Tuesday, 14 April 2009

International Business Avoidance Company

Jersey gets a brief mention in this week's Private Eye, but the bulk of the focus is on BVI and their schemes.

The BVI is home to a million mostly single-purpose companies that pay no tax, provide no accounts, need no auditors or shareholders' meetings, offer shares in anonymous bearer form, need only one nominee or corporate director and offer good-to-go formation within days - all for under £l,000.
Beneficial ownership is supposed to be disclosed to the local manager or agent, but not to the local financial services commission regulator who can, however, demand ownership information. That can be sidestepped by way of lawyers, banks or accountants in other secrecy havens claiming client privilege. A paradise indeed for those looking to hide assets or corrupt deals - or even the payment of informers, like the ' US authorities have been reported as doing!
The BVI was the creator of the IBC, or "international business company", which it pioneered in 1984, since copied by all the Caribbean havens. (Ironically BVI has recently renamed all its IBCs simply "business companies" - the name changed to protect the guilty.) The IBC is to companies what the numbered or anonymous bank account is to criminals, a Kevlar shield against prying law-enforcement investigators or civil-action lawyers' eyes.
In the words of a leading London offshore company-formation specialist, the IBC is "easy to set up, has low maintenance cost, is confidential, has no filing requirements, is exempt from any taxation". A rival adds: "BVI incorporation documents do not carry the name or identity of any shareholder or director. The names or identities of these persons do not appear in any public record... Shareholder(s) and director(s) nominee services are allowed to ensure confidentiality of beneficiaries... BVI companies records and accounts do not have to be held or filed with the authorities. If the shareholders, directors or officers decide to maintain such records or accounts, these may be held anywhere in the world."
A BVI website promotes these advantages: "minimal regulations", "no wealth, capital gains or estate taxes", "asset security", "protection of wealth benefits", "legislative exemptions" and an "enlightened Financial Services Department (which has) maintained minimalist yet tight regulation to safeguard the integrity of the jurisdiction".
Clearly every home should have one. Which is why the growth of BVI offshore companies has been phenomenal, from around 300,000 at the start of the decade to 535,000 in 2002 and 852,000 in 2007 - a year in which more than 77,000 companies were formed. The figure is now believed to have passed the 1m mark. The greatest fans are Russia and, more recently, China - countries where tax evasion, flight capital and corruption are rife. For the issue with the BVI is not just tax but, more importantly, secrecy.
Jersey copied BVI in January 1993 when Pierre Horsfall, then Finance Minister, brought in the International Business Company (created in BVI in 1984) to great fanfare.

The Independent noted that:

Jersey will introduce the international business company, a structure by which multinationals will be able to reduce the tax they pay on inter-company financing. IBCs will pay a maximum tax on profits of only 2 per cent, falling to 0.5 per cent on profits of more than pounds 10m.

Unlike BVI, however, there was a requirement of satisfactory disclosure of beneficial ownership to the Jersey Financial Services Commission. Even despite this, there were 184 international business companies in Jersey by March 1994.

However, although it is still holding on until 2011, the IBC can no longer be formed in Jersey, as noted by Trident Trust, because of the changes needed to avoid harmful tax competition (whereby external and internal taxation of companies differs significantly):

The preliminary phase of the implementation of Jersey's adherence to the European Union Tax Package in 2003, whereby Jersey agreed to make changes to its tax regime involving the introduction of a general rate of 0% and to phase out companies with tax exempt status was to first abolish International Business Companies.

The International Business Company was abolished with effect from 1st January, 2006. Existing beneficiaries of the International Business Company regime at that date continue to enjoy the benefits thereof, but subject to them being progressively phased out by the 31st December 2011.

What is always disconcerting is that such an abolition is a result of political pressure, rather than as a result of considering the ethical implications . There seems to be too little philosophical scrutiny about the deeper ethical consequences of this kind of action, as long as it follows accepted "codes of practice". When introduced, no one seems to have been concerned about the ethical implications of copying a kind of structure that was clearly designed to promote tax avoidance from the UK by way of purely technical balance sheet transactions to reduce tax (with no actual trading considerations). The Jersey IBC document mentions one of the advantages as "avoidance of CFC legislation", which the UK Government spelled out as follows:

The purpose of the CFC legislation is to prevent UK companies from avoiding UK tax by diverting income to subsidiaries in low tax countries. A CFC is a company which is not resident in the UK (but which is controlled by individuals or companies who are) and which is subject to a level of taxation less than three quarters of what it would have paid had it been resident in the UK.

Perhaps we need more philosophers in the States! And in the BVI, Private Eye notes tighter restrictions:

The BVI has also been imposing tighter restrictions on IBC/Business Companies. Bearer shares - the most effective way to hide ownership - will go next year. Evidence of ownership will need to be provided, but there are loopholes - such as accepting that the information is held elsewhere and will be provided....More information may be made available to the UK and US and others with a big stick. But just how much information on those companies and their bank accounts, usually in other havens like Switzerland, Jersey or Luxembourg, will be provided on the BVI's biggest customers - the Russians and Chinese - or those from developing countries in Africa, is likely to be a very different story.

For the other BVI vehicle for tax avoidance, the VISTA - a special Trust vehicle, and other named and shamed avoidance schemes  - including Barclays - I would thoroughly recommend buying this week's Private Eye.


No comments: