By Martin Roche
Tax domicile has become a frontline issue for business and governments large and small, writes, Martin Roche
In the boardrooms of companies worldwide and in the finance ministries of governments of every size senior people are trying to get to grips with an enormously complex geopolitical problem. Tax domicile. Or to be more precise, let’s simply use the word tax. Tax is a toxic issue. Hardly a day passes without one giant corporation or another arraigned in the court of public opinion accused of tax avoidance or evasion.
Two powerful forces – people and the internet – have come together to catapult tax, domicile and international finance centres onto the media stage almost everywhere. The peoples’ case is that they have seen their real wages fall and their public services slashed in the wake of the finance crash of 2008 and through it all they’ve paid their taxes and done their civic duty. They contrast their behavior with what they see as the very rich, big business and dodgy dealers avoiding tax and public scrutiny by using tax havens, banking secrecy and labyrinthine corporate structures to move money from place to place to minimize scrutiny and cut tax bills
How corporations and the super-rich move and use their money and power mattes to every man and woman on the planet. It is a subject of fundamental importance everywhere and is central to how much tax nations can raise and spend in their economies, to the global flow of capital and investment, to combating financial crime and to fighting corruption.
Faced with the righteous anger of the ordinary hard-working voter, the politicians have opted to hold lots of worthy conferences. Big businesses are burning the midnight PR oil to find a strategy that might save reputations, market share and shareholder value.
And in the heart of the storm are finance centres from Delaware to Bermuda, from the British Virgin Islands to Monaco. It is important to understand that not all tax havens are disreputable and many operate with legal structures and regulatory and supervisory regimes that are as good as and sometimes better than you’d find in Hong Kong, Frankfurt, Zurich or New York.
Part of the problem is the word “offshore.” Offshore has become short hand for lax standards and the authorities turning a blind eye to the dealings of fraudsters, cheats, terrorists and crooks of ever nature. The reality is that offshore is actually, mainly, a description for tax rules that give one jurisdiction a comparative advantage over another, which can as easily include a great financial capital like London as Jersey or Bermuda. And when it comes to transparency the vast majority of premier league finance centres – for example, London, New York, Malta, Guernsey, Jersey, Bermuda, Mauritius…..it’s a long list – have signed up to and adhere to international conventions on exchange of information, anti-money laundering and “Know Your Customer” procedures that allow the good to get on with their business and the bad to be, at least most of the time, shunned.
Public opinion leading
Very few people understand that tough rules exist and are taken very seriously in almost all jurisdictions. The problem is that hardly anyone is telling the positive story about finance centres. As a result, the vacuum is filled only with the negative
The public in the big economies is growing universally hostile to small finance centres and the politicians – even those inclined towards a global free market in tax competition – are being led by public opinion. Leaders of industries grow increasingly concerned that a worldwide attack on reputation can have a devastating impact on business performance and relations with governments.
Caught in the spotlight are the world’s small state finance centres. Most, though not all, are small islands and they can be found worldwide. Many have built finance into the cornerstone of their economies. The industry provides thousands of highly paid jobs and thousands more in support sectors like law, accountancy, IT, travel and hospitality. Those jobs and the money they bring are critical to the economic health of many small island economies. Financial services have moved numerus islands and small territories from relative poverty to long-term affluence, but nothing in life is guaranteed (expect perhaps for death and taxes).
Now, one of the problems of being a small country is that it can be very difficult to stand up against big countries, particularly when those big countries are facing voter pressure and economic uncertainty. If the G8 nations combine with the EU and have the support of the IMF and the OECD the global rules on tax, transparency, regulation and supervision can be easily changed and you can bet your bottom tax free dollar that they won’t change to suit the small guys.
Big change in the wind
The many wholly respectable and well managed finance centres need now to seriously think about how and what they communicate to the world. Their industry and political leaders have to ask and answer some hard questions. They have to demonstrate how they benefit global society. They have to show how the monies that pass through their banks and hedge funds is used to fuel global enterprise. Perhaps most important of all is that the honest, upright and well-managed small finance centres have to show how they are different from the places that see only money and have no moral compass.
They have to give people permission to believe that that the world is better off with small finance centres than without them. It will take money, time, patience and tenacity. The alternative is to do nothing and hope that the world will leave things are they are. Having been involved in advising finance centres and finance businesses for over 20 years, my bet is that big change is in the wind.
Martin Roche has advised the governments of two of the world’s premier league finance centres on global positioning and managing reputational challenges. He created and managed campaigns that have attracted over 50,000 finance jobs and has advised globally famous corporate finance businesses. He is a partner in the geopolitical consultancy, Etoile Partners and a version of this article first appeared on its website at www.etoilepartners.com