Tax havens are toast

The world has recently seen Russia cut off from the West’s financial system, and something similar is likely to happen to many of the places commonly known as “tax havens”. In short, tax havens are the next Russia – and it’s great for Guernsey!

The Cayman Islands, the British Virgin Islands (BVI), Mauritius… Offshore tax havens of that ilk are toast.

Excuse my bluntness. I’ll probably lose a few professional contacts over this post, and the article should carry a trigger warning for anyone who does ANY business (including legally) with these jurisdictions. However, it’s a very important issue, so I am not going to mince words.

If you are using any of these jurisdictions to hold assets or operate companies, then good luck putting your wealth to a productive use in the future. You might not even be able to transfer your money elsewhere anymore.

Why?

Here are just some of the stories I have recently picked up in my network (all anonymised):

• An Austrian friend is officially and legally moving to Mauritius. His home country’s bank is obstructing his money transfer, even though it’s for the purchase of real estate advertised by an international estate agency.

• A Chilean contact who runs her global import/export business through a Panama company is finding that a growing number of banks elsewhere simply refuse to deal with Panama – even though she is doing everything legally. She has constant issues sending and receiving money: “Computer says ‘No’.”

• For many years, the Asian owner of a multi-billion-dollar investment manager exclusively used Cayman Island entities to launch funds. These were the standard solution of the hedge fund industry, used for 70% of all hedge funds worldwide. However, he will now stop using them for new fund launches. He concluded that Cayman entities expose not just his clients, but also his funds and his own firm to unnecessary risks, such as losing the fund’s bank account or even having assets frozen.

These are anecdotal stories, but I hear them ever more frequently.

It’s no surprise, and it’s been coming for years. The world has recently seen Russia cut off from the West’s financial system, and something similar is likely to happen to many of the places commonly known as “tax havens”. In my view, it’s not “if”, and it’s not even “when” – it’s already underway!

In this article, I’ll explain the political and financial drivers behind this development, and what it will mean for the individuals who are affected by it.

Whatever your personal stance on the underlying political and philosophical issues, this is simply the direction in which the world is moving. You may be able to manoeuvre around it for a little while longer, but the issue is not going to go away, and it will likely catch up with you eventually. This time, it’s serious.

As someone who lives and runs a business in the Bailiwick of Guernsey, I actually welcome these developments.

My stance may seem counter intuitive. Isn’t Guernsey – one of the Channel Islands in the English Channel and a so-called Crown Dependency – a “tax haven” as well?

To which I say: LOL!

If you believe the Channel Islands are a tax haven, you are so misinformed that I urgently recommend you read the entirety of this article. It might be the best 15 minutes you spend today, and others would probably charge you a lot of information for this information.

Almost every day, my colleagues at Sarnia Asset Management and I discuss with a broad variety of people where to base assets, companies, investment fund structures, and wealth. We are flabbergasted how much confusion and misinformation exists out there. As the staff member who has more freedom to speak his mind in public and call a spade a spade (being CEO and large shareholder), I decided to tackle this controversial subject and write about it on our company’s website.

Whether you are an entrepreneur, an investor, or fund manager, this article will give you a window into the future.

Ignore the following at your own peril.

Tax havens: inevitable developments you need to know about

For well over two decades, I have been preaching the following to anyone who was willing to listen:

“If you want to make use of so-called tax havens, you either have to physically base yourself in one or else just forget about the idea.“

I already said as much at a time when you could still carry wads (or suitcases) of cash across the border to Switzerland and use that country’s famous banking secrecy to hide the dosh. Doing so did work until the 1990s, and millions of investors made use of it. There were manifold variations of it. For example, at the time it was also perfectly feasible to use an offshore company to redirect some of your income and reduce the taxes you paid at your onshore domicile. It was mostly illegal, or at least in a grey area, but the risk of getting caught was low and you were able to do it all without leaving the comfort of your home.

However, this entire system lived on borrowed time.

My mantra was always: “Big Brother will be coming for you, and you’ll regret it.“

As far back as the mid-1990s, I told anyone who was willing to listen that electronic data exchange and government surveillance would put an end to these practices eventually. To be precise, from 1 April 1995 it was all too clear which direction of travel this issue would take.

On that day, 20 of the world’s most powerful economies agreed to assist each other in tax matters. It was an imperfect system initially, with more loopholes than a Swiss cheese. But the Organisation for Economic Cooperation and Development (OECD) – as the driving organisation behind the initiative – always had its eyes set on an ambitious goal. A global, electronic, and automatic exchange of information between nations, to ensure that every penny of income earned by someone somewhere was automatically reported to the tax authorities of that person’s home country.

The mills of the OECD grind slowly, but grind they do.

In 2009, a new protocol came into force that unified the tax information collected by an initial 70 countries. During an initial eight years, the exchange of this information between the member countries was mostly voluntary. Since the passing of a 2017 deadline, it has become obligatory and automatic. The OECD used the ensuing time to sign up more countries, and many countries chose to start the exchange of information ahead of the deadline.

Today, ≈160 jurisdictions are participating in this global, electronic, and automated exchange of tax information. This includes all G20 and OECD countries, practically all international financial centres that are worth mentioning, and an increasing number of what used to be known as developing countries.

This network of information exchange has now reached such a scope where there is virtually no getting away from it anymore. It’s complemented by a system where an increasing number of countries offer substantial cash rewards to whistle blowers who help to collect tax, even if the client information was stolen – effectively legalising data theft provided it serves government, all aimed at creating a perfect web of surveillance. A 1984-type Big Brother has arrived, and any attempt to illegally evade tax using “tax havens” is bound to get you caught up in the electronic dragnet.

Which is fine. After all, everyone is in favour of people respecting laws and governments enforcing them. We all like to live in civilisation (excluding a limited number of crypto bro’s – but they have got their own set of issues right now). Judges and policemen have to be paid for somehow, and without taxes we couldn’t sustain the nation state with all that it offers its citizens.

The problem is, there is more to come.

The next phase of the OECD’s work will create tremendous problems for anyone who is currently basing their activities out of the wrong kind of jurisdiction – even if it’s done entirely legally!

Just like back in 1995, few people have these upcoming developments on their radar. Many will prefer to continue to live in denial for a while longer. However, the writing is on the wall, and developments will take place much faster now than they did back then.

If you are using places like Panama, the BVIs or Mauritius for something entirely legal (which nowadays would be most people who do), trouble is heading your way.

A much broader assault on tax havens is coming

Getting the tools to prosecute tax evasion – the illegal way of reducing your taxes – was only ever the first step in the ambitions of supra-national organisations like the OECD.

Governments, bureaucracies, and international organisations forever try to extend their mandate. What started as an effort to tackle tax evasion has now become an effort “to tackle tax evasion and avoidance“. Check it for yourself, you can see it on the website of the OECD.

The last time I checked, “tax evasion” was illegal and “tax avoidance” was legal. The #1 Google search result for tax avoidance reads:

“Tax avoidance is when an individual or company legally exploits the tax system to reduce tax liabilities. … Simply put, it means paying as little tax as possible while still staying on the right side of the law.“

Why would the OECD, an international organisation that never faces any direct accountability to the voters (= taxpayers) of its member countries, want to tackle something that’s legal and enshrined in national laws?

Because we now live in a new world.

It’s a world where national governments increasingly get away with not abiding by laws anymore, and where international organisations increasingly have a say in how people live.

Governments and international organisations increasingly govern based on vague, vapid concepts.

The latest one of which is so-called “unfair tax competition”.

You can stretch and twist this term into anything you’d like it to mean. It’s part of a wider cultural and political development in the Western world, one where:

• The sitting US President claims “the US Constitution isn’t an absolute.“

• Policies are based on concepts such as “social justice“.

• Assets can now be seized from the citizenry of entire nations without due process. In the past, this would have been possible only after formally declaring war on another nation, but as the case of the Russian sanctions has shown, it’s now merely a matter of which direction the political winds blow.

All of this is mixed with other societal phenomena of our time, such as:

• Corporatism, i.e. the concentration of ever more market share and power in a few corporations, many of which employ lobbyists that work to actively supress small enterprise and entrepreneurship.

• Safetyism, i.e. the elevation of safety above all else.

• Cancel culture, i.e. the outright elimination of that what is deemed unacceptable.

It makes for a complex mix, and any multi-causal system is difficult to analyse and explain.

For so-called tax havens and the people who use them, the bottom line is clear. If you operate through old-style tax havens such as Panama, the BVIs or Mauritius, you’ll soon get a taste of how Russian oligarchs with Western assets feel today. If my sense for trends is anything to go by, you’ll find yourself increasingly cut off from the rest of the world. Maybe you are already, like my friends I mentioned earlier.

Is it fair?

Is it justified?

I doubt these questions matter anymore. We now all live under the clout of a political class for which the leading motto famously is: “Whatever it takes.“

German and French speakers were recently able to watch a two-part documentary about the history (and implied future) of taxation. A senior official of France’s Authority on Competition, Christophe Strassel, made it clear: “For as long as anywhere in the world one tax system is in competition with another one, sovereign nations will not be able to shape their own system of taxation.” He continued to explain that the free flow of capital needs to be stopped and capital control measures need to be adopted.

I already published an article elsewhere about the risk of capital controls coming back. Just ask yourself, if EU governments are already starting to talk about capital controls in their own territory, what are the chances they’ll let proponents of “unfair tax competition” continue to operate? Politicians the Western world over have just done a useful trial-run in how to cut off an entire nation (and its citizenry) from the global financial system. Who wants to bet that the same politicians – many of which are long-standing advocates of more taxes and less competition – will not use these lessons and apply them elsewhere? The unprecedented clampdown on Russian assets in the past few months is a weapon that authorities will now have developed a taste for and wield again. When debt is high and GDP growth is slowing, tax collection has to rise somehow.

The fix is in. In a world that lives under the spirit of safetyism, corporatism, and cancel culture, large banking corporations have already started to race ahead. Would you like to buy a house in a jurisdiction that is deemed “harmful” to the public interest of your current home country? Your bank is a private corporation and entirely free to decide which bank transfers it deems too risky to carry out. Even if it didn’t have that freedom, it could still annoy the heck out of you simply by being obstructive. They’ll know you probably have nowhere else to go, other than similarly large banks with analogous standards (most of which wouldn’t accept you as a client anyway if you had a link to a place deemed dubious or if they hear you had problems with your banking relationship elsewhere). Being both closely aligned with government and afraid of cancel culture-type mob action, banks will more likely cut bad jurisdictions out of their service offering than to risk problems with the minority of customers for whom such services matter. It’s already happening, though little public reporting about it exists, because who would speak about their personal experiences to a journalist?

Mind you, the tax havens themselves also share the blame. Many of them brought this upon themselves and are now merely reaping what they sowed.

Many jurisdictions had it coming

Some international finance centres have spent decades building their services, created a culture of excellence, and were realistic about inconvenient truths that forced adjustments to how they operate.

Others just latched on to a hot trend, put minimal systems in place to exploit a loophole, and preferred to live in denial when external factors brought their model under pressure.

There is another side of the argument to what I set out above. The world has simply evolved, and many of the places commonly referred to as tax havens simply missed their chance to evolve and adapt.

Tackling terrorism financing? Since 11 September 2001 at the latest, every country on earth knew this was going to be a priority. A full 21 years later, Panama is still “among the top countries for … terrorism financing in Latin America“. How is that even possible?

Money laundering? Since the mid-1990s, every financial centre in the world will have been aware that this is a top priority in the minds of policy makers and the public alike. To this day, the Cayman Islands cannot conclusively prove that within its borders “money laundering cases are being prosecuted and resulting in effective and proportionate sanctions”. As a result, in February 2022, the Cayman Islands were added to the EU’s “black list” of jurisdictions.

When dragging your feet is a key part of your business strategy, you become vulnerable. 

Jurisdictions that ended up on a naughty list will usually point you towards new laws and regulations they passed, and claim that they have changed their ways. Without a doubt, in all of these jurisdictions there are many hard-working, law-respecting professionals in the business and government sector who make a real effort to establish the necessary standards. However, it’s an open secret in offshore banking circles that many (if not most) of these jurisdictions repeatedly use the passing of new laws to kick the can down the road. They pass laws, implement some measurable steps to show a degree of action, get off a list, fail on enforcement because they just don’t have the staff capacity or the culture to enact lasting and thorough change, and then get back onto another list.

In the post-Madoff, post-GFC and post-Russia-vs-Ukraine world, many of these financial centres simply will not be able to compete anymore with the operating standards that most sophisticated investors, entrepreneurs, and fund managers demand from a jurisdiction. They can pass laws because you can literally copy the existing laws of other jurisdictions. Creating the necessary competent staffing and the underlying culture to actually live these laws on a day-to-day basis is an entirely different matter altogether.

It ties right back to the opening premise of this article. If you are still using such jurisdictions, you are hugely exposed to risks that could burst onto the scene at any moment. I already see parts of what this article sets out happening in real life. For example, much as Malta has recently worked successfully to get off the EU’s naughty list, some Maltese banks have in the meantime lost some of their correspondent banks elsewhere (because the correspondent banks have started to simply cut off certain jurisdictions). You may still be able to use Maltese banks, but you may find in day-to-day business that your bank won’t let you transact in certain currencies anymore. It’s a creeping process and those affected by it are reluctant to speak about details, which is why there is so little about it written in publicly available sources.

Which begs the question, what should you do about it all?

Guernsey Simply Knows How To Strike The Right Balance

What many on the outside get confused (or are actively misled) about is the fact that Guernsey has a culture that is different from much of the rest of the Western world. This culture entails:

• Putting responsibility in the hands of the individual whenever possible.

• Being fiscally prudent instead of overspending.

• As a result of the two previous points, limiting government to areas where it’s absolutely necessary.

Guernsey has an income tax of 20% – so much for “no taxes”.

Such headline tax rates tend to provide just one part of the picture. A tax rate of 20% may be much lower than elsewhere, but residents of Guernsey also have to pay out of their own pocket for necessities that elsewhere are covered by government. Citizens of Denmark and Sweden will pay higher taxes, but also receive many more government services.

Some types of companies in Guernsey can benefit from a 0% tax rate. However, as has been documented by economists decades ago already, corporate taxes are only ever passed on to the consumer and as such are mere window dressing. All corporate taxes are ultimately borne by shareholders, workers, and customers. Corporate taxes are just another veil to distract the less informed from the whole weight of their personal tax burden (check my article about “Understanding your Lifetime Tax Bill” to learn more about this).

Guernsey as a “tax haven”? You have got to be kidding!

What Guernsey does have is a system of government that is shaped around the long-standing preferences of its citizens.

The state apparatus in Guernsey is legally limited to 24% of GDP. The levels of burden elsewhere are 32.8% in the UK, 33.5% across the OECD, 38.3% in Germany, and 45.4% in France (source: OECD, 2021).  

The national debt of Guernsey amounts to less than 25% of GDP even when factoring in the fall-out of the pandemic, compared to 85% in the UK, 136% in the US, and 60% even in Germany.

That’s careful planning and prudence wrapped into one, and done by a jurisdiction that has had a stable form of government for centuries, and which to this day has virtually no crime, no unemployment, and not even political parties. Politicians in most Western governments will be afraid that anyone will take notice that such jurisdictions exist (and thrive), which is why they occasionally badmouth them.

Unfair tax competition? Guernsey is far removed from being the kind of tax haven that authorities elsewhere are railing on about. It’s a different system than what is found elsewhere, and it will need tweaks to deal with changing international demand and to deal with the fall-out from the pandemic. However, it’s already pretty close to striking just the right balance between these competing needs. 

The same shows in its financial industry, too.

Guernsey was long known in the financial industry as a comparably tedious place in which to do business:

• OECD information exchange standards? When others were still dragging their feet, Guernsey became one of the first adopters of these standards in 2009. During the early years of these standards, this created additional work (and costs) that back then you were still able to evade if you moved your business elsewhere.
• Shell companies to enable tax evasion? Guernsey never offered the kind of brass plate companies that you would have found (and still find!) in the likes of Panama, the BVIs, or Mauritius (three countries I picked as mere examples). Many an enquiry sent to fiduciaries in Guernsey led to disappointment when the prospective customer was told that this kind of service is not available in Guernsey.
• Standards in client due diligence? When other jurisdictions were still lax about the origin of funds, Guernsey already applied strict standards. This made customers rip out their hair over lengthy due diligence questionnaires, when elsewhere they were handed much shorter forms.

Guernsey is OECD White Listed and has been so since 2009. That’s a 100% perfect track record for being on the right side of long-term trends and doing so proactively.

Adopting higher standards right away cost Guernsey business at the time, but playing the long game has now started to pay off. Guernsey is an OECD White Listed jurisdiction with a deeply embedded culture of being ahead of these developments instead of dragging its feet. Its government and its financial regulator are totally on top of these matters and constantly ahead of the curve. As a result, Guernsey can offer its clients stability above all else, which is now placing it among the top jurisdictions for moving business to.

More than one of my contacts has recently opted to relocate to Guernsey. They are now moving their company, their investment fund, their bank account, or even their personal residence to the Bailiwick to use the jurisdiction as one of the solid pillars they base their life on. This includes contacts who would never previously have considered Guernsey.

Of course, Guernsey has its downsides, too. For some, other jurisdictions will work much better for any number of reasons. That could be places like Switzerland, Liechtenstein or Singapore, which have also successfully evolved to operate in the new world we are living in. However, when people now run a matrix of the jurisdictions that they can move “A&A” (ass and assets) to and be sure that it’ll be safe in the long-run, Guernsey appears somewhere among the top spots of a relatively short list.

Given the trends described above, Guernsey (almost) just needs to lean back and wait for business to fall into its lap. As described above, this has already started. What used to be a trickle of new business has already become a stream and could soon become an avalanche.

The tax havens’ pain is set to become Guernsey’s gain.

My Advice: Investigate It Yourself, Or Ignore At Your Peril