So which tax haven should you use?

Richard Murphy considers whether there is such a thing as a ‘safe’ location for offshore investment.

The last year has been turbulent for tax havens. The Liechtenstein debacle cracked open its secrecy, at least to some degree. Switzerland has suffered the same fate as UBS' illegal activities in the USA have exposed the whole Swiss banking industry to risk. The Isle of Man and Guernsey have seen banks fail either without investor protection, or with funds available for that purpose being unequal to the task suggesting any compensation won't be repeated in future. And amongst all this the UK government has announced a review of regulation in the territories for which it is responsible; the EU has announced substantial reform to the Savings Tax Directive and in the US major reform is expected as Barack Obama is expected to enact the Stop Tax Haven Abuse Act to which he gave his name when a Senator.

This gives the tax adviser making use of offshore a considerable problem. Where is a safe location where the client should not suffer loss and the tax practitioner a claim for offering inappropriate advice on the place to locate a company, trust or investment?

The reputation of many of the offshore locations is low at present: there is evidence to suggest funds are leaving some of those that publish data on balances held. This seems true of Switzerland and the Channel Islands, for example. The Isle of Man has suffered a loss of reputation as a result of the failure of Icelandic banks located there, and Cayman knows it is the focus of US attention, whether it likes it or not and rumours suggests this is impacting on business.

Does that mean that, as some suggest, that Dubai and Singapore are the places to go? Singapore has the reputation of being dedicated to secrecy, of being impregnable (still) and being resistant to all pressure for improved access. Dubai, in contrast, is the 'new kid on the block'. It is seeking to emulate Singapore, but its own economy is already showing signs of volatility in the face of the onset of recession. Questions about its sustainability arise as a consequence, and to be candid despite all its attempts to promote itself, it is not everyone's idea of a perfect holiday destination or place to visit.

The accepted conclusion is that Singapore might be the place to go. Certainly the Swiss seem to think so. There is little doubt that much of the activity traditionally associated with that country is now being moved by the likes of Credit Suisse and UBS to Singapore because it now offers the secrecy they are used to in what appears to be a stable political environment with ferocious laws to deter whistleblowers.

But can even Singapore stand apart from the move towards openness and accountability that is being demanded by places like the USA? The EU has also tried to get it to join the Savings Tax Directive, albeit to receive in response a pretty resounding rebuff. Is though any place really immune from enquiry of the sort many offshore clients resent? And given the change of attitude that many tax authorities (led by the US – where a presumption of guilt on the part of the offshore user will be built into law if the Stop Tax Haven Abuse Act is passed, with the onus of proof being on the taxpayer to prove this wrong) – is it now worth advising anyone to use an offshore structure?

My own position on this issue is probably well known, but the questions I ask are, I hope as objective as I can make them. They arise from an e-mail I got recently from a person who had read my blog. The person was one of the 8,000 or so estimated to have lost as a result of the failure of Kaupthing Singer Friedlander in the Isle of Man. He asked “How do you fix all this [mess] without mortally wounding innocent people?  There is no shortage of financial advisors as well as regular accountants who actively promote the Isle of Man (and others of course). Who bothers to do lots of independent research if you are given advice from your accountant? Any change has to take account of this, surely”.  

The implication was clear: this person had been told to follow a strategy by an accountant which the accountant probably thought had remarkably low risk attached to it. And yet loss arose. Of course the accountant will argue that it was unforeseeable, and yet any accountant who has acquainted themselves with offshore banking will know that few of the locations offering such services have any chance of offering effective investor protection in the event of anything going wrong: the banking assets to GDP ratios in these places are ludicrous. It’s thought to be more than 80 to 1 in Jersey, higher still by some way in Cayman.

This is the point where tax ceases to be relevant and risk becomes paramount. It may not an issue many advisers thought of having much consequence with regard to plain vanilla offshore banking to date. But the focus of just about everything to do with offshore is changing, and the risk profiles, whether of having a safe investment or of avoiding investigation and more are increasing.

In that case it is a fair question to now ask which tax haven an adviser should recommend. It’s an equally fair point to speculate on whether it is really safe to recommend any.

Article Added Saturday, 24 January 2009

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