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8 | Letter from America
We find the attack on offshore finance to
be deeply disturbing. Investors may choose to
bank and invest in confidentiality outside of With the G20 meeting now history, it
their country’s boundaries for any number of
legitimate reasons that have nothing to do
with taxes and certainly pose no risk to public could be that the worst of the crusade
finances. These would include protection
from frivolous lawsuits (particularly in plain-
tiff-friendly America and Britain), and priva- against tax havens is over. China’s
cy from nosey relatives, acquaintances, rival
investors, and perhaps even the paparazzi.
There is, of course, also the superb level of defense of Hong Kong and Macau with
service that many traditional offshore bankers
and wealth managers are able to provide to
the mobile expatriate, who may need access to respect to the OECD black list give us
his or her funds in far-flung regions of the
world that domestic banks are simply not able
to adequately reach. hope that rivalry between states will
Sadly, there is also the risk of political
“witch hunts,” as the U.S. House of
Representatives recently proved to our dismay preserve offshore finance
with their proposed 90% tax on bonuses to
employees of institutions receiving govern- icate use of language was enough to keep this, and perhaps some do. But for now, the
ment aid. Cooler heads eventually prevailed, everyone happy. crackdown continues.
and the bill quietly died. But the actions of Fearing inclusion on the OECD’s black list With the G20 meeting now history, it could
the Congress have proven that, even in the and the possible sanctions that might accom- be that the worst of the crusade against tax
world’s leading industrialised economy, polit- pany inclusion, all but four countries of the havens is over. China’s defense of Hong Kong
ical risk remains a concern. Confiscation of original black list had formally agreed to meet and Macau with respect to the OECD black
property and abrogation of contracts are not international standards of transparency by the list give us hope that rivalry between states
limited to the likes of Zimbabwe or end of the meeting. The remaining four— will preserve offshore finance in substantially
Venezuela; they can happen in the developed Costa Rica, Malaysia, the Philippines, and its current form. After all, it is individual
world too. Uruguay—have since agreed as well. states that ultimately enforce policies, not
To be clear, citizens who enjoy the benefits international organisations like the OECD,
that a state provides—even basic ones like law Aftermath G20, or UN. France could have shut down
and order—should pay their taxes. Tax eva- Our leaders should be careful what they wish Monaco as a financial centre decades ago,
sion and fraud are a form of theft from our for. Their present zeal notwithstanding, it as France supplies virtually all of the
fellow citizens. But investors can maintain is not entirely clear that it is in the best inter- principality’s basic utilities and infrastructure.
their privacy while still meeting their tax obli- est of the world economy to eliminate tax Likewise, the United Kingdom could shut
gations. This was the objective of the havens and to regulate their most important down many of its Caribbean and Channel
European Savings Tax Directive, to which the users—hedge funds. Our current financial cri- Island dependencies and territories, or at
major European offshore financial centres— sis was the result of reckless lending and an least apply a greater degree of pressure to
including Switzerland, Luxembourg, Austria, irresponsible amount of leverage by the major them, but has thus far chosen not to. The
and Belgium—agreed, as well as many British onshore banks in the United States and European Union is likewise reluctant to apply
and European island territories. Under this Europe, not hedge funds or offshore financial too much pressure to member states such as
scheme, taxes on interest would be collected centres. Hedge funds have been a major con- Austria and Luxembourg for fear that they
from the client and paid anonymously to the tributor to the financial system’s liquidity, cre- would lose market share to other havens.
client’s home country. But alas, this pro- ating what became known as the “shadow” The end result has been that moves to limit
gramme now appears to be defunct, as “tax banking system, and they are needed now offshore investing have been slow and
transparency” has become the priority. more than ever. Tying the hands of hedge tenuous and generally hypocritical (after all,
One of the more bizarre subplots of this fund managers during a time when we desper- Britain herself could have been considered a
drama was the row between French President ately need the liquidity they provide is unwise, tax haven under its “non-dom” regime, and
Nicolas Sarkozy and Chinese President Hu to say the least. the United States continues to offer secrecy to
Jintao. Mr Sarkozy made the crackdown on In a recent letter to the editor printed in the foreigners in the form of Delaware and
tax havens, along with the regulation of hedge Financial Times, Philippe Manet makes some Nevada LLCs).
funds, his primary objectives and threatened, valid points about the value of the offshore For now, the biggest outstanding issue con-
with his typical Gallic flair, to walk out of the financial industry: tinues to be the US Justice Department suit
summit were his demands not met. Mr. Hu “Tax havens play a key role in optimising against Switzerland’s UBS. At the time of writ-
was also in favor of producing a tax haven the recycling of savings into the productive ing, no agreement has been reached on the
“black list”—so long as Hong Kong and sector. Were it not for these distribution chan- status of the 52,000 American accounts that
Macau were not on it! nels, the weighted average cost of capital of the Justice Department has ordered the bank
President Barack Obama brokered a com- companies across the world would rise sub- to surrender. This case is something that we
promise, convincing both sides to agree that stantially….” will continue to monitor, as it has potentially
the G20 would “take note” of an OECD list Mr Manet’s points are valid. We would hope significant implications for the future of off-
rather than “endorse” it. Apparently, this del- that many of our world leaders would realise shore saving and investment.
April 2009 Investment International
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