Comment: The future of international financial centres
Geoff Cook (pictured), chief executive of Jersey Finance, argues that international financial centres such as Jersey, which are well regulated and have demonstrated their co-operation in efforts to curb tax evasion, are not part of the problems that led to the global financial crisis, but are an important part of the solution.
The April 2009 G20 Summit in London was a seminal moment when the whole world focused on global financial stability, banking secrecy and tax havens. Almost a year on, these topics continue to feature in the news as the UK tentatively emerges from the longest recession since records began in 1955.
In Jersey, we have seen no bank failures, no banking stability issues, and no major headline fund failures. Like all centres, we have seen some job losses, and regrettable though they are, we have not experienced the deep cuts seen elsewhere.
We have proven, stable financial institutions, with deep pools of advisory and administrative expertise; we have political and fiscal stability, with high levels of reserves, and the ability to stimulate our economy without recourse to borrowing. We are meeting, and in some cases exceeding, the highest international standards of corporate governance and regulatory compliance. Our recent IMF review makes it clear that Jersey is in the top tier of international finance centres, including those in the G20 and European Union.
There can be no doubt that our reputation with informed commentators has been enhanced through the crisis. Jersey is in good shape – our standing in the global rankings of international finance centres is high, and we will come through the crisis and the global slowdown stronger, leaner and fitter. Contrast this with other centres, which are being shaken by stability issues, fiscal imbalances and governance challenges.
But detractors and the poorly informed have laid at our door the charge that we are responsible for tax leakage, that we are secretive, and that we are poorly regulated, and contribute to financial instability. I contend that any meaningful examination of the facts will not support these charges, and that we have proven beyond any question that we are a co-operative, transparent and well-regulated centre, indeed arguably the best regulated in the world.
The report on British Offshore Financial Centres – a year-long independent review undertaken by Michael Foot, and supported by a team from the UK Treasury – concluded that Jersey is among the best performers of the crown dependencies and overseas territories. The report also made clear that the estimates of tax leakage advanced by our detractors are grossly exaggerated, and that the contribution of Jersey-sourced deposits to the UK banking system, at USD200bn, is both substantial and extremely valuable.
But we are no strangers in Jersey to international scrutiny; we were subject to requests to amend our tax arrangements as far back as the OECD Harmful Tax Competition programme in 1998.
More recently it appears that the EU Code of Conduct Group has indicated that our tax system may not meet with the spirit of the EU code of conduct on business taxation. This is interesting, as the UK had previously indicated our tax system did meet the code’s requirements, especially as we have a diversified tax base including corporation tax, income tax, property taxes, customs duties and a goods and services tax.
Of course we offer benign tax treatment to non-residents, as do a large number of other countries, including many EU member states. It is certain, for example, that the UK and the US could not fund their significant budget deficits without offering tax-free returns to overseas investors.
But we need to distinguish here between tax transparency and tax competition. Jersey is no friend to tax evaders and criminals. We have achieved the highest ratings of any country under the IMF’s Financial Sector Assessment Program inspections, and have been a leading and willing participant in the OECD’s tax information exchange programme since 2002. Last year we filed more than a thousand suspicious transaction reports, and co-operated in over 700 investigations.
Tax evaders should not be able to use jurisdictions to hide non-disclosed wealth. Recent research by Prof. Jason Sharman of Griffith University in Sydney proves that Jersey has a better record of fighting this kind of activity than many larger countries, including the UK, France and the US.
Some commentators have observed that the debate over tax transparency and tax competition looks very much like big countries with large budget deficits (the high tax, high spend, large government countries, and their trading blocs and agencies) seeking to impose their view of the world on smaller, less powerful nations. It is after all much more difficult to keep raising taxes if your citizens are mobile, and can move themselves and their wealth to a more attractive environment.
Given this backdrop it is not surprising that the subject of tax receipts and cross-border activity has come to the fore again, as cash-strapped governments look for solutions.
The truth, however unpalatable, is that the crisis had its roots anchored firmly in debt taken on in the major Western deficit economies.
This had everything to do with central bank interest rate policy and a lack of effective financial supervision, and nothing whatever to do with financial centres such as Jersey.
Jersey competes for business on exactly the same basis as the 70 other countries in the world that offer some kind of benign tax-neutral regime to overseas investors - on a mix of business expertise, political and social stability, modern infrastructure, good communications and sound regulation.
International financial centres act as way-stations, gathering capital from around the world where it is not needed and acting as a conduit for that capital to where it can most effectively deployed. Tax is paid on capital before it arrives in the way-station, and it will be paid after it leaves, as it is invested and put to work. There is just no extra layer of taxation on top of that applied by the originating and receiving countries.
This allows large proximate onshore economies to operate their domestic tax systems, without dislocation from the need to offer attractive tax treatment in their primary tax framework for foreign investment. This activity has been proven to increase economic activity, increase jobs and increase wealth creation, such that a boost to tax take is generated, according to studies by professors Hines, Desai, Foley, Hejazi and others.
It is self-evident that free markets, globalisation and tax competition have all combined to produce stellar growth in world GDP over the past 30 years, pulling countless millions out of poverty. Unfettered capitalism can be problematical, and checks and balances by way of sound regulation are clearly essential.
However, it is important to keep in view that in remedying the global financial crisis, it is the checks and balances which need attention, and that we do not throw the wealth-creating baby out with the bathwater.
The reality is that a hopeful grab for tax will miss the target. Even if discriminatory measures were introduced against international finance centres, they would not see universal adoption. China has reduced its poverty rate from 40 per cent to less than 10 per cent in 30 years, and it knows how important its capital conduits – Shanghai, Hong Kong and Macau – have been to this economic renaissance.
Like water, the flow of mobile international capital may move eastward, following the course of least resistance, as the US and Europe live with the outcomes of the unintended consequences of financial services protectionism. In Jersey, we have already planned for such an eventuality through our market diversification strategy.
Tax competition is good for all countries; it leaves more capital in the wealth-creating side of the economy, acts as a brake on excessive government spending, and provides for greater investment activity, completing the virtuous economic circle.
Given our track record of co-operation, transparency and meeting the highest international regulatory standards, I believe it will be extremely difficult for any international forums, or government, to take discriminatory action against Jersey, and I don’t believe there is any appetite to do so, other than among a few extreme tax hobbyists and non-governmental organisations.
The UK has no interest in undermining our economy, particularly now the Deloitte study has reaffirmed that we are not a source of tax leakage. Research in the Hines report has provided further strong evidence of the significant economic benefit we bring to large proximate economies, including the UK.
The financial crisis has brought home the essential requirement to keep capital flowing to business, whether it be debt or equity. The slowdown in the real economy has principally been caused by a lack of capital, the vital lubricant for all economic activity. The restoration of capital flows is the essential prerequisite for the recovery we all hope for. Centres such as Jersey form efficient conduits and pipelines for internationally mobile capital, facilitating more effective and productive economic activity.
Large international forums, or countries, cannot trample on their own democratic conventions without exposing themselves to the charge of hypocrisy and protectionism, something the G20 has very publicly declared it will not support.
The reason I have great confidence in the future of Jersey is that not only are we not part of the problem with respect to the global financial crisis, we are an important part of the solution.
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