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Looking forward: An industry on the move
Transcript of Looking forward: An industry on the movedownload.myformations.vistra.com/assets/files... ·...
Looking forward: An industry on the move
1
Contents2 Foreword
3 Introduction
Key Trends
4 1. Big picture: Bruised but not beaten
8 2. Jurisdictions: Defensible market position?
12 3. Regulation: A heavier burden
18 4. Customers: From China to the world
24 5. Market drivers: Less about tax planning
30 6. Service providers: Coming consolidation
34 The future state of the industry
37 Summary
38 Methodology
40 Acknowledgements
2
Foreword
Are we beginning to see the end of the storm clouds? Has the industry weathered the convergence of external pressures to find itself more robust and confident to withstand the changes being forced upon it?
Rewind 12 months and the industry was facing perhaps its greatest threat in decades – an existential threat you could say. The International Consortium of Investigative Journalists (ICIJ) had published the so called offshore data leaks; a handful of international banks were making it increasingly difficult to open bank accounts using key jurisdictions; the moral debate raged about multinationals not paying their “fair share” of tax regardless of the legal soundness of their approach; and the issue of tax transparency and public registries of beneficial ownership were debated at the G8 summit.
A year on and a sense of optimism is beginning to return. The pervading mood is that, despite the negative publicity, the offshore industry is integral to the concept of globalisation and continues to play a crucial role in the financial supply chain.
Now in its 5th year, the “Offshore 2020” project continues to look into the key trends and issues facing the industry. We are delighted by the growth in participation with approximately 300 senior level stakeholders taking the time to share their views. It is particularly pleasing to see that respondents are now split roughly 50-50 between Asia and the rest of the world, giving the survey a true global perspective.
We are confident that the “Offshore 2020” research remains the key annual temperature check for the industry at large.
An encouraging development in the past 12 months is the more confident, assertive approach the industry is taking against much of the misleading and at times downright biased case made against it. Rather than remaining below the parapet, industry participants are becoming more forthright in articulating their value to the global economy.
Given the initiative has now been running for five years, we thought it appropriate to examine some of the trends that have taken shape and extrapolate them into a series of predictions that offer a picture of the offshore industry in 2020. Some of these predictions may be obvious and others you may disagree with, but hopefully they will provoke dialogue about the opportunities for those willing to embrace change.
We also wonder at what stage certain G8 nations will realise that the so called trillions of dollars “stashed” in a range of Caribbean islands is a misguided fallacy, designed to take away attention from the real issue of economic mismanagement within their home countries.
A final thought: one day, the industry might even get some credit for the role it plays in facilitating foreign direct investment. These are the capital inflows that drive economic growth, fuel job creation, and ultimately lift people out of poverty in emerging markets. Wishful thinking? Most likely, and we’re not holding our breath in anticipation of the recognition!
We trust you enjoy the read and welcome any feedback on how the report can be improved.
Martin Crawford Chief Executive Officer
Jonathon Clifton Managing Director, Asia
Simon Filmer Managing Director, ex-Asia
3
Introduction
The offshore industry continues to weather a political storm, but is perhaps emerging all the stronger for it. Pressures that seemed almost irresistible 12 months ago have been withstood, and then there is succour from the fact that demand for offshore structures remains robust. No jurisdiction or service provider can sway a non-governmental organisation (NGO) with entrenched views of the industry, but they can convince customers of their ability to build best-in-class financial services infrastructure.
The regulatory development uppermost in most people’s minds is the US Foreign Account Tax Compliance Act (FATCA), which is designed to encourage foreign financial institutions, including offshore investment vehicles, to disclose the identities of US investors to the Internal Revenue Service (IRS). But it sits at the top of a list of initiatives that may yet converge into a single set of standards for the industry.
The Organisation for Economic Cooperation and Development’s (OECD) ongoing push for greater transparency; the Multilateral Convention on Tax Matters; the Common Reporting Standards programme; the prospect of wider adoption of FATCA as well as FATCA itself. Taken together, they will increase the cost of business as jurisdictions and service providers are obliged to invest in the people and systems required to meet compliance standards.
This is not necessarily a bad thing. Overregulation remains a key concern – the call for publicly accessible registers of beneficial owners is the latest example of how political zeal can be counter-productive – but obliging the industry to conform to a higher standard is essential to its long-term health. Although higher costs can be passed on to clients, they will eat into service providers’ profit margins and encourage consolidation. Those able to offer a genuine value proposition will prevail and prosper; and use the proceeds to invest in better infrastructure which will reinforce their competitive advantage.
Jurisdictions face a similar battle to prove they are relevant in an increasingly complex commercial environment. A number of offshore financial centres have already carved out niches for themselves of varying sizes and across various disciplines – in some cases this is the result of years of effort and it is difficult to see them being supplanted. Others must identify a unique selling point and invest in it, or face extinction.
Part of staying relevant means engaging with China, still the fastest-growing source of new business yet a constituency that is now looking to put capital to work overseas as much as find ways to bring it in. This amounts to a more global opportunity, which can be tapped by industry participants almost irrespective of their location. However, it also emphasises the importance of providing a multi-jurisdictional service, which brings us back to the innate advantage of being a global player with standardised and reliable systems and processes.
Price remains a factor for customers, but it is not the only one. Service providers must be able to cope with the evolving needs of clients, whether this means hiring people capable of finding tax efficient paths through a regulatory jungle, investing in IT hardware that can cope with the workload brought by automatic exchange of information, or having the bandwidth to help an investor establish substance in Luxembourg as well as Hong Kong.
And it is worth reminding the wider world that – in spite of what politicians might say – the majority of these needs have more to do with facilitating international trade and asset management than traditional tax planning.
4
BRUISED BUT NOT BEATENBIG PICTURE1The offshore industry remains a target for politicians, investigative journalists and non-governmental organisation (NGOs), but it appears to be getting used to the attention. Indeed, steps are being taken – from ensuring business practices are whiter than white to engaging and educating stakeholders – to address the public relations problem. It remains to be seen whether this will have a meaningful impact.
Twelve months ago, this survey offered a snapshot of industry sentiment amid the fallout not only from the leak of records identifying the owners of assets held offshore but also pressure from the G20 group of nations on multinationals perceived to be shuttling money around the globe to avoid tax. And all this was on top of the continued attentions of the Organisation for Economic Cooperation and Development (OECD) and its transparency drive.
These issues are still pertinent. It was only in July that details of a cache of files – this time from a Jersey-based wealth management firm – entered the public
domain after being leaked to journalists. The gleanings identified celebrities, sportspeople, aristocrats and – in some dark irony –
political donors with interests offshore. Opening a bank account for a company has become harder as lenders
tighten up on oversight while automatic exchange of information between jurisdictions has gone from
being a possibility to near nailed-on certainty.
5
And yet, demand for offshore structures remains robust, suggesting that a majority of investors are not letting political attacks and bad press get in the way of their practical wealth management and other needs. New incorporations in the British Virgin Islands (BVI), Cayman Islands, Seychelles, Samoa and Jersey are projected to reach 99,000 in 2014, up from 97,000 in 2013 [Figure 1]. This would continue a run that has seen incorporations exceed 95,000 in each of the past three years.
“Global” offshore jurisdictional new incorporation volumes (Thousand)
FIGURE 1
Remark: 2014 (Projected) is estimated by using latest jurisdictional actual volume. Jurisdictions consist of: The BVI, Seychelles, Cayman Islands, Samoa and Jersey (Delaware & Guernsey are excluded in this case).
2014(Projected)
2009 2010 2011 2012 2013 2014P
73
88
96 95 9799
OIL’s in-house calculations point to steady incremental growth in new incorporations, with a corresponding trend to higher value work. The attractiveness of mid-shore jurisdictions – which are well-equipped to handle more complex demands and offer reputational comfort – supports this trend. New incorporations in Hong Kong are expected to surpass 202,500 this year compared to 173,561 in 2013 [Figure. 2]. While activity in Singapore is likely to be flatter, with incorporations dropping to around 57,000, this may be a result of the regulator’s efforts to position the jurisdiction as a premium location, with tighter restrictions in the private banking sector.
Hong Kong/Singapore new incorporation volumes (Thousand)
FIGURE 2
2014(Projected)
2014(Projected)
2012 2013 2014P
SG
HK
150
34
174
6657
203
Source: OIL
Source: OIL
6
Industry participants appear to have reclaimed some of their bullishness following a challenging 2013. Last year, 42% of respondents in the “Offshore 2020” survey agreed that the battle for public opinion had been lost. Today, the “yes” camp has fallen to 26% with 13% uncertain. It is worth noting that in both 2013 and 2014, a similar proportion of respondents – 58% and 61% – denied that the industry’s reputation was beyond repair.
More than half of the sample said there would be no change in demand for offshore services but the pressures weighing on the industry are likely to result in customers switching between jurisdictions [Figure 3]. Last year, 46% were of this view. A smaller minority – 41% – believe overall demand will be adversely affected and only 7% expect no change in the underlying market. Change is coming but the consequences don’t have to be fatal, appears to be the message.
Has the dynamic offshore industry environment (data leaks, G20 and OECD regulatory pressure, changing banking policies, etc.) undermined client confidence and adversely affected the demand for offshore companies?
FIGURE 3
No, there will be no change in the
underlying market
Yes, it will have an adverse impact on overall demand
for offshore companies
No change in demand, but it will likely
result in switching between jurisdictions
2014
2013
41%
38%
52%
46%
7%
16%
As to how the industry can best address its image problem, the most heavily endorsed solution was professionalism and training, effectively seeking to put the industry beyond reproach [Figure 4]. Interestingly, lobbying of governments and regulators and media outreach were ranked as more important steps than the certification and licensing of offshore service providers and coordination with other industry participants.
Industry responses in addressing its image problem
Source: OIL
FIGURE 4Industry professionalism and training
Lobbying of governments and regulators
Public relations in the media
Certification & licensing of offshore service providers in markets where they serve clients
Coordination with other industry participants (e.g. banks)
Independent industry and market research
Engagement with the NGO sector
4.2
4.1
4.0
3.9
3.7
3.6
2.9
Less Important Most Important
Partner at a law firm, UK
“The battle for public opinion has not been lost ….. but the industry needs to get on the front foot”
Source: OIL
7
Given the mixed appetite for collaboration – the offshore industry remains highly fragmented, although the very challenges now being addressed are likely to help drive consolidation – it is unsurprising that many efforts have been individual groups acting in their own strategic interests. Nearly one quarter of survey respondents have held conferences, seminars and forums in the last 12 months to address the public relations issue, and 11% followed up with client education. Meanwhile, Jersey, which has suffered heavily in the media storm, has published papers detailing the benefits the jurisdiction brings to the UK economy and promoted at least one academic study that questions the arguments put forward by its critics.
The Society of Trust and Estate Practitioners (STEP) has sought to represent the industry’s interests on a macro level. Responding to moves by the United Kingdom (UK) to require Crown Dependencies and British Overseas Territories to commit to public registers of beneficial ownership, STEP has made the case for the opposition to policymakers in London and Brussels, sought to coordinate lobbying activities in different jurisdictions, and examined what training and resources might be required if the changes go through.
The International Financial Centres (IFCs) Forum likewise liaises regularly with senior UK politicians and civil servants, the EU Commission and United States (US) policy advisers, with particular focus in 2014 on UK and European Union (EU) proposals for government registers of beneficial ownership, Foreign Account Tax Compliance Act (FATCA) and the OECD Common Reporting Standard. It also engages with NGOs including Christian Aid and Action Aid, and leading media outlets, with some success.
These acts of outreach amount to a series of incremental positive developments. More can be done in terms of engagement and it is OIL’s view that the largest industry participants should take the lead. While we support and encourage lobbying efforts, these should be targeted and focused. Mass media is not the answer, and efforts should be directed to clients as well as to policymakers. This can be achieved through active participation as a member of industry bodies worldwide and direct engagement with governments and regulatory bodies. (These groups already reach out to OIL for consultation on draft legislation and regulatory standards.)
One of the starkest conclusions to be drawn from the survey is that engagement with NGOs on these issues is futile. Of the possible responses to the public relations problem put before respondents, reaching out to NGOs was by some distance the most poorly received. On a scale of 1 to 5, with 5 being the most important, it was scored 3 or below by nearly 70% of respondents.
This cynicism is understandable and some NGOs will never come to appreciate the benefits of offshore financial services. Often these arguments are made from a position of ignorance: NGOs see the offshore component as a malign influence – even believing there are vast amounts of untaxed money hidden in the BVI, a ludicrous notion to anyone who has visited the jurisdiction – rather than an essential part of the infrastructure that facilitates international trade and capital efficiency.
However, by employing the correct approach – and the IFC Forum have engaged with a few prominent NGOs – it is possible to inform the debate.
8
DEFENSIBLE MARKET POSITION?JURISDICTIONS2In each edition of the “Offshore 2020” survey, participants have been asked to rank jurisdictions based on their importance today and their expected importance in five years’ time. The British Virgin Islands (BVI) and the Cayman Islands have maintained a stranglehold on the top two spots but respondents were also in agreement that the significance of these jurisdictions would wane.
The 2014 survey is no exception. As in previous years, offshore financial centres were rated on a scale of 1 to 5, with 5 being most important. The BVI scored 4.0, with Cayman Islands and Hong Kong joint second on 3.8, followed by Singapore on 3.5 [Figure 5]. These are almost exactly in line with the 2013 assessments. Over the next five to ten years, industry participants expect the established order to be turned on its head. Hong Kong and Singapore will occupy the top spots come 2019 with ratings of 4.1 and 3.8, respectively. The BVI and Cayman Islands will slip to 3.4 and 3.6, not that far ahead of the likes of Luxembourg and the Netherlands.
9
Jurisdictions by importance
Now
In the next 5 to 10 years
Source: OIL
Others
Crown Dependencies or British Overseas
Territories
Europe
Mid-shore Asia
FIGURE 5Anguilla
Bahamas
Barbados
Bermuda
The BVI
Cayman Islands
Guernsey
Isle of Man
Jersey
Cyprus
Ireland
Luxembourg
Malta
Netherlands
Hong Kong
Labuan
Singapore
Belize
Cook Islands
Mauritius
New Zealand
Panama
Samoa
Seychelles
United Arab Emirates
USA (Delaware)
Less Important Most Important
1.6
1.6
1.8
2.3
3.4
3.6
2.5
2.6
2.8
3.2
3.0
1.8
1.6
1.4
2.1
1.9
1.9
2.4
2.4
2.9
1.9
2.4
2.2
2.8
2.2
4.1
3.8
2.5
2.42.4
2.32.3
1.7
1.7
2.0
2.4
4.0
3.8
2.6
2.7
2.7
3.1
2.9
1.8
1.7
1.5
2.0
2.1
2.2
3.8
3.5
2.4
The theory is clear: As the industry comes under increasing regulatory pressure, business will gravitate to jurisdictions that are seen as more transparent, offering traditional offshore benefits combined with onshore credibility. However, this has been the prevailing view ever since the first “Offshore 2020” survey, and yet five years on, the BVI and Cayman Islands remain as significant to the offshore community as they ever were.
Twelve months ago, the crisis of confidence that impacted all jurisdictions was felt particularly keenly in these two locations, largely as a result of their high profiles. While many of the pressures remain, the industry has not imploded and participants are articulating a response to the changing operational environment. The BVI and Cayman Islands are central to this process.
US based lawyer
“There is a real perception that the sun is setting on the traditional Caribbean offshore centres as poor press and regulation erode their advantages …..”
10
Setting up a bank account for a BVI company has become much harder – survey respondents ranked it fourth out of 10 jurisdictions by this measure in 2013, but it has dropped to ninth in 2014 [Figure 6]. There has also been a decline in professional infrastructure – from fifth to seventh – while both Cayman Islands and the BVI have slipped in terms of the strength of regulatory environment. But the BVI remains the most attractive jurisdiction based on set up and maintenance costs and Cayman Islands retains third place for professional infrastructure. The two jurisdictions also continue to rank highly for commercial mindset.
Above all, the question for investors in need of offshore financial services is: If not Cayman Islands or the BVI, then where?
Performance of major jurisdictions against key service criteria
FIGURE 6
The BVI
Cayman Islands
Cyprus
Luxembourg
Guernsey
Jersey
Hong Kong
Seychelles
Singapore
Netherlands
Samoa
2013
2014
Robust regulatory
environment
6
3
8
5
4
2
7
1
8
6
4
5
2
3
9
1
7
10
Commercial mindset
(willingness to work with stakeholders)
4
2
8
6
5
1
7
3
4
3
6
7
8
2
9
1
5
10
Cost (set up and
ongoing maintenance)
1
5
6
7
8
2
3
4
1
6
10
8
9
3
2
5
7
4
Professional infrastructure
5
3
7
6
4
1
8
2
7
3
4
8
6
1
9
2
5
10
Ease of use (e.g. opening a bank account)
4
3
8
7
6
1
5
2
9
3
4
7
6
1
8
2
5
10
The rise of mid-shore jurisdictions such as Hong Kong and Singapore is inevitable, but predictions that it would come at the expense of the traditional market leaders have so far not played out. In a more complex commercial universe, there is a place for pure offshore and quasi-offshore financial centres in multi-layered corporate structures. The BVI and Cayman Islands are high profile because they are popular. The two jurisdictions cannot stand still as the industry evolves, but they are so well used – and their competitive advantages so well known – it is difficult to envisage a significant number of investors breaking established habits and going elsewhere.
Source: OIL
11
Ask the same question of other locations and the answer is different. It is estimated approximately 66 jurisdictions describe themselves as offshore financial centres. Smaller players will inevitably suffer as regulatory forces converge and scrutiny of the industry intensifies.
The compliance burden means the cost of doing business will increase. For jurisdictions, this means investing in the systems, infrastructure and people they need in order to meet higher standards. Some simply don’t have the resources to take appropriate action. If, for example, jurisdictions have to engage in frequent automatic exchanges of information with multiple counterparties, would a sub-scale financial centre be able to handle the workflow and ensure security? Clients will flee to established locations with the infrastructure to meet their needs.
Of the 10 jurisdictions survey, respondents were asked to rank by certain service criteria, Samoa came in last for ease of use, robust regulatory environment, professional infrastructure and commercial mindset. It ranked fourth for set up cost, behind the BVI, Seychelles and Hong Kong. Samoa can lay claim to a unique value proposition – a reasonably convenient time zone for China and a familiarity with Chinese characters – but it remains to be seen whether this will be enough to compete with more established players in the long-term.
The onus, therefore, is on carving out a defensible market niche. Both the BVI and Cayman Islands effectively did this, it’s just their respective areas of specialisation – international holding company structures and fund formation – are core to the offshore industry. Smaller but arguably equally successful in building strong defensive capital market positions are the Marshall Islands for ship registration, Gibraltar for online gambling companies, and Bermuda for reinsurance. They got in early and were proactive in engaging customers.
In this context, it is worth re-examining respondents’ perceptions of different jurisdictions importance now and in five years’ time. Samoa, Seychelles, Mauritius and Labuan are expected to hold steady on 1.9, 2.4, 2.2 and 1.8, respectively, perhaps because of potential business growth in China and ultimately Africa. Other “pure offshore” locations are all tipped to lose business.
Of the European jurisdictions, Ireland and Luxembourg – well known for multinational incorporations and investment funds – are likely to see increased demand. The same can be said of Malta and the Netherlands. The Channel Islands Crown Dependencies are in an interesting position: Will there be weaker demand as regulators eat into their competitive advantages or will compliance serve as a great leveller and clients return simply because these are places for efficient transaction of business? Anecdotal evidence suggests the latter.
It is worth bearing in mind that the “Offshore 2020” survey was limited to 26 jurisdictions, each of which is recognised by the international investment community. The prospects for many of the smaller players that fill out the 66 – strong markets are not captured here, but based on the prevailing trends, their future will be about finding an appropriate, differentiated niche.
CEO of a consulting firm, BVI
“Smaller jurisdictions and service providers will no longer be able to compete on a global stage”
12
A HEAVIER BURDENREGULATION3On July 1, 2014 arguably the single most significant piece of legislation in a generation impacting offshore financial centres came into force, with the industry at varying degrees of readiness. The United States (US) Foreign Account Tax Compliance Act (FATCA) encourages foreign financial institutions, including offshore investment vehicles, to disclose the identities of US investors to the Internal Revenue Service (IRS). Failure to comply will result in the imposition of a 30% withholding tax on any US source payments.
Nearly 88,000 entities featured on the first iteration of the IRS’ list of foreign financial institutions that have registered for tax disclosure. To reach the point of registration, groups are supposed to have screened client bases and established the extent of their liability. The next phase of the process involves putting in place the infrastructure that will enable ongoing monitoring, with the transition to full reporting to the IRS
scheduled to happen in 2015.
Anecdotal evidence suggests some foreign financial institutions have been working on FATCA compliance for two years while others have yet
to take substantive action, which will inevitably result in plenty of last minute calls to administrators and accountants as
enforcement begins.
13
The more proactive groups are likely those with large and complex US customer bases, but even an offshore structure without any US exposure is not immune to FATCA. Either its jurisdiction of incorporation will have signed an intergovernmental agreement (IGA) with the US, which may make FATCA compliance a local issue; or it will have counterparties – for example, banks where they hold accounts – that want to be compliant and therefore start asking questions of clients.
On a broader level, FATCA should be seen as a stalking horse for a raft of other legislation leading to a convergence of regulatory standards for offshore financial services. The Organisation for Economic Cooperation and Development’s (OECD) ongoing push for greater transparency is philosophically identical to FATCA and bears a number of similar characteristics in terms of practical implementation. Bringing them together will give greater impetus to other initiatives, such as United Kingdom (UK) FATCA – which directly impacts the British Overseas Territories and Crown Dependencies – the Multilateral Convention (MLC) on Tax Matters [Figure 7], and the OECD-endorsed Common Reporting Standards programme.
HK private banker
“FATCA, FATCA, FATCA ….. the most important regulation effecting the industry”
Countries which have signed the Multilateral Convention on Tax Matters
FIGURE 7
NorthAmerica Europe
AfricaSouth America Oceania
Asia
Brazil
Argentina
Chile
Colombia
Albania
Andorra
Austria
Azerbaijan
Belgium
Croatia
Czech Republic
Denmark
Greece
Estonia
Finland
Hungary
Latvia
France
Iceland
Liechtenstein
Lithuania
Georgia
Luxembourg
Cyprus
Germany
Ireland
Italy
Mexico
Canada
Guatemala
Saudi Arabia
Costa Rica
Belize
US
Cameroon
Gabon
Romania
Spain
Moldova
Sweden
San Marino
Switzerland
Netherlands
Slovak Republic
Ukraine
Norway
Slovenia
UK
Malta
Poland
Portugal
Japan
Kazakhstan
Russia
Korea
Singapore
Turkey
Indonesia
Ghana
Morocco
Tunisia
Nigeria
South Africa
Australia
New Zealand
* Israel has not signed the MLC Agreement.
Source: OECD
China
India
RemarksExtension by UK: Anguilla, Bermuda, the BVI, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Montserrat, Turks & Caicos IslandsExtension by the Netherlands: Aruba, Curacao, Faroe Islands, Sint MaartenExtension by Denmark: Faroe Islands, Greenland
14
There are still many unknowns. FATCA compliance means additional costs, from more intensive client due diligence to continuous reporting, and it is unclear how steep they will be. The IRS has also indicated that requirements will not be rigorously enforced in the first couple of years for those who make good faith efforts to comply. But ultimately there is no escape and the “Offshore 2020” survey indicates that most in the industry recognise this.
Asked to name two regulations that are having a significant impact on business now, respondents overwhelmingly opted for FATCA at 41% [Figure 8]. Anti-money laundering being second with 14%, while the European Union (EU) Alternative Investment Fund Manager Directive (AIFMD), exchange of information and beneficial ownership disclosure each below 10%. The results are not so dissimilar from last year’s survey.
Five years from now, FATCA is still expected to be the key issue, but the gap narrows: FATCA received 25% of the votes, while beneficial ownership disclosure at 15% and exchange of information 13%. This is in effect regulatory convergence writ large. Nearly two thirds of respondents expect FATCA to be adopted universally across the OECD by 2017 – last year 60% said this would happen by 2020 – and 88% anticipate automatic exchange of information between OECD nations within the same time frame [Figure 9]. Asked which of these developments will be introduced first, 59% of respondents opted for automatic exchange of information with 24% going for universal adoption of FATCA [Figure 10].
Regulations having the most impact on the industry
FIGURE 8
Today
In next 5 years
FATCA
AIFMD
Anti moneylaundering
Exchange ofInformation
Beneficial ownershipdisclosure
41%25%
14%8%
9%5%
7%
3%
13%
15%
* Others includes: Savings Directives, UCITS, EU Directives, BEPS, International Trust Act, KYC, bank account opening requirement and compliance, tax transparency initiatives, increased DTAs and accounting standardisation.
Source: OIL
Partner of a law firm in Hong Kong
“FATCA means more business for law firms due to higher awareness and compliance pressure”
15
Publicly available beneficial ownership information
The end of the use of offshore structures
A central (non-public) registry of beneficial ownership
Automatic exchange of information between OECD nations
FATCA will be adopted universally across the OECD
Tax accounting standardisation
Uniform global (non-tax) regulation such as licensing
AverageRating
3.7
3.5
3.5
3.4
3.4
2.9
2.9
83%17%
93%7%
43%57%
12%88%
35%65%
71%29%
83%17%
Regarding the potential OECD “regulatory end game”, are the following likely by 2017?
What is the likely impact on clients’ business (Scale of 5, 5 being most significant)
FIGURE 9 Yes No
The peer reviews that underpin the OECD’s efforts on tax transparency are now into their second phase, where the focus moves from whether or not a jurisdiction has the requisite legal and regulatory framework for exchange of information for tax purposes to the level of compliance with a global transparency standard. An automatic exchange mechanism is seen as the next step.
FATCA, to the extent that it requires foreign financial institutions to provide reports on US-based clients on an ongoing basis, is an automatic mechanism that is already being rolled out. Indeed, as of July 1, the US had signed 39 IGAs and reached “an agreement in substance” with another 62 jurisdictions [Figure 11]. The majority are Model 1 agreements, which means compliance with FATCA is a local tax requirement, with local authorities collecting the relevant information and passing it on to the IRS.
Which of these regulatory initiatives will be implemented first?
FIGURE 10 Automatic exchange of information between OECD
nations
A central (non-public) registry of beneficial
ownership
FATCA will be adopted universally
across the OECD
Others*
* Others include tax accounting standardisation, publicly available beneficial ownership information, end of the use of offshore structures and uniform global (non-tax) regulation such as licensing.
59%
24%
12%
4%
Source: OIL
Source: OIL
16
Countries/Jurisdictions who have signed US FATCA-IGA
UK
Belgium
Austria
Cayman Islands
Switzerland
The British Virgin Islands
Chile
Denmark
Germany
Gibraltar
Guernsey
Hungary
Ireland
Isle of Man
Estonia
Finland
France
Canada
Honduras
Costa Rica
Bermuda
Mexico
Jamaica
Jersey
Norway
Latvia
Spain
Liechtenstein
Slovenia
Luxembourg
Malta
Italy
Netherlands
FIGURE 11.1
NorthAmerica Europe
AfricaSouth America Oceania
Asia Israel
Japan
Australia
New Zealand
Mauritius
South Africa
Countries/Jurisdictions who have reached “an agreement in substance” with US FATCA
Cyprus
Kosovo
Saudi Arabia
Turkey
Dominica
Poland
Singapore
Turkmenistan
Azerbaijan
Croatia
Antigua and Barbuda
Dominican Republic
Portugal
Turks and Caicos Islands
San Marino
Bahamas
Curaçao
Greenland
Lithuania
Georgia
Montenegro
Moldova
Qatar
South Korea
TaiwanCzech Republic
Grenada
Panama
Romania
United Arab Emirates
Barbados
St. Kitts and Nevis
Thailand
Uzbekistan
Belarus
Haiti
St. Lucia
Armenia
Nicaragua
Peru
Paraguay
Colombia
Guyana
Brazil
Argentina
Bulgaria Serbia
Kuwait
Malaysia
Slovak Republic
Ukraine
Sweden
Iraq
St. Vincent and the Grenadines
FIGURE 11.2
NorthAmerica Europe
AfricaSouth America
Asia
Algeria
Cabo Verde
Seychelles
Anguilla
Bahrain
India
Indonesia
Hong Kong
Source: OECD
Source: OECD
17
While the industry is broadly supportive of moves to improve regulation, there are concerns about the debate becoming politicised. Tracking beneficial ownership has emerged as a contentious issue in this context. The Financial Action Task Force, in its recommendations to the G20, stressed the importance of regulators being able to establish who owns, controls and benefits from companies as part of efforts to combat tax evasion. It led to calls for the introduction of central registries naming beneficial owners, but opinion is divided as to whether this information should be placed in the public domain.
The UK pre-empted the release of results of a public consultation on the matter to announce plans for a publicly accessible register maintained by Companies House. France has said it will follow suit, while the remaining members of the G8 – Italy, the US, Canada, Germany, Japan and Russia continue to consult on the matter. More than half of respondents in the “Offshore 2020” survey expect a central, but privately held registry of beneficial ownership to be introduced by 2017. However, only 17% envisage this information becoming publicly available within the same time frame.
In jurisdictions such as the British Virgin Islands and the Cayman Islands, beneficial owners’ details are held by privately owned and licensed service providers that are legally obliged to cooperate with regulators. Documentation is kept in confidence, but not complete secrecy: service providers must report any suspicions to the authorities and then there are mechanisms through which regulators can make information exchange requests. The system offers privacy and security – a public registry would not permit the former and a central registry may not allow the latter – and it is the result of a well established and functioning regulatory regime that has yet to be matched by the G8 nations.
The current stand-off is a stark reminder that regulation involves striking a balance between a variety of interests – meeting oversight requirements without undermining the benefits offshore structures bring. Excessive political pressure throws this balance out of kilter.
18
FROM CHINA TO THE WORLDCUSTOMERS4The swing from China inbound to outbound was widely anticipated and in last year’s “Offshore 2020” survey there were signs of it being realised. Approximately half the respondents conduct China related business and, in 2013, 56% of those said this business was outbound, the first time the 50% threshold has been crossed [Figure 12]. The breakdown is similar this year, in keeping with anecdotal evidence that an increasing amount of the wealth being generated in China is heading overseas.
19
Percentage of China “inbound” versus “outbound”
FIGURE 1244% 56%
56%
45%
44%
55%
2014 2014
2013 2013
2012 2012Inbound
Outbound
And this is a global view. Over the past five years, the survey has become broader both in terms of sample size and location – indeed, the 2014 respondents represent a near 50-50 split between Asia and the rest of the world. It is not a case of Asia-based service providers focusing on China as the nearest market of scale; industry participants from the Middle East to the Caribbean are looking to the country for business.
Asked to name the top 10 locations for client origination over the next five years, 40% respondents opted for China, well ahead of the United States (US) and the United Kingdom (UK) in second and third, with 13% and 10%, respectively [Figure 13].
Source: OIL
Client origination by country: Top 10 locations in the next five years
FIGURE 13
Source: OIL
40%
China
13%
US
6%
RussianFederation
4%
Taiwan
4%
Singapore
3%
Australia
7%
United Arab
Emirates
10%
UK
4%
India
9%
Hong Kong
20
In this respect, the offshore industry is following in the footsteps of countless others. In 2013, BMW sales in China rose 20% year-on-year as the country overtook the US as the group’s largest market. The likes of Audi and Mercedes-Benz are also profiting on the back of demand that will see China’s premium car market grow at 12% per annum through 2020, according to McKinsey & Company. At this rate, the country will surpass the US as the world’s leading luxury car consumer as early as 2016.
Chinese consumers of luxury goods are not immune to the impact of a slowing economy and a crackdown on corruption that has reigned in lavish gift-giving, but they remain the most prolific. Bain & Company estimates that China accounts for 29% of luxury purchases worldwide, more than any other country. Interestingly, a sizeable proportion of these transactions occur overseas. A more prosperous and internationally oriented population is likely to seek ways to preserve this wealth overseas.
Unsurprisingly, Asia remains by some distance the most important region for business origination, with a score of 4.1 out of a possible five, the same as last year. The UK and Europe ex-UK retain joint second spot on 3.2 in another repeat of 2013 [Figure 14].
Five to 10 years from now, Asia is expected to consolidate its dominant position, with 4.4. Developed markets are likely to stay more or less the same, while there will be significant jumps in both the Middle East and Africa. The former scored 2.4 this year and is tipped to reach 3.1 by 2019; the latter is expected to jump from 2.0 to 2.7 over the same period.
Client origination by region
FIGURE 14
2014
In next 5 to 10 years
Less Important Most Important
Asia
UK
Australia/ New Zealand
Africa
Latin America
North America
Middle East
Europe (ex-UK)
4.44.1
3.23.2
3.23.2
3.12.4
2.82.8
2.72.1
2.72.0
2.32.1
Source: OIL
21
There is certainly a correlation between economic growth and demand for offshore financial services. A country in rapid expansion mode tends to prioritise attracting foreign direct investment – which, for practical reasons, usually arrives via an offshore jurisdiction – over concerns about tax leakage. This is its sovereign prerogative. As it leaves this phase of the development cycle, though, the focus shifts from speed of growth to preservation of wealth, and so government attitudes towards the perceived benefits of the offshore industry change.
The three regions identified by survey respondents as those becoming more important most quickly – Asia, the Middle East and Africa – are all still in this rapid expansion mode. GDP growth in Asia is projected to be 5.4% in 2014, rising to 6.7% for emerging and developing nations, while the Middle East and North Africa will expand by 3.1% and Sub-Saharan Africa by 5.4%. By comparison, the UK economy will grow by 2.9% and Europe ex-UK by 1.2%.
At the same time, it can be difficult to reconcile the business expectations of the offshore community with the economic reality. For several years, Africa has been tipped for greatness five years down the road. In the 2014 survey, respondents see the region’s importance rising from 2.0 to 2.7 by 2019, surpassing Australia and New Zealand, matching Latin America and coming within touching distance of North America. This is broadly comparable to 2011 when Africa was awarded a rating of 1.7 with the expectation it would reach 2.5 by 2016. While there is certainly economic momentum this hasn’t necessarily led to a commensurate increase in demand for offshore structures – or at least not beyond jurisdictions that are comparatively close to Africa, such as Dubai and Mauritius.
In China, progress is more advanced and more tangible, yet demand should be viewed in its wider context. For a generation, companies and individuals have channelled capital into the country through offshore vehicles, driven not only by tax efficiency but also by the comfort drawn from robust legal systems and professional infrastructure.
Is there a perception difference of regulatory pressure between clients in developed versus developing markets?
FIGURE 15 Yes Don’t knowNo
12%62% 26%
It is also worth noting that the perception of regulatory pressures differs markedly between clients in developed and developing countries. Close to two thirds of survey respondents agreed that authorities in developing markets are less aggressive towards the offshore industry, either because their regulatory regimes are not sophisticated enough or they feel problems can be addressed by other means [Figure 15].
Source: OIL
22
Outbound investment can also take advantage of double tax treaties (DTTs) but there is the additional consideration of capital account restrictions. Without a fully convertible renminbi, investors tend to use a “conduit” when going offshore; a high net worth individual might go through Hong Kong for a trust product while ownership of a private enterprise could be structured through the British Virgin Islands (BVI)-incorporated special purpose vehicles.
Indeed, Hong Kong and the BVI were cited by survey respondents as by some distance the preferred “conduit” for China outbound business, with 40% and 33% of the vote, respectively. The Cayman Islands ranks third on 7% with Seychelles in fourth on 5% [Figure 16].
Preferred jurisdictions for outbound China investments
FIGURE 16
* Others include Labuan, Luxembourg, United Arab Emirates, Ireland, Cayman Islands and the UK.
2%
Jersey
7%
CaymanIslands
5%
Seychelles
4%
Samoa
9%
Others*
33%
The BVI
40%
Hong Kong
Source: OIL
23
Chinese outbound direct investment continues to grow, reaching US$90 billion in 2013, up from US$60 billion just two years ago. More than three quarters of outbound direct investment is said to be corporate merger and acquisition (M&A). Strategic acquisitions of energy and materials assets by state-owned enterprises still feature strongly but there has been an upsurge in private sector involvement across multiple sectors in recent years. In WH Group, the pork producer that bought US-based Smithfield Foods in 2013 and added then a majority stake in Europe’s Campofrio Food Group, China has a major global player in the consumer space. And in Fosun International, it has a domestic state-owned conglomerate that is building up a portfolio covering everything from insurance to baked goods.
Chinese companies use offshore structures, if not for the transactions themselves then for various ancillary functions. Where these companies are under private ownership, the founders rely on offshore services for wealth management purposes as well.
The question remains as to what impact renminbi liberalisation will have on demand. On one hand, it could lead to a fall in demand for offshore structures because using “conduits” for outbound capital flow is no longer a structural necessity. On the other, easing Chinese companies’ passage into international markets may boost activity, creating a larger overall pie of which offshore service providers have a share. In this context, the legal and financial infrastructure offered by the likes of Hong Kong and the BVI continues to be a value-add.
There is no formal time frame for fully opening up China’s capital account but the steps the government has taken to internationalise the currency naturally prompts industry participants to think about the future. Roughly four in five survey respondents said the continued liberalisation of the renminbi will have a medium-term impact on the offshore market and the vast majority expect this impact to be positive [Figure 17].
Will the continued liberalisation of the RMB have an impact on the Chinese offshore market?
If yes, indicate whether this will be a positive or negative impact
FIGURE 17 Yes Don’t knowNo
12%82% 7%
56%
0% 1%
Negative Positive
Source: OIL
5%
13%
25%
Negative Positive
HK ‘Big 4’ accounting partner
“Hong Kong has the right mix of proximity to the China opportunities, professional ecosystem and legal system to take advantage of new business”
24
An ongoing theme of the “Offshore 2020” survey in the past few years is the decline in traditional tax planning as an industry driver. Asked to rank a series of factors on a scale of 1 to 5, with five being the most important, in terms impact on business, tax planning scored 3.8 in 2012. This fell to 3.6 in 2013 and to 3.4 this year [Figure 18]. No other factor has experienced such a rapid demise.
LESS ABOUT TAx PLANNINGMARKET DRIVERS5
25
Key drivers of business
FIGURE 18
Asset protection/wealth planning
Traditional tax planning
Double tax treaties
M&A activity
New IPOs and capital market activity
Higher taxes in developed markets
Increased client sophistication
Emerging market wealth
Cross border trade
Improving global economy
Privacy and client anonymity
GDP growth
4.0
4.14.0
3.93.7
3.53.4
3.43.6
3.43.2
3.33.2
3.23.4
3.63.4
3.7
3.8
3.4
2014
2013
Less Important Most Important
Asset protection and emerging market wealth remain the key issues, with 4.1 and 3.9, respectively, representing a slight increase on 2013. They are joined in the top five by increased client sophistication, cross-border trade and the improving global economy – all three of which haven’t previously featured as questions in the survey. GDP growth and privacy and client anonymity are both now seen as more important than tax planning.
Source: OIL
Respondents said 10.5% of their business is done for individual tax purposes, roughly the same as last year, but well down on the 15.9% of 2012. Asset protection tops the rankings on 28.2% followed by funds management on 18.8% [Figure 19].
Lawyer in HK
“Asset protection is the key driver for ‘individual’ clients”
26
Key usage of offshore entity
FIGURE 19
2014
2013
Asset protection & wealth management
Fund management
Investment holdings for corporate
Individual tax planning
Special purpose vehicles
Trading for corporate
Tax planning for companies
Listing vehicles for IPO
Asked specifically whether tax planning has become less important for individual clients, 59% answered in the affirmative, while just 25% disagreed outright. And these entrepreneurs and high net worth individuals remain the fastest growing segment of end-users, according to 41% of respondents, up from 37% last year. The gap between first and second place has increased substantially in 2013, with hedge funds and private equity cited by only 21% of respondents compared to 30% in 2013 [Figure 20].
End-user segments driving growth in the past two years
FIGURE 20 Entrepreneurs/High Net Worth
Individuals
Multinational Corporations
Hedge Funds/Private Equity
Small and Medium
Enterprises
Family Offices
Small Medium
2014
2013
28%
19%
11%
9%9%
8%
4%
8%
13%
29%
20%
10%
12%
5%
15%
41%
21%
11%11%
19%13%
8%9%
37%
30%
Source: OIL
Source: OIL
27
A group of international investors identifies a Chinese infrastructure developer that needs capital for a series of desalinisation projects [Figure 21]. They set up an international business company in the British Virgin Islands (BVI) as a holding structure and deposit the money, supplementing it with bank loans. The funds are then routed to the Chinese developer and the projects get up and running. Profit travels back to the BVI structure in the form of dividend payments that are distributed among the investors.
Chinese company
Infrastructure Projects in China
Bank
International investors
The BVI Company
Shareholdings Invest in
Loan
Investors benefit from British-based:• law• courts• professionals
A sample of a non-tax driven structure
FIGURE 21
This scenario is not unique to China, although the BVI has become a tried and tested conduit for overseas capital entering the country. Contrary to widespread public perception of offshore financial services, the motivation is not tax avoidance; each investor is subject to taxation in the jurisdiction in which it is incorporated.
Rather, the BVI is used for purposes of tax efficiency, legal certainty and general ease of doing business. The structure is tax neutral, so there are no double taxation issues to untangle and the dividends generated by the Chinese company – as well as any capital gains that accrue on exiting the investment – are not touched by local revenue authorities. Should problems arise, there is the comfort from the British-based law under which issues are assessed, with the option of recourse to the Privy Council.
In the BVI as elsewhere, there is a deep pool of service provider talent familiar with these structures. And international banks are happy to extend loans to companies incorporated in the jurisdiction, citing local creditor friendly legislation and an effective system of registering charges.
Source: Harneys & Stikeman Elliott
Chairperson of an investment management firm, Hong Kong
BVI registered agent
“Entrepreneurs/ HNWIs is the end-user segment of the offshore market where business has seen the biggest growth in the last two years”
“Clients ‘Individual’ are inclined to pay their taxes as required, however, they are more concerned about maintaining and preserving their assets after filling their tax obligations”
28
BVI registered agent
“MNCs have to satisfy their shareholders and also have huge operational costs that make tax planning much more significant”
It is worth noting that multinational corporations are the fastest growing market for just 11% of the survey sample. The percentage of business most closely linked to corporations has also fallen over the past couple of years. In 2012, trading for corporates accounted for 13.4% of activity but it has since dropped to 8.3%; investment holdings for corporates has declined from 16.7% to 12.9% over the same period. Meanwhile, tax planning for companies – a new category this year – only has an 8.2% share.
These numbers, to a certain extent, allow us to disentangle myth from reality in terms of who is using offshore structures for what purposes.
Last year, the likes of Apple and Google appeared before committees comprising members of the United States (US) Senate and United Kingdom (UK) Parliament to answer accusations that they deliberately avoid tax. Google, it was claimed, generated US$18 billion in revenue from the UK between 2006 and 2011 yet paid the equivalent of US$16 million in UK corporation taxes during that period, essentially by basing its sales force in Ireland and leveraging the UK-Ireland double tax treaty (DTTs).
If the system has been abused then it should be cleaned up and multinationals that have transgressed – for example by falsely claiming substance in a lower tax jurisdiction for the purpose of minimising payments – should be punished. But by explicitly targeting large multinationals, politicians have made them the public face of offshore financial services; where in the minds of politicians, these are the groups that are short changing governments and eating into budgets for schools, roads, elderly care and social services. Tellingly, there is scant acknowledgement of multinationals’ contribution in areas such as job creation and driving innovation.
Nearly half of survey respondents said that tax planning may indeed be the primary reason why multinationals use offshore structures; the remainder were divided equally between “No” and “Don’t know”. Yet the survey also confirms that these multinationals are not the primary source of business.
If anything, the offshore industry is investing in the skills and infrastructure required to ensure the system is as watertight as possible. Asked to rank a series of constraints in terms of their impact on business, competition and pricing scored highly [Figure 22]. There is unlikely to be much short-term change in this area. However, the obstacles created by anti-money laundering and know-your-customer processes, DTTs and information exchange, and the lack of qualified staff have all dropped by comparatively large margins from two years ago. This suggests best practices are increasingly understood and ingrained.
29
Key constraints on the industry
FIGURE 22
Competition and pricing
Information leaks eroding client confidence
Higher taxes
The Ukraine/Russia incident
AML/KYC processes
Opening a bank account using an offshore companies
The industry’s public relations image
FATCA and similar regulations
Lack of qualified staff
DTTs and information exchange
4.0
3.73.7
3.43.3
3.33.3
3.33.5
3.33.1
3.33.7
3.23.2
3.1
2.2
Less Important Most Important
2014
2013
Source: OIL
30
COMING CONSOLIDATIONSERVICE PROVIDERS6The arrival of double tax treaties (DTTs) and tax information exchange agreements (TIEAs) created enormous uncertainty among offshore practitioners. However, within a couple of years these codicils were seen more as an opportunity than a threat. Shouldering the administrative burden that comes with greater regulation is a point of differentiation for service providers – it creates a barrier to entry and enables them to prove their value-add to clients. In this context, there is no reason why the industry cannot adapt to the next phase of change and the challenges presented by the Foreign Account Tax Compliance Act (FATCA) and automatic information exchange.
31
97%2%1%
>= 40% 30 – 40% 20 – 30% 10 – 20% 0 – 10%
$7%
30%
43%
15%
Does increased regulation lead to increase cost? By what percentage would it increase?
FIGURE 23 Don’tknow No Yes
But the competitive landscape will not emerge unscathed. An overwhelming majority of respondents in the “Offshore 2020” survey expect increasing regulation to lead to higher cost, with the average anticipated increase 20.7% [Figure 23]. Broken down by industry segment, corporate service providers predict a 22.2% jump in cost, with industry associations and regulatory agencies putting it at 21.8% and 21.3%, respectively.
5%
Additional expense is manifested in numerous ways, but human and IT resources arguably represent the biggest burden. Service providers must add to staff headcount in the compliance department while simultaneously investing in the hardware required to manage deeper know-your-customer processes. For FATCA registration alone, groups must first screen their client bases and establish the likely compliance burden. This will be followed by ongoing monitoring of United Stated (US) based clients and reporting back to the Internal Revenue Service (IRS).
While most of these costs will largely be passed on to clients, it will still eat into service providers’ profit margins, making it harder for smaller players to compete. Consolidation is inevitable, although the process will be gradual and, for some, painful.
Source: OIL
Partner of a law firm, Cayman Islands
“Higher barriers to entry and more competition on fees across jurisdictions due to the increased cost”
32
Describe how the offshore industry will look like in 2020
FIGURE 24
How optimistic or pessimistic is the industry?
FIGURE 25 Pessimistic
Pessimistic
Optimistic
Optimistic
Challenging
Growing
Regulated
Smaller
Transparent
Consolidating
Uncertain
Competitive
Stable
Declining
26%
24%
12%
8%
7%
6%
5%
5%
3%
3%
Another driving force for consolidation is the nature of ownership of the major corporate service providers [Figure 26]. There has been an influx of private equity capital in the past decade. Until 2011, OIL was owned by The Carlyle Group, while Intertrust remains a portfolio company of The Blackstone Group and Doughty Hanson & Co. controls TMF Group. This has in turn led to a jump in merger and acquisition M&A activity as the private equity investors have sought to build larger-scale businesses that generate higher multiples upon exit. TMF Group acquired Equity Trust and KCS, Intertrust merged with ATC, and OIL joined forces with Vistra in recent years.
37%35%
2% 4%
11%10%
Source: OIL
Source: OIL
It is telling that, when asked to name two words that captured the outlook for the offshore industry in 2020, by far the most popular terms were “challenging” and “growing” – which perhaps alludes to the bifurcation in fortunes. “Regulated” was the third most-frequently cited word, followed by “smaller,” “transparent,” “consolidating” and “uncertain” [Figure 24]. However, it is worth noting that more than 80% of respondents describe themselves as optimistic in their outlook [Figure 25].
33
2004 2008 2010 2011 2012 20132014
2002 2009 2010 20132014
Roadmap for industry consolidation
FIGURE 26
Carlyle Group
acquired OIL
Doughty Hanson & Coacquired TMF
Group
Blackstone Group
acquired Intertrust
TMF Group acquired KCS
2002 2014
OECD TIEA
OECD “White list”
G20 tax transparency
push
G8 tax transparency
push
Automatic exchange of information
FATCAAutomatic
exchange ofinformation
BO publicregistry
consultation
HG Capitalacquired
ATC
Doughty Hanson & Co Fund V acquired
Equity Trust
TMF Group merged with Equity Trust
IK Investments Partners
acquired OIL
OIL merged with Vistra
Blackstone Group
acquired ATC
Intertrust merged with
ATC
On a broader level, the industry itself is evolving. As clients become more sophisticated, incorporating a wider array of geographies – a product of globalisation and expanding interests or tax efficiency as investments are threaded through multiple locations – single jurisdiction players may find it difficult to survive. Smaller service providers are already establishing partnerships, on a formal or informal basis, to ensure they can meet cross-border needs. While there will always be space for niche operators, the momentum appears to be behind those with the scale to invest in their product offering while remaining price competitive.
The evolution of the global accounting industry provides a possible template for offshore service providers. There remain boutique audit firms across all markets that win business through a combination of particular local skill sets and reputation. However, the introduction of global branding and marketing in the 1980s – necessary to win custom from a growing array of multinational corporations – prompted industry consolidation at the top end.
The Big Eight firms that survived for most of the 20th century were largely the product of alliances between US and United Kingdom (UK) providers. After a spate of merger & acquisition (M&A) and one huge corporate governance scandal, the industry became what we see today: the “Big Four” large networks of independently-managed professional service providers whose brands are widely regarded by the investor community as gold standard.
Source: OIL
Consolidation “Big 4” corporate service providers
Regulatory convergence
Private equity investment
34
The Future State of the Industry
Five years into the “Offshore 2020” initiative, we’ve witnessed the emergence of a handful of trends. At this juncture it is appropriate to look into the future and assess which of these trends can be extrapolated through to 2020 and which will fade away. Some of the following predictions are obvious; others may be disputed. But the objective is to provoke thought and dialogue about the direction the industry is heading and the opportunities available for those willing to embrace change.
Offshore in 2020 – The Predictions
Self Confidence
The offshore industry will be better regulated, more globally integrated and transparent, and generally more robust than what it was in 2010. Hardened by the regulatory pressure of recent years, the industry will be better equipped to cope with unforeseen challenges than ever before, resulting in change being seen through the prism of opportunity, not just threat. In short, the industry will be bruised by a decade of external pressure being forced upon it, but confident in its rightful place within the global financial supply chain.
Growth & Development
Corporate service providers within the industry will consolidate with this phenomenon driven by two factors. First, increased regulation will push up the cost of doing business – investment in the infrastructure and increase headcounts goes hand-in-hand with heightened compliance. Second, by 2020 international private equity firms will have held stakes in the industry for approximately 15 years, giving the major players ample time and capital to make strategic acquisitions. The industry will ultimately display similar characteristics to the international tax and accounting industry. A “Big Four” corporate service providers will emerge with true global scale, while a large number of single jurisdiction operators will carve out successful niche for themselves. A handful of major players will end up listed on global stock exchanges, reinforcing the move towards a more transparent, better regulated industry.
Automatic Exchange of Tax Information
Many of the key principles of the United States (US) Foreign Account Tax Compliance Act (FATCA), and the broader automatic exchange of tax information, will be adopted by the majority of the G8 nations but fall short of a full take up by the G20. China, Russia, India, Indonesia and Saudi Arabia will all push back to varying degrees. The “Westerners arguing with other Westerners” mind-set will prevail and those not part of the debate will develop FATCA-free channels for economic engagement.
35
FATCA
After approximately six years in existence, causing significant upheaval for jurisdictions, financial intermediaries and other industry stakeholders, FATCA is unlikely to “break even”. The cost of implementation and ongoing management will exceed the additional revenues it generates for the US and other governments. As global economic conditions continue to improve, questions will be asked as to whether the cost of “running” has created an additional burden for the tax payer. Some will appreciate the irony that a piece of legislation designed to plug tax leakages and help pay down debt has in fact only added to governments’ fiscal burdens.
Public Registers of Beneficial Ownership
Public registers of beneficial ownership will not be adopted broadly, regardless of political pressure from certain quarters. Some European Union countries will implement registers, with varying degrees of success and consistency. In the United Kingdom – which led the initial calls for public registers – there will be numerous exemptions to the public aspect, due to legitimate privacy and security concerns. Central registers of shareholders (not beneficial owners) will become the global standard.
China
China will be the major growth driver for new business within the industry. This will be driven by state-owned enterprises and private companies from all sectors expanding overseas, the local base of high net worth individuals growing at a rate that far outpaces Western markets, and an increasingly convertible renminbi facilitating the move of a further wave of Chinese capital into the global economy. As China becomes more integrated into the global economy, the fruits of its growth will not be harvested by Greater China-based service providers alone. Service providers across the entire spectrum of the value chain – legal, accounting and corporate services – will be actively looking to China to drive future business growth. All major jurisdictions will be far more proactive with their engagement with the country in an attempt to create a niche for themselves.
Compliance Burden
Increased compliance burdens will see business move to (or stay within) jurisdictions that are either historically better regulated or invest in the relevant infrastructure to get themselves there. Survival depends not only on compliance but also on creating a defensible market position, whether it involves catering to a high-end niche or a large volume of customers.
IFCs
From an Asian perspective, the “Big Four” jurisdictions – the British Virgin Islands (BVI), the Cayman Islands, Hong Kong and Singapore – will retain their dominance. The BVI’s role as a lynchpin for international business companies and Cayman Islands’ popularity for funds and capital markets vehicles may gradually erode, but they will not fracture. Hong Kong, Singapore, Luxembourg and Malta will continue to grow in importance as mid-shore jurisdictions, offering a combination of traditional offshore benefits and onshore credibility, enabling clients to build substance. By 2020, a handful of new mid-shore jurisdictions will be emerging in Africa and the Baltic States, attempting to capture a slice of the new world economy. Even more interesting will be the emergence of “cloud-based” corporate service providers which will challenge the existing sovereign based compliance requirements.
36
The Offshore Debate
The moral debate over the use of offshore structures will not have disappeared, but its severity will fluctuate based on the health of the global economy and the emergence of other potential targets for politicians. Non-governmental organisations (NGOs) with a stated vested interest in the demise of the offshore industry will remain well funded and serve as the mouthpiece for a broader political cause. As a result, the industry will be more co-ordinated and assertive in its approach to public relations and lobbying relevant stakeholders. Vested interests are difficult to shift, but a true industry body involving the financial centres and private business will emerge. The work of the International Financial Centres Forum, the Society of Trust and Estate Practitioners (STEP) and other associations will all play an important role in this process.
Due to significant reputational risks created by negative publicity, a handful of high profile multinationals will agree to pay higher rate of tax than legally required in their jurisdictions of incorporation. Beyond that, the majority of global businesses will continue to utilise the bilateral or multilateral infrastructure – such as double tax treaties – to facilitate cross-border operations. Further to the Base Erosion and Profit Shifting (BEPS) initiative, there will be greater country-by-country reporting by multinationals. This will result in a higher tax spend by these companies in certain countries and sectors, but implementation will be inconsistent – tax incentives will continue to be used as a means of attracting business. A consensus will gradually emerge on how to tax online businesses, but new opportunities will arise and multinationals will retain the ability, resources and the leverage to restructure and take advantage.
Wealth Planning
Asset protection and wealth management will be the primary drivers for using offshore entities at an individual level. As developing economies mature across Asia, the Middle East, Africa and Latin America, an entirely new, first generation of individuals and families will utilise a range of legitimate wealth protection strategies that have been employed by their Western counterparts for generations. This will continue to fuel the growth of the industry in 2020.
Globalisation
The concept of globalisation will have been established in modern economic terms for approximately 40 years. While not perfect, the outlook for an interconnected and interdependent world with free transfer of goods, services and capital across borders will be largely recognised as essential for growth. China and other non-G8 nations will play a much larger role in the global economy than any time since the mid-1800s. To enable globalisation, an economically efficient trading and investment infrastructure is required, which means the offshore industry will continue to evolve in response to customer demand. Offshore financial centres enable globalisation and by 2020, this concept will be better understood.
37
Summary
The offshore industry remains a target for politicians, investigative journalists and non-governmental organizations, but it appears to be getting used to the attention. Indeed, steps are being taken – from ensuring business practices are whiter than white to engaging and educating stakeholders – to address the public relations problem. It remains to be seen whether this will have a meaningful impact. Meanwhile, demand for offshore structures remains robust, suggesting that a majority of investors are not letting political attacks and bad press get in the way of their practical wealth management needs.
Despite these pressures, predictions of the British Virgin Islands (BVI) and Cayman Islands’ demise are exaggerated. Although regulatory pressure is causing business to gravitate to jurisdictions that are seen as more transparent, offering traditional benefits combined with onshore credibility, it is not a zero-sum game. The BVI and Cayman Islands have established strong competitive advantages in holding company structures and fund formation and capital markets, respectively. There is a place for them alongside mid-shore jurisdictions like Hong Kong and Singapore in more complex, multi-layered corporate structures. However, the issue of competitive advantage remains pertinent for other financial centres. In order to stay relevant, they must carve out defensible market niches, whether that is Samoa capitalising on its convenience and affinity with China, or Jersey finding compliance to be a great leveler and winning business on the basis of its efficiency.
All of these jurisdictions must come to terms with the fact that the cost of doing business is increasing due to weightier compliance requirements. This is not going to change any time soon. The US Foreign Account Tax Compliance Act (FATCA) should be seen as a stalking horse for a raft of other legislation leading to a convergence of regulatory standards for offshore financial services. Bringing together FATCA and the Organisation for Economic Cooperation and Development’s (OECD) ongoing push for greater transparency would give greater impetus to other initiatives, such as UK FATCA, the Multilateral Convention on Tax Matters, and the OECD-endorsed Common Reporting Standards programme. While the industry is broadly supportive of moves to improve regulation, there are concerns about the debate becoming politicised. Tracking beneficial ownership – and the possibility of keeping this information in publicly accessible registers – has emerged as a contentious issue in this context.
As for customers, the swing from China inbound to outbound business continues, making the country a market of relevance for service providers in the Middle East and the Caribbean as well as in Asia. At the same time, China is no guarantee. The removal of capital account restrictions and greater renminbi convertibility could impact demand for offshore structures as investors no longer require a conduit for outbound investment. On the other hand, easing Chinese companies’ passage into international markets may boost activity, creating a larger overall pie of which offshore service providers have a share.
The majority of these customers – whether from China or elsewhere – are not using offshore structures primarily for purposes of traditional tax planning. While asset protection and emerging market wealth remain the main drivers of business, the significance of tax planning has regressed in recent years. In this context, it is also worth noting an evolution in the identikit offshore client. Multinationals, a number of which have been pilloried in the last 12 months for using international financial centres to deliberately avoid tax, are not seen as fast growing as the end-user segment. Rather, the focus is on meeting the wealth management needs of individual clients.
OIL will continue to track these trends over the coming year as a means of opening up the debate on where the industry could – and should – be headed.
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Methodology
OIL’s first White Paper, “Offshore 2020”: An Asian Perspective, which was published in December 2010, was based on interviews with 47 offshore industry participants who conduct business in Asia. Interviewees were based in locations including Hong Kong, Singapore, Taiwan, China, the Cayman Islands, the British Virgin Islands, Anguilla and Labuan.
The following year’s offering had a wider geographical remit and larger sample size (92) and then the 2012 survey saw similar levels of geographical participation but there was a significant rise in the sample size, with 155 interviews. In 2013 this trend continued, with 228 interviews conducted.
The number of interviews has risen once again in 2014, to 284, and there has been a conscious effort to redress the Asia bias. While the region is a key ingredient of this report as a key driver of industry growth, for the first time the majority of respondents – 53% – are based outside of Asia.
2014
2013
2012
2011
2010
284
228
155
92
47
US
Switzerland
Samoa
Others*
1.1%
1.1%
1.1%
7.5%
Hong Kong
Singapore
China
Taiwan
Labuan
Japan
Thailand
Malaysia
India
The BVI
UK
26.3%
8.9%
6.8%
7.8%
7.5%
2.8%
0.7%
0.7%
0.4%
0.4%
0.4%
Asia
47%
Rest of the world
53%
Source: OIL
Source: OIL
* Others include Bahamas, Belgium, Belize, Bermuda, Curacao, Guernsey, Luxembourg, Monaco, New Zealand, Panama, Philippines, Russian Federation and Turkey.
2.8%
2.5%
2.5%
2.1%
1.8%
1.8%
1.8%
1.4%
1.4%
5.7%
2.8%
United Arab Emirates
Netherlands
Cayman Islands
Ireland
Anguilla
Cyprus
Ukraine
Seychelles
Australia
Malta
Jersey
Sample size
Sample by geography
Hong Kong is still home to the largest number of respondents, but the British Virgin Islands is now in second place. The UK and the United Arab Emirates (UAE), in fifth and sixth, are within touching distance of Singapore and China in the two places above them.
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Interviewees represented the following job roles: CEO/Managing Director/President Partner Director General Manager/Manager Head of Department Founder Lawyer/Attorney Chairperson Vice president General counsel
Law firms
Corporate services/ consulting firms
Accounting/taxation
Banking/financial advisory
Investment management
Regulatory agencies
Industry associations
30%
29%
11%
11%
8%
6%
5%
Source: OIL
Sample by industry segments
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Acknowledgements
Adam Consulting; Alemán, Cordero, Galindo & Lee Trust (BVI) Limited; Alex Richardson & Associates; AllBright Law Offices, Shenzhen; Anguilla Commercial Registry; Apex Fund Services; Appleby; Aspen Trust; ATU General Trust (BVI) Limited; Baker & McKenzie; Belmont Group, BVI; Bird & Bird; Boughton Peterson Yang Anderson; Brooks Macdonald International; BSI Bank, HK; BVI House Asia; Campbells, Cayman Islands; Cayman Islands Finance; Cayman Islands National (Dubai) Limited; Chancery Partners Limited; Clermont Trust; Clifford Chance; Collas Crill; Conyers Dill & Pearman; Deloitte Touche Tohmatsu; Dorsey & Whitney; E.A.S.T. Consulting Limited; EJ Consultancy; Ensol; Ernst & Young, BVI; Family Capital Conservation HK; Financial Partners Ltd; Government of Ras Al Khaimah, Rak Investment Authority; Hamber Consulting Service Inc.; Harneys; Hilda Loe Associates PTE Ltd; HLB Prime Advice; HSBC Private Banking; IMT International Management Sarl; IN Asset Management; INCE & Co; Jersey Finance; Jersey FSC; Jimmy C H Cheung & Co; Jordans Trust Company (BVI) Limited; Kinanis LLC; Kingston Secretarial Services Limited; KRyS Global; LawAlliance Limited; Lennox Paton; Macquarie Global Investments; Matheson, Ireland; Mayfair Trust Group; MC Campos Tax Services Ltd; Millennium Capital; Mourant Ozannes; Nerine Trust Company (BVI) Limited; Northwestern Management Services Limited; Ogier; O'Neal Webster; Orbis Advisory; Osiris International Trustees; Oyster Global Marketing Group; PB Corporate Services; Penningtons Solicitors LLP; PwC, HK; RHK Legal; Rooks Rider Solicitors LLP; Samoa International Finance Authority; Sedgwick Chudleigh; Shu Jin Law Firm; Simonette Lewis; Sonet Secretaries Limited; SPD Bank; Stafford Trust – The Stafford Group of Companies; Stephenson Harwood; Stevensons Lawyers; Stikeman Elliott; The Corpag Group – Corpag Services, Netherlands; Trench & Associates; Trinity Management & Corporate Services Ltd.; Vistra Group; Walkers, HK; Wind & Macher Enterprise Corp.; Winterbotham Trust Company Limited; Zhong Lun Law Firm; 宇信國際管理顧問股份有限公司
Contact usTo have a further conversation about the key findings and how OIL may further enhance its service and add value to your business, please contact any of the following business unit heads in our local office:
Hong Kong Jonathon Clifton, Managing Director, Asia [email protected] T: +852 2886 7645
Singapore Helen Soh, Managing Director [email protected] T: +65 6438 0838
China Ernest Zheng, Managing Director, China [email protected] T: +86 21 6287 7706
Taiwan Nadine Feng, Managing Director [email protected] T: +886 2 2718 2222
The British Virgin Islands / Cyprus / United Kingdom / Dubai Simon Filmer, Managing Director, ex-Asia [email protected] T: +1 284 852 2560
If you wish to participate in the next survey, please register your interest with [email protected].
Offshore Incorporations Group is Asia’s company formation specialist with over 25 years of expertise serving professional intermediary clients through offices in Hong Kong, the British Virgin Islands (BVI), Singapore, Taiwan, China, the United Kingdom, Cyprus and Dubai. We have over 200 highly experienced professionals and strong alliances with trusted professional partners to enable coverage of jurisdictions worldwide and facilitate local support.
The information and opinion expressed in this publication are not to be relied upon as professional advice or a comprehensive report. Readers are responsible to seek proper professional advice for specific situations. © 2014 OIL All Rights Reserved. www.offshore-inc.com
