Government is rightfully thrilled to have dodged the bullet – the Premier sagely pointing out that our economy is important to our livelihoods, and promising that this is not the end of the process.

Let’s hope he’s sincere:  you can guarantee that the bar will be raised – not only on the issue of tax agreements but also on overall good governance.  Bermuda would be well advised to work on its overall frameworks for transparency, accountability, and anti-corruption.

I am glad to see the PLP finally, after ten years in power, acknowledging that international business is key to Bermuda’s future.  It has been slighted and ignore for too long.

Larry Burchall makes some good points in his Sun editorial today: Air tourism brings in about 17 percent of our foreign exchange, cruise arrivals about 3 percent , and international business a staggering 80 percent.

Based on this, our investments and priorities have been skewed.  Too much time and money on the cruise segment, with the main tourism product drifting while international business has been neglected.

One of the proposed changes would eliminate companies’ ability to defer tax payments on profits that result from overseas investments, which they currently can deduct immediately from their tax bills.

Corporations often use intermediate offshore holding companies so that profits from one international subsidiary may be used to invest in another – outside of the reach of US taxes.

The Obama administration says that this practise is abused to create “disappearing profits” so that, by their estimation, in 2004 U.S. multinational corporations paid an effective tax rate of only 2.3 percent on $700 billion in profits.

In doing this Obama says he is fulfilling a campaign pledge “finally ending the tax breaks for corporations that ship our jobs overseas” .. in the somewhat simplistic belief that the law encourages businesses to bolster their foreign operations instead of creating jobs in America.

This obviously will have a big impact in Bermuda, starting with the law and accounting firms and trickling down.  Fees and taxes levied by our Government are likely to be hit hard as well.

It will also have a significant impact on the ability of U.S. multinationals to compete internationally.  Last month, more than 200 companies and trade groups like the U.S. Chamber of Commerce, signed a letter saying the tax change would create a serious disadvantage versus international rivals, many of which are not required to pay taxes at home on overseas entities.

“Bermuda committed in 2000, but there has not been enough actions taken since that time,” Mr. Owens [of the OCED] said. “We’re not interested in just commitment, we want to see tax information exchange agreements agreed and implemented swiftly and effectively.”

While congratulating Bermuda on the progress made, he points out that some countries – like Belgium – who started later in the game were working on 20-30 TIEAs.  In other words, 12 is not the magic number … the bar will be raised … and the expectation is that Bermuda keep on working to sign more agreements.

Mr. Owens said realisation of the OECD’s aims would create a world in which “onshore and offshore financial centres will compete not on the basis of what secrecy they provide, but on what services they provide”.

Funnily enough, Mr. Owens seems to confirm exactly what the UBP’s Grant Gibbon said about our current government; that they are reactive rather than proactive, and very slow on delivering on promises and commitments.  We’ll hold our breath for a retraction of Minister Cox’s rebuke that Gibbons was “Irresponsible, Uninformed and Misguided blah blah blah”.

Secrecy is not a major component of Bermuda’s value add.  We must minimize this distraction while protecting our tax competitiveness – which is entirely legitimate – and other benefits to target industries like insurance.

The Prime Minister, Gordon Brown, has put British overseas tax havens under renewed pressure to end their culture of secrecy within six months or face sanctions. Mr Brown has written to all British Crown dependencies and overseas territories, setting them a September deadline to sign agreements to share tax information with the authorities…

The new move by Downing Street puts Britain in the unusual position of threatening punitive action against its own dependencies.  Mr Brown has also signalled in the correspondence that he wants to tackle not just illegal tax evasion through personal offshore bank accounts, but also tax haven companies used for tax avoidance by corporations and super-rich individuals.

Two comments:

1. In the interests of transparency, the Bermuda Government should publish this letter as well as Bermuda’s official response.
2. Mr. Brown should also speak with the bankers in the City of London, who represent a “brain trust” of tax avoidance strategies.  Good housekeeping starts at home, chums.

This means that all attention will now focus on the “greylist”, which includes Bermuda.

Obviously, it behooves Bermuda to make all efforts to be one of the first countries to enact sufficient reform to move off the list of targeted jurisdictions.

The TIEAs are just the start of it.  Bermuda must also move rapidly to improve the transparency and accountability of its Government, with freedom of information laws, stronger anti-corruption laws, whistleblowing provisions, and better contracting and audit performance, among other things.

The G20 countries have agreed to work towards levying sanctions on non-compliant countries.

• Read the OECD announcement
• Look at the OECD list

40 countries are shown as compliant, including the offshores of the Channel Islands, Isle of Man, Barbados, Mauritius, and Malta.

Four countries have been blacklisted:  Costa Rica, Malaysia, the Philippines, and Uruguay.

Bermuda is on the greylist of 39 “jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented”.  These countries are being observed for rapid progress towards compliance.

The current list shows Bermuda having only 3 of the recommended 12 TIEAs – bilateral information exchange agreements – but Minister Cox has announced that Bermuda recently signed or will sign a passle more of them.  It’s clear that this must be a continuing priority for Bermuda.

Of interest is the Cayman approach,where instead of chasing bilateral exchange agreements with individual countries, they enacted unilateral legislation identifying 11 countries which Cayman is prepared to open the kimono to.  This approach is being reviewed by the OECD.

Treasury minister Stephen Timms says the G20 have agreed to impose sanctions on tax havens that refuse to sign up to OECD rules to fight money laundering and tax evasion, although discussions are continuing over whether uncooperative havens will be named and shamed.

So, all the sound and fury from politicians leading up to the event seems largely to have been for domestic consumption.  However, it had the effect of sending many of the offshores scrambling to comply with the OECD standards (which, as noted before, Bermuda has been doing since 2002).

It seems that China has been the unlikely champion of the offshores, protecting its business interests in Hong Kong and Macao.

It will be interesting to see if the G20 countries apply those same rules to themselves; we all know that more money is laundered in the US and UK than anywhere else in the world.

I believe that Gordon Brown’s whipping up the hounds over offshores is merely a cover to distract attention from his earlier mismanagement of the UK economy.  All was rosy while momentum pulled the economy along, but now that the pinch is on, repeated and costly failures like his private finance intiatives (PFI) are coming home with a vengeance.

The attack on offshores is cheap populism – a convenient red herring. The politicians leading the chorus with complaints that companies “deprived the taxpayers of more than [insert crazy big number here] last year alone” are, to put it simply, full of shit.

1. These same politicians have been champions of global free trade.  There’s a contradiction in their current stance.  Free trade is about “making things in the most competitive place”.  Companies should also be able to choose the most competitive jurisdictions for their corporate structure.
2. No-one is depriving taxpayers of anything.  Governments are loosing out on tax revenue and that’s different.  Those same Governments have been mournfully bad about improving efficiency and services in their own operations.

Put it this way:  If an insurance company sets up in Bermuda, is it better that it pays X in taxes to a Government, or saves XX in the costs of procuring insurance to citizens and businesses in that same country?

The Economist, which is the only news magazine left worth reading, hits the nail right on the head:   the G20 countries have more laxity in terms of money laundering and other financial crimes than the majority of the offshore centres.

A money-laundering threat assessment in 2005 by the [US] federal government found that corporate anonymity offered by Delaware, Nevada and Wyoming rivalled that of familiar offshore financial centres. For foreigners, America is a particularly attractive place to stash cash, because it does not tax the interest income they earn. Thus with both anonymity and no taxation, America offers them all the elements of a tax haven…

America is not the only rich nation Mr Sharman [the researcher] tested. He tried to open anonymous shell companies and bank accounts 45 times across the world. These were successful in 17 cases, of which 13 were in OECD countries. One example was Britain, where in 45 minutes on the internet he formed a company without providing identification, was issued with bearer shares (which have been almost universally outlawed because they confer completely anonymous ownership) as well as nominee directors and a secretary. All was achieved at a cost of £515.95 ($753).

In other cases Mr Sharman formed companies by providing no more than a scanned copy of his driving licence. In contrast, when trying to open accounts in Bermuda and Switzerland, he was asked for documentation such as notarised copies of his birth certificate. “In practice OECD countries have much laxer regulation on shell corporations than classic tax havens,” Mr Sharman concludes. “And the US is the worst on this score, worse than Liechtenstein and worse than Somalia.”

This is a witchhunt, plain and simple.

Take this fine rant:

But what reason other than evasion could there be for Goldman Sachs Group to set up three subsidiaries in Bermuda, five in Mauritius, and 15 in the Cayman Islands? Why did Countrywide Financial need two subsidiaries in Guernsey? Why did Wachovia need 18 subsidiaries in Bermuda, three in the British Virgin Islands, and 16 in the Caymans? Why did Lehman Brothers need 31 subsidiaries in the Caymans? What do Bank of America’s 59 subsidiaries in the Caymans actually do? Why does Citigroup need 427 separate subsidiaries in tax havens, including 12 in the Channel Islands, 21 in Jersey, 91 in Luxembourg, 19 in Bermuda and 90 in the Caymans?

This spit-frothing populism will hurt their own companies who need to compete internationally.  Sure, there is work to be done on international regulatory frameworks and transparency, but don’t believe for a minute that it’s a good idea to reduce jurisdictional competition.

So for every American who gets worked up about “offshores stealin’ our gosh darn tax dollars” … I’d like to remind you that there’s a Californian who should be asking why so many of their corporations are registered in Delaware.  Same principal, chums.  I don’t hear many people calling for regime change in Vice President Joe Biden’s hometown.

Finance Minister Paul Cox finally gave a statement today in Parliament which answers some of those questions:

“President Sarkozy and other European leaders from the G20 have said that they will crack down on tax havens as they seek to boost transparency and to apply uniform rules governing financial markets in the wake of the global economic crisis. I remind the House that on 28th November 2008, Jeffrey Owens, Director of the Centre for Tax Policy Administration at the OECD, favorably mentioned Bermuda as one of the jurisdictions which upholds its obligations under tax information exchange agreements (TIEAs).  He pointed out at that time that only seven centres, including Bermuda, were fully compliant with OECD transparency standards.

Mr. Speaker, of special note in 2008, an OECD sub-committee recommended that the new standard for countries is to have a minimum of 12 signed TIEAs. This is in order to advance the tax information exchange network and to demonstrate a commitment to transparency.”

To summarise, she says:

• Unlike those other countries that are rushing about now to sign TIEAs (yeah, we’re looking at you Switzerland), Bermuda is no Svennie-come-lately to TIEA compliance having signed its first agreements with the US in 1986 and 1988 and participating in the OECD working group that created the OECD Model TIEA in 2002;
  
• To date, Bermuda has signed three TIEAs with the US, Australia, and the UK;
• Next month, she will sign 8 more with the Nordic Group countries and with NZ;
• And they hope to sign one with Germany soon too, and are now talking with 2 other EU states; and
• They are speaking with the EC about how the EU Savings Directive might be implemented here (Bermuda being one of the few holdouts).

She also tries on this argument – which is rather clever and certainly true – but unlikely to appease many onshore critics.

Bermuda is not one of those countries that has designed its fiscal regime to attract international business.  Bermuda’s consumption-based tax policy has been in place since the 19^th century. This regime is a credible tax regime which raises substantial tax revenue proportionate to our key foreign trade partners such as the US and Canada.  In Bermuda, the ratio of total Government tax receipts in relation to GPD was approximately 17.8 per cent in 2007. For the United States and Canada this ratio was in the range of 19.5 per cent to 20.5 per cent of GDP in 2007.

Bermuda’s been playing square with the regulators for a long time.  However, it’s the politicians who are the problem – lumping us in with offending jurisdictions out of populist enthusiasm.  The Bermuda Government seems to generate a release-a-day to inform the world of Dr. Brown’s latest feats of spin:  why are we not communicating our business message more clearly?  I mean, really?!

I encourage Government to continue to be more forthcoming like this with facts – instead of the normal Gold Standard™ waffle.

Moreover, the Bermuda Government must begin some concerted steps to mend bridges with the international business community here.  It’s nice that the Premier knows how to make a Harvey Wallbanger, but it would be good for all of us if he spent some time understanding the needs of the business world as well.

(Swiss President) Merz said the country — which already works with other countries to fight terror financing and return dictator cash — will now adopt standards set by the Paris-based Organization for Economic Cooperation and Development for countries working together against tax evasion. Switzerland had refused to commit to the standards since they were written in 2000 for fear of compromising banking secrecy rules…

He said, however, that Switzerland will maintain banking confidentiality for clients unless foreign governments produce concrete evidence of tax evasion. Switzerland’s new cooperation will come into force after agreements with other governments that provide Swiss banks with new financial opportunities, he added.

Countries are hustling to protect themselves before the G20 meeting next month.  This move by Switzerland may increase its attractiveness to Bermuda companies that are seeking to change domicile.  Bermuda needs to continue its efforts to work sensibly with international regulators – and start some serious efforts to mend bridges with our international business clientèle. We get the occassional media release from the Minister of Finance, but insufficient visible action from our leadership on this latter element.