Offshore industry report paints a different picture

| 10/11/2009

(CNS): A new report from the Society of Estate and Trust Practitioners (STEP) examining the roll of offshore finance in the global economy paints a very different picture to the one currently making headlines. Not surprisingly, the industry body has found that what it calls international financial centres (IFCs) have a very positive impact on the world economy. Contrary to current modes of thinking, the report concludes that not only do IFCs not divert tax revenues away from the onshore economies, they help the larger economies generate more money which they can tax.

The report, International Financial Centres and the World Economy, which was commission by the international body that represents thousands of professionals working in the area of trust and wealth management around the world, was written by an academic from the University of Michigan and NBER. James R. Hines Jr. uses a considerable amount of academic research in his study rather than anecdotal evidence about the effect IFCs have on the rest of the world.

While the report has an obvious bias because of its backers, the use of empirical evidence affords the findings certain credibility and adds fuel to the argument that IFCs are not the source of all evil but are serious players in the global economy. The report suggests that the evidence flies in the face of currently held assumptions about offshore finance.

“IFCs occasionally raise concerns that they may erode tax collections, divert economic activity, and otherwise burden nearby high-tax countries. A large body of economic research over the last 15 years considers these issues, with findings that point sharply in the opposite direction: the evidence strongly suggests that the policies of IFCs contribute to investment, employment, and the efficient functioning of markets and government policies in other countries,” Hines writes in the report.

According to his findings, the evidence reveals that IFCs are not the locations of choice for anonymous accounts and other vehicles for international tax evasion but it is the large countries such as the United States and the United Kingdom instead that attract those looking for those services.  Hines even suggests that the low tax rates available in IFCs contribute to a form of tax competition that increases the efficiency of tax policies elsewhere by distinguishing between highly mobile international investments that are very responsive to tax rate differences, and less mobile domestic, investments that large countries are able to tax at high rates.

“The findings of this research point to conclusions very different from those on which the concerns about IFCs are based,” he writes. “Virtually all of the complaints about IFCs appear to have little economic merit, with the evidence instead pointing to the benefits that IFCs confer on other countries. Far from eroding the tax bases of high-tax countries, there is evidence that IFCs improve the operation of the tax systems of high-tax countries, thereby contributing to their ability to raise tax revenue.”

Hines says that IFCs promote rather than depress economic activity elsewhere, but he says few people ever take the time to look at the evidence that favours offshore centres, and hence the tenacity of the opposite image. “Wading through this material can be a dreary business, which makes it understandable that many interested observers instead proceed on the basis of informed intuition together with snippets of anecdotal evidence,” Hines writes.

Citing the work of Jason Sharman, who approached service providers in 22 different countries about the possibility of creating shell corporations and anonymous bank accounts, he says Sharman failed to establish any in commonly identified IFCs but was successful in a number of onshore locations.

While Sharman was turned away in the Bahamas, the British Virgin Islands, the Cayman Islands, Dominica, Nauru, Panama, and the Seychelles, he found OECD countries, including the United States, the United Kingdom, Spain and Canada, to be very helpful in his enterprise. Hines argues that as the same approaches were used in each case and Sharman has full knowledge of when he was and was not successful, the evidence is powerful.

In his research Hines concludes that IFCs contribute to the operation of economies worldwide by stimulating foreign direct investment in high-tax parts of the world; disciplining financial markets in other parts of the world and promoting good governance and accountability. He also argues that the evidence indicates that IFCs contribute to financial development and stability in neighbouring countries, encourage investment, employment, and other aspects of business development in high-tax countries, have salutary effects on tax competition and enhance economic growth elsewhere.

“This evidence appears to be quite robust, and suggests a rather different interpretation of the IFC experience than some that appear from more casual readings of the history,” Hines says. He goes on to describe IFCs as pressure valves, assisting the policies of their high-tax neighbours by letting off economic steam when the pressure becomes too great. He also noted that no economic limits resulted in greater innovation, production and prosperity.

Likely to be music to the ears of those engaged in the argument to persuade the onshore OECD country’s of the merits of jurisdictions like the Cayman Islands, Hines says that the economic successes of international financial centres does not threaten the prosperity of other parts of the world but appears to enhance it.

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  1. Anthony Travers says:

    The true answer to the question is slightly more sinister.Most financial reporters operate in a symbiotic relationship with the press departments of the Treasury or relevant Governement department .The understanding is simply that  in exchange for afavoured position with respect to leaked or early information the reporter will print precisely  he or she  is told .Failure to do so will place the jounalist outside the inside track and a day late with the story  .Thus the Guardian was able to headline "Cayman Bankrupcy " before the FCO letter had been reviewed in the Cayman Islands and with no pretence at obtaining an on the record rebuttal.In this world the public relations machines of Governments are able to advance almost any agenda unless and until they are met with instant and constant  rebuttal that is evidently sound. That is indeed where Cayman Finance has made a difference and will continue to do so.It is now routinely the case that certain journalists who have been made aware of the facts and the typical distortions with which we are familiar  will check their stories with Cayman Finance  prior to publication  with a view  to providing a more balanced opinion.There comes a tipping point in this engagement  where not even the most extreme of journalists is prepared to be in the minority in supporting a discredited mantra regardless of its source .The more recent Guardian article is an indication of the changing attitude.. 

  2. Anonymous says:

    CNS, thank you for publishing this news story.  Sadly, not many can see past the smoke screens that have been placed to block the view of the many and I thank STEP for offering another opinion.

    • Anonymous says:

      What I do not understand is why, when the evidence is so clear and so readily available to all, the international press has turned a blind eye to it and just parroted the political rhetoric coming from the US, UK and other G20 nations. 

      I guess the story is just not ‘sexy’ enough for the media to really bother investigating.

      • Anon says:

        Sadly you are right. The attention span of the press is very limited and their interest restricted to reporting on only the most juicy, scandalous and shocking stories possible. Boring stories with no bite rarely get a mention.

        However with this report, together with the tireless work of people like Mr. Travers and Premier Bush, plus the countless voices of other practitioners in the business will eventually change perceptions. I think it is changing already.

        Amongst all the noise out there, has anyone else noticed Messrs. Obama, Brown, the OECD, FATF etc. etc. have stopped with their wild acquisitions directed towards the offshore jurisdictions? Even the Tax Justice Network has finally pointed out the truth about Delaware.

        A new renaissance is about to begin for the IFC’s.