Thursday, April 23, 2009

HM Treasury report sets out challenges and opportunities for British overseas territories

British offshore financial centres including Gibraltar could benefit from the global economic downturn by seeking new business while meeting tight standards on tax transparency, according to a preliminary report published by the UK Treasury yesterday.

The opportunities could even include management of the toxic assets that led to meltdown in the banking sector, the report suggests.

But in targeting new areas, British jurisdictions must ensure that they comply with international regulatory standards, it added.

Brian Reyes, writing in today's Gibraltar Chronicle says the report was immediately damned as "deeply disappointing” by British unions". They said the review failed to address the negative impact of offshore jurisdictions on the world’s economy.

The Treasury's progress report by Michael Foot, a former director of the Bank of England, sets out the challenges and long-term opportunities for Britain’s overseas territories.

Mr Foot was asked by the Chancellor of the Exchequer, Alistair Darling, to conduct a deep review at a time when the global financial crisis has put offshore jurisdictions under close international scrutiny.

"Meeting regulatory standards is not only important for the integrity of the financial system, but also for attracting financial services business from centres which are unable to do so", the report said. It added:

"Recent developments, particularly in the run up to the G20 London Summit, have moved tax issues up the political agenda.

The renewed focus on tax transparency and tax avoidance will have implications for the financial centres covered by the Review.

The growing focus on tax avoidance and the emergence of national initiatives such as the US Stop Tax Haven Abuse Bill will continue to shape international opinion in the short to medium term.

Each centre will need to take this into account in balancing the real or perceived competitive advantages of current tax regimes with the need to generate sufficient revenue to support its domestic economy."

But the UK’s Trades Union Congress said Mr Foot should have adopted a tougher approach to the review.

"The PM and Chancellor have made it clear that they want to ‘outlaw’ tax havens and the evasion and avoidance they promote", said TUC general secretary Brendan Barber in a statement.

"But this progress report suggests that this leisurely review is more focused on helping tax havens through their current financial difficulty than addressing the serious threat they pose to the global economy.

The Treasury needs to get a grip of this review and decide whether it is flowing with or against the grain of world opinion which has turned so decisively against tax havens since the G20."

Much of Mr Foot’s interim report focuses on the need to explore ways in which financial centres can ride out global economic strife and perhaps even grow from it.

He said the challenges for Britain’s offshore centres would be particularly acute in the event of a significant and protracted downturn in business in the financial sector. That is a key point because many of these financial centres have been very successful in attracting business and, as a result, are heavily reliant on this sector for revenue and employment.

"In relative terms, that reliance is much higher than in the UK, in some cases over five times higher", the report said.

"Added to that, the policy tools the financial centres have at their disposal to deal with economic volatility are generally more limited than those available to a sovereign state."

But Mr Foot was also clear about the opportunities that lay ahead.

"Even in a downturn, new opportunities may arise to offset retraction in certain areas of financial services business. Managing toxic assets from the banking sector may be an example of one such area", the report said.

"In other areas of business such as property and casualty insurance, underlying profitability remains strong.

But, because of global events, the business environment for the foreseeable future is likely to be more difficult than the financial centres have been used to."

Earlier this month, following a letter from British Prime Minister Gordon Brown to the UK offshore and Overseas territory jurisdictions including Gibraltar, "warning them to meet international transparency standards", the Gibraltar Government said:

Gibraltar is well advanced in the process of signing up tax information exchange agreements and fully expects to be in the category of countries that have fully implemented the internationally agreed standard, by the time that the OECD issues its next progress report in November 2009."

Further to the HM Treasury report published yesterday, Mr Foot is welcoming feedback from "interested parties". His interim report, which includes details of the consultation, can be viewed and downloaded here: British Offshore Financial Centres Report - HM Treasury.