“If you have a Japanese corporation wanting to do business with a U.S. corporation in relation to a project in Brazil, the Japanese corporation probably wouldn’t be that keen on the idea of having a joint venture vehicle [incorporated] in the U.S. because of the impact of U.S. regulations and taxation,” he says. “Conversely, the U.S. corporation would not want to see the vehicle structured in Japan. An offshore jurisdiction provides a neutral venue.”
Bridges spoke to CFO Innovation’s
Cesar Bacani about the latest developments in going offshore, including tax and anti-money laundering
Given the post-crisis environment, G20 government closing tax and regulatory loopholes and so on, is there any advantage for businesses to set up in offshore jurisdictions?
I think the view out there, which is probably an accurate view, is that there has been a political desire to look for scapegoats, and the offshore industry has been a traditional scapegoat of first choice in many ways. I’ve been working in this industry for about 15 years and over that period of time, there have been periodic attacks on the offshore industry.
But the reality is that the offshore industry has continued to grow year-on-year. I suspect that perhaps 2008 was a year when it didn’t grow, but frankly I think that’s the only year in my experience where there’s hasn’t been growth. I think now we’re starting to see growth again.
I think it’s really a function of global trade and commerce. Globalisation and offshore are completely entwined in terms of their destinies. As we continue to have globalisation, there will be [continuing] need for offshore jurisdictions.
The perception is that if you go offshore, that means you’re hiding something or you’re looking for a tax haven.
I think that’s more to do with certain Hollywood and other fictional [stories]. But it’s fair to say that if you were to look at the 70s and the 80s, at that time there was some truth in that. People would literally turn up at some of these jurisdictions with big cases of money. I can say quite happily that I was still in school at the time. I went offshore in the mid 90s and I can tell you throughout my entire career AML [anti-money laundering] has been a very fundamental part of offshore process. All of the clients that we work for in a corporate context are legitimate commercial enterprises, many of whom are household names. They’re not of the type that is still associated with offshore industries.
What may be the legitimate reasons for a company to incorporate offshore?
You have an international transaction involving parties located in different countries with different tax regimes, different roles and different complexities. When those parties look to do a transaction together, the question is, where do they base their joint venture vehicle?
By way of hypothetical example, if you have a Japanese corporation wanting to do business with a U.S. corporation in relation to a project in Brazil, the Japanese corporation probably wouldn’t be that keen on the idea of having a joint venture vehicle [incorporated] in the U.S. because of the impact of U.S. regulations and taxation. Conversely, the U.S. corporation would not want to see the vehicle structured in Japan.
An offshore jurisdiction provides a neutral venue. It allows the Japanese investor or corporation to comply with Japanese regulations and Japanese tax laws and the U.S. joint venture partner to comply with U.S. regulations and tax laws.
Provided that those two jurisdictions recognise the offshore centre.
You do see some jurisdictions, Mexico for example, where they have specifically blacklisted certain [offshore] jurisdictions and therefore you see very little offshore activity with Mexico. But despite the rhetoric, most governments in the developed world, in particular, recognise that offshore jurisdictions play a legitimate role in the facilitation of trade.
The reality is it’s much more difficult to set up a business in terms of hiding your identity in an offshore jurisdiction than it is in the UK or U.S. I read a news story about an individual who set out to try and form a company in as many places as he could without actually having to give information about who the beneficial owner or business entity was. I recall that he succeeded approximately 50 times -- with something like 27 of them in the U.S. and 17 in the UK.
The OECD has a so-called white list of jurisdictions that have substantially implemented the internationally agreed tax standard that the OECD has developed in cooperation with non-OECD countries. Do you operate only in offshore centres included in this white list?
All the jurisdictions that we operate in – Jersey, Guernsey
, Cayman, BVI – they’re all white- listed.
Why these four jurisdictions in particular?
First of all, they share English common law heritage. They all have the highest court in the UK, being the Privy Council, so there’s a lot of legal comfort there. They are all effectively still under the dominion of the UK, although they do have a high degree of autonomy in certain issues, certainly in terms of driving their economy forward.
Aren’t there offshore jurisdictions in Asia that possess the same strengths and advantages?
I have asked myself this question a few times. Here we are in Asia, the economic driving force of the foreseeable future, and all these offshore jurisdictions are located in other time zones. Wouldn’t it be convenient to have an offshore jurisdiction located on a small island just off Hong Kong?
There is Labuan island off Malaysia . . .
They do send me information once in a while, but I don’t know much more about them. Labuan hasn’t had a lot of traction. It takes time for an offshore jurisdiction to mature. Starting up an offshore jurisdiction is a nice idea, but it’s not as simple as that. And all these jurisdictions to a greater or lesser degree, they have real service providers with knowledge – you visit these jurisdictions and you see the development that’s going on there; there’s a lot of intellectual capital there as well.
You were talking about the advantages of UK common law. Why don’t companies just incorporate in the UK itself?
It’s not a coincidence that offshore jurisdiction are all quite small islands. The UK government, when it’s making policies and laws, has to consider its 60 million people as well as the complexities of its society some of which have a historical that wouldn't apply were you starting with a clean slate today. In some ways, you can say that it has 60 million different perspectives to balance out when decisions are made about how to drive the economy forward. In a small island environment, it’s much easier to make policy decisions. You have fewer people to consult, you can move more quickly.
It is conceivable that you can effectively have a two-tier tax system onshore [one for the locals and another for foreigners]. But there has been a lot of criticism of these two-tiered systems, which are seen as an unfair taxation system. Whereas in the Cayman, for example, the treatment of locals and treatment of foreigners, international players, are exactly the same. If you live in Cayman, you pay zero income tax, zero capital gains tax. That’s a tremendous consistency.
If you are an offshore Cayman company and you operate a business in the UK, your business can be subject to UK tax. If you look at what offshore jurisdictions are doing today, they’re actually not about tax evasion and not really much about avoidance either. There is an element of avoidance, but certainly not tax evasion.
It’s really facilitation of trade?
It’s a facilitating vehicle. That’s a generalisation but that is the reality of it. Ultimately that is why you can look at offshore jurisdictions and say they have a legitimate role to play. In a complicated world they help you do the things that are potentially complicated in a more simple way.
TAX AND LEGAL ISSUES
That’s interesting that you talk about the tax avoidance or optimisation. The common perception is that people set up offshore because they don’t want to pay taxes. That’s not the case?
In the past, I think that’s absolutely right. I don’t think there’s any question that the desire among business people to be tax efficient is ever going to go away.
If you can legally reduce or minimise your tax liability, of course you would but achieving that through onshore vehicles in the international context can be difficult because those tax laws are often extremely complicated and do not always result in tax neutrality for a foreign participant. Even if it can be achieved it may require the assistance of an expensive tax advisor.
It’s possible that offshore jurisdictions could disappear if onshore laws were less complex. But the reality is that onshore legislators are balancing so many different factors that it’s never going to happen. And from that point of view, I believe that offshore jurisdictions will continue to have a role to play.
Suppose a company is incorporated offshore but its assets are mainly in China, for example. If there’s a suit against that company, you would need to garnish their assets in China and not offshore?
The place of incorporation only goes to capacity to contract so you are right to some extent. The choice of jurisdiction will also depend on the law governing your contract. If, for example, it’s governed by English law, it can be heard in English courts. You then seek to enforce that judgement where the assets are and go through the Chinese process to get the assets. At least that's my understanding as a corporate law specialist.
This goes back to what offshore companies are used for. They are used for international transactions. If you’re talking about a transaction between Chinese domestic parties, there’s really no reason to use an offshore vehicle. The same applies to the U.S. or any other place. So as soon as you start talking about an international transaction with some international aspect to it, you’re always going to have complexity with regards to insolvency and enforcement, because you have this problem of having to go where the assets are.
But is it possible for a domestic company to structure offshore for tax reasons, not for international transactions?
There could be other motivations, tax being one of them, political risk, and so on. I can’t speak to those motivations. All I will tell you is when we look at a transaction, we need to understand what the transaction is about and we have a standard of responsibility placed on us as professionals in our organisation. We have to assist this transaction, see whether they make sense. If we do not understand the transaction, we will not take the transaction on. If I don’t understand the basic rationale for that transaction, then that raises a red flag for me. We obviously have to be mindful of our reputation.
But if you look at something like an IPO, that’s a very straightforward piece of business. We know why they’re using an offshore vehicle for this purpose.
INITIAL PUBLIC OFFERINGS
So why do some companies structure offshore when they do initial public offerings in Hong Kong, for example?
Historically, the reason an offshore jurisdiction is used in Hong Kong is because of concerns about the political risks of the handover back to China. A number of significant household names in Hong Kong felt that they wanted to protect themselves against that political risk and as a result they migrated their Hong Kong companies to Bermuda and that was really the beginning of the use of offshore jurisdictions. There was uncertainty in the 1980s; no one really knew what was going to happen.
The handover happened in 1997. Have you been seeing a deceleration of offshore structuring with regard to IPOs in Hong Kong?
No, and one of the reasons is that there’s a comfort in doing what people have always done. These offshore jurisdictions are very established. They’re cheap, it’s quick to set up [an offshore company], they are a more business-friendly vehicle. And they’re the market standard. Those things give people a lot of comfort. Doing an IPO is complex. You want to try and pack as many things that you can make as simple as possible. And the choice of jurisdiction, you just go with something that no one’s going to ask you questions about, because ultimately you’ve got more difficult things to deal with.
Are people still worried about political risk in China?
I have heard that there are certain business people who might choose Singapore over Hong Kong because, for example, they feel Singapore is more removed from Chinese political risks. But I think, given that we now have 13 years of handover, the level of comfort with regards to Hong Kong’s autonomy is very high.
I’ve been in Asia for a relatively short period of time, but my sense is that people see China as being all about business. Chinese people and the Chinese government are viewed as pragmatic. They want to get business done and they want to do business. I think that gives business people a high level of comfort. This contrasts with some other jurisdictions where there has been a lot of anti business noise coming out in the last couple of years.
And you’re very confident about the legal system in Hong Kong? There’s always this talk about being contaminated by China and all these things...
I’m not an expert in constitutional law here but I know there is a 50-year agreement in place. I am also confident that greater harmonisation of international laws [which will impact China] will continue over time. So I see it trending towards that.
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