Channel Islands Banking
Of course, Guernsey’s regulatory reputation has never really
been up for debate. Only a handful of centres - Switzerland, Luxembourg
and Jersey perhaps - could claim comparable anti-money laundering
reputations.
Now though, a new threat is emerging for jurisdictions like
Guernsey. Some believe supranational organisations, such as
the OECD, threaten the island’s future as a viable financial
services centre.
When the OECD announced its list of centres with harmful tax
practices, it gave them until July this year to commit to reform
- or face the sanction of enormous withholding taxes. But with
two months to go, there has been no public statement from Guernsey
on whether it will change its tax practices.
Channel Islands Banking & The OECD
The OECD’s main complaints against offshore centres are discriminatory
tax regimes and lack of effective exchange
of information. On the tax front, Guernsey has a number of
tax advantages for foreign companies. Basic tax rate for individuals
and domestic companies is an across-the-board income tax rate
of 20 per cent.
However, companies based on Guernsey that are beneficially
owned by non-residents and trade outside the island can avoid
paying tax in a number of ways.
They can, for instance, become an ‘exempt company’,
and pay just £600 tax a year. And if rules outside Guernsey
force a company to pay Guernsey tax, the company can become an International
Company and elect to pay tax at between 10 and
30 per cent.
Channel Islands Banking - Banks
Banks also benefit from earning deposit interest on a tax-free basis.
Get rid of these preferential tax rates and there is less reason for
financial services companies to set up on the island, or for investors
to go there. If centres such as Dublin (which promises it
will adopt 12.5 per cent across-the-board tax) keep lower corporate
tax rates than Guernsey, the relative costs will make Guernsey
increasingly unattractive for business and consequently investors.
The other area facing reform is information exchange. At present
Guernsey is regulated to the same standards of confidentiality as
any other financial centre. But the OECD and EC are demanding an
upgrade of these standards for offshore centres.
Channel Islands Banking And Offshore Centres
Current standards require an exchange of information between countries
for companies that are facing investigations. Now, the OECD is calling
for offshore centres to pass on information ‘en bloc’.
Otherwise, investors in non-compliant centres will be forced to pay
35 per cent withholding tax until 2003. If Guernsey is forced
to compromise on either tax equality or information exchange, it
would see any potential tax evaders flee the island.
Such companies and people would find their financial accounts closely
scrutinised and be forced to move elsewhere. Regardless of the changes
it ends up adopting, Guernsey can only suffer if it adopts standards
that adversely affect client confidentiality, which other countries
do not. Switzerland, for instance, has a withholding tax, yet most
of its banking business is fiduciary, which is not subject to a
withholding tax. So Switzerland would lose less than the likes of
Guernsey.
Channel Islands Banking & Davies of HSBC
Davies of HSBC thinks the problems are being blown out of proportion:
“The only danger is that people in these EU meetings become
too outspoken. Guernsey prides itself on having high standards and
it will maintain those standards. “Regarding exchange
of information, there is a system whereby [information exchange]
can take place already, albeit through the courts. As long as
we have a level playing field, we will be OK.”
Durkin agrees: “It is almost certain that Guernsey will
not adopt a unilateral approach against the OECD, or against
the consensus view of the other major offshore centres, but
certainly wishes to see a level playing field across the worldwide
financial community.”
Channel Islands Banking And Guernsey's Position
Guernsey’s position as a crown dependency is important here.
It means that the island cannot be forced to adopt whatever measures
supranational bodies such as the OECD suggest, because the island
is only connected with the UK through the monarchy. The island therefore
has a degree of independence that will be important in maintaining
the level playing field it needs. Though the threat may be
small, Davies says there is a danger that investors will be forced
to leave if Guernsey comes out worst in the wash.
“There is a faint danger that the impact of the [OECD] demands
may lead to investors leaving, but all we want is a level playing
field,” he says.
Channel Islands Banking & The OECD
“This is quite an emotive issue. The OECD’s requests
are all areas of concern for Guernsey as well as the other offshore
centres,” he admits.
However, the GFSC is working closely with all parties concerned
to address this.”Davies is equally confident in the island’s
regulatory authority: “I don’t think we will get
this change until the long term. There will only be decisions
on the issues that everyone agrees to.
So investors shouldn’t
be alarmed about exchange of information.”
The main threats are Switzerland and Luxembourg. Switzerland, similarly
to Guernsey, is not part of the EC and is determined to protect
its own interests. But Davies reckons Switzerland and Guernsey are
targeting different markets and whatever transpires between offshore
centres and supranational bodies, Guernsey will retain its niche.
Channel Islands Banking And Switzerland
“Generally speaking, Switzerland is recognised as being a very,
very expensive place in which to set up an international business
and doesn’t benefit from being in the EU. Guernsey has its own
specialisation. We focus on the offshore captive insurance market,
and it is very easy for people to establish businesses here.”
The ramifications are hard to predict and conclusions difficult
to reach. “There are too many variables to include and the
speculation may turn out to be entirely unfounded,” says Durkin.
“What is clear is that there are testing times ahead for all
offshore centres and it will be down to the GFSC to ensure Guernsey
doesn’t fall behind the competition.”
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