TAX DELAY THREATENS LOCAL JOBS

GOVERNMENT SHOULD ACT NOW TO KEEP FINANCE CENTRE COMPETITIVE

 Local jobs at risk as financial crisis worsens

 Gibraltar's finance centre - and its 3,000 or more employees - are under threat...not just from the global credit crunch and the domino chain of international job losses it has engendered, but from Government tardiness in implementing its promised corporate tax cuts. While it is widely expected that, wearing his Finance Minister's hat Peter Caruana will introduce a significantly reduced level of company tax in his June Budget, he may find it impractical to implement the cuts immediately. And, even if he does, it may be too late to prevent an outflow of investment to other more benevolent jurisdictions.

Significant Tax Differences

The threat to investments and jobs becomes apparent from a remarkable document issued by the British Treasury in mid-April. It is an interim report of  the Michael Foot review of British Offshore Financial Centres and it spells out not only the significant differences in corporate and other taxes between Gibraltar and its rival jurisdictions but also the levels of ‘compliance' which the nine British ‘colonial and overseas territories' have reached. We lag behind most on several counts.

The implications of the interim Foot Report contrast sharply with the euphoria with which No 6 greeted last December's ‘victory' in the European courts and prompted the bungled declaration of an extra public holiday. "Without our ability to devise and implement our own tax regime, Gibraltar's economy, and thus our social and political model, could not have survived," Caruana said at the time. "This would have represented a massive political, economic and social blow for Gibraltar."

By then the first tremors of the global earthquake shaking the world's finance structures had already been felt and offshore centres were jockeying to protect themselves and attract support. With the verdict being given in the Rock's favour, this would have been the time to introduce new easier tax measures, many in the finance sector believe.

Instead, Jersey, Guernsey and even the Cayman's were allowed to steal a march on us.

The Foot Review is described as looking at "the long-term opportunities and challenges facing the British Crown Dependencies and Overseas Territories as financial centres, which have been brought into focus by recent financial and economic events". And it is working with these finance centres "to identify opportunities and current and future risks (and mitigation strategies) to their long-term financial services sector, including: financial supervision and transparency;  taxation, in relation to financial stability, sustainability and future competitiveness; financial crisis management and resolution arrangements;  international cooperation."

The Review expects provide "insights" into the amounts and nature of funds which flow between the financial centres and the UK in particular as well as what factors, other than tax, govern the choice of financial firms to use particular financial centres. It is also looking at each centre's track record in meeting international minimum standards in areas such as financial regulation, anti-money laundering and  the sharing of financial and tax information.

But, as one critic points out: "Just when the world has decided it's time to have a crackdown on tax havens, the review ... seems to think the real goal must be to help these territories' banking sectors get through difficult financial times".

Odd Choice Of Chairman

Michael Foot, was always an odd choice as chairman if the intention was to really probe the role of so-called tax havens, nor does its terms of reference really focus on the key issues in the international debate.  They haven't worked and as one financial observer wrote recently: "The fundamental problem is that Foot is seeing the world through the eyes of the havens themselves - unsurprising given that he has spent his time on a tour of those havens.  How else to explain this bizarre sentence in the report: ‘More broadly, the growing focus on tax avoidance and the emergence of national initiatives such as the US Stop Tax Haven Abuse Bill will continue to shape international opinion in the short to medium term. Each centre will need to take this into account in balancing the real or perceived competitive advantages of current tax regimes with the need to generate sufficient revenue to support its domestic economy'."

"Foot may get a shock when he experiences the strength of feeling there is about tax havens.  But the Treasury needs to address the failings in this review now or else HM Government will be publishing a whitewash at precisely the time the G20 Finance Ministers might be deciding to get even tougher on tax havens at their meeting in St. Andrews in November.  That would look even odder than this progress report and prove a big embarrassment to the PM and Chancellor".

In the interim review Foot and his team warn that Budget statements made in a number of the centres recently have acknowledged the challenge of coping with a period of retrenchment by the financial sector and that this "challenge will be particularly acute in the event of a significant and protracted downturn in business in the financial sector. The success of the financial centres in attracting business means they are heavily reliant for revenue and employment on the financial sector.

"In relative terms, that reliance is much higher than in the UK, in some cases over five times higher. Added to that, the policy tools the financial centres have at their disposal to deal with economic volatility are generally more limited than those available to a sovereign state".

But it does contain elements of optimism and suggest it would be "wrong to assume that no opportunities will flow from recent events, particularly as the global economy begins to recover. The financial centres are well used to operating in a competitive market place and to adjusting to changes in the economic and regulatory landscape".

Weathering Current Crisis

What is coming under scrutiny though is the ability of each financial centre to weather the present crisis for, if a centre  - or even a particular firm - cannot there are clear implications for the UK and Treasury.

Such questions are affected by a number of factors. Firstly, financial regulators everywhere face the prospect of substantial additional demands on their resources to implement wide-ranging changes to international regulatory standards. Meeting these "is not only important for the integrity of the financial system, but also for attracting financial services business from centres which are unable to do so," according to Foot.

But financial centres also will need to review their current legal structures to ensure the legal framework and institutional infrastructures are in place to deal with major shocks.

(Gibraltar and some others already have depositor, policyholder and investor compensation schemes in place to provide a ‘safety net' and those who do not will need to consider the extent to which such safety nets are considered vital for the business proposition. All will need to consider the funding implications of a major call on a compensation scheme and the local consequences of the failure of a major firm.)

Exchanging Tax Information

All of the financial centres have committed to the internationally agreed standard on the exchange of tax information developed by the OECD. However, the progress report published by the OECD on 2 April 2009 following the G20 Summit shows that a number of the financial centres have more to do to implement the international standard and we are among these.