies have industry bases that are sufficiently diverse to raise “worthwhile levels of corporation tax”, but that this was not necessarily the case in some less diversified economies in the Overseas Territories.
 
Moreover, the Report admits that administrative problems, such as the lack of a system to collect the taxes, may constrain the development of these tax systems.
 
Deloitte’s analysis also touched on the importance of Crown Dependencies and OTs for tax avoidance by UK corporates.
 
Deloitte estimates that the amount of unpaid tax was likely to be significantly lower than what has been suggested in previous studies.
 
The accounting firm finds that British offshore financial centres “provided net financing to the British banking system of $332.5 billion in the second quarter of 2009.”
 
It showed that by using nearby low tax jurisdictions foreign investors were able to lower the ‘hurdle rate’ of return required to invest in high tax jurisdictions.
 
The report therefore concluded that “the UK might be overall better off with them [Crown Dependencies and Overseas Territories] in place on the grounds that their existence allows more investment to flow to the UK than would otherwise be the case”.

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