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Jersey Riding Out Onshore Storm

Monday, March 15, 2010

Jersey will overcome the challenges of a changing environment for offshore international financial centres, Geoff Cook, Chief Executive of Jersey Finance, told participants at a Breakfast Briefing in London.

In his address on the future of IFCs, Cook noted that despite the challenges of the economic crisis, and the scrutiny of offshore territories - stemming from the G20 Summit in April 2009 - Jersey remains well placed to continue growing as a financial centre that is transparent, well-regulated and beneficial to the global economy.

Cook remarked that:

“In Jersey, we have seen no bank failures, banking stability issues or major headline fund failures. Like all centres we have seen some job losses, and regrettable though they are; we have not experienced the deep cuts seen elsewhere."

"We are meeting, and in some cases exceeding, the highest International standards of corporate governance, and regulatory compliance. Our recent IMF review makes it clear that Jersey is in the ‘top tier’ of international finance centres, including those in the G20 and EU."

“So Jersey is in good shape: Our standing in the global rankings of international finance centres is high, and we will come through the crisis and the global slowdown stronger, leaner, and fitter."

Commenting on the scrutiny of International Finance Centres going forward, Cook cited the findings of the Foot report on the British dependent territories: “The report made clear that the estimates of tax leakage advanced by our detractors are grossly exaggerated, and that the contribution of Jersey sourced deposits to the UK banking system at USD200bn, is both substantial and extremely valuable.”

“We are no strangers in Jersey to international scrutiny; we were subject to requests to amend our tax arrangements as far back as the OECD Harmful Tax Competition programme in 1998. More recently it appears the EU Code of conduct group have indicated that our tax system may not meet with the ‘Spirit’ of the EU code of conduct on business taxation."

"This is interesting as the UK had previously indicated our tax system did meet code requirements, especially as we have a diversified tax base including corporation tax, income tax, property taxes, customs duties, and a goods and services tax. Of course we offer benign tax treatment to non residents, as do a large number of other countries, including many EU member states. It is certain for example the United Kingdom and the US could not fund their significant budget deficits without offering tax free returns to overseas investors. But we need to distinguish here between tax transparency and tax competition. Jersey is no friend to tax evaders and criminals,” Cook underscored, continuing:

“We have achieved the highest ratings of any country under the IMF FSAP inspections, and have been a leading and willing participant in the OECD's Tax Information Exchange programme since 2002. Last year we filed over a thousand suspicious transaction reports, and cooperated in over 700 investigations.”

“Tax evaders should not be able to use jurisdictions to hide undisclosed wealth. Recently published research conducted by Professor Jason Sharman, of Griffith University, Sydney, Australia, proves that Jersey has a better record of fighting this kind of activity than many larger countries, including the UK, France and the US.”

“Some commentators have observed the debate over tax transparency and tax competition looks very much like big countries with large budget deficits, (the high tax, high spend, large government countries, and their trading blocs and agencies) seeking to impose their view of the world, on smaller less powerful nations. It is after all much more difficult to keep raising taxes if your citizens are mobile, and can move themselves and their wealth to a more attractive environment.”

“Given this backdrop it is not surprising that the subject of tax receipts and cross border activity has come to the fore again, as cash strapped governments look for solutions."

"The truth, however unpalatable, is that the crisis had its roots anchored firmly in debt taken on in the major western deficit economies. This had everything to do with central bank interest rate policy and a lack of effective financial supervision, and nothing whatever to do with Financial Centres, such as Jersey."

Turning to discuss the future for Jersey and other IFCs, Cook stated:

"Jersey competes for business on exactly the same basis as the 70 other countries in the world who offer some kind of benign tax neutral regime to the overseas investor. IFCs act as way stations, gathering capital from around the world where it is not needed, and then conduiting that capital to where it can most effectively deployed."

“Tax is paid on capital before it arrives in the way station, and it will be paid after it leaves the way station, as it is invested and put to work. There is just no extra layer of taxation on top of that applied by the originating and receiving countries. This allows large proximate onshore economies to operate their domestic tax systems, without dislocation from the need to offer attractive tax treatment in their primary tax framework for foreign investment."

"This activity has been proven to increase economic activity, increase jobs and increase wealth creation, such that a boost to tax take is generated,” Cook said, referencing studies by Professors Hines, Desai, Foley, Hejazi and others.

“It is self evident that free markets; globalization, and tax competition, have all combined to produce stellar growth in world GDP, over the last thirty years, pulling countless millions out of poverty.”

“The reality is that a hopeful grab for tax will miss the target, as even if discriminatory measures were introduced against international finance centres, they would not see universal adoption. China has reduced its poverty rate from 40% to less than 10% in thirty years, and China knows how important its capital conduits, that is Shanghai, Hong Kong and Macau, have been to this economic renaissance.”

“Like water, the flow of mobile international capital may move eastwards following the course of least resistance, as the USA and Europe live with the outcomes of the unintended consequences of financial services protectionism. In Jersey we have already planned through our market diversification strategy for such an eventuality.”

“I would contend that tax competition is good for all countries; it leaves more capital in the wealth creating side of the economy, acts as a brake on excessive government spending, and provides for greater investment activity, thus completing the virtuous economic circle. Given our track record of cooperation, I believe it will be extremely difficult for any international fora, or government, to take discriminatory action against Jersey, and I don’t believe other than amongst a few extreme ‘tax hobbyists’ and NGOs, that there is any appetite to do so.”

“The UK has no interest in undermining our economy, particularly now the Deloitte study has reaffirmed that we are not a source of tax leakage.”

“The slowdown in the real economy has principally been caused by a lack of capital; the vital lubricant for all economic activity. Centres such as Jersey form efficient conduits and pipelines for internationally mobile capital; facilitating more effective and productive economic activity.”

Cook concluded that: “The reason why I have great confidence in the future of Jersey is that not only are we not part of the problem with respect to the Global Financial crisis; we IFCs are an important part of the solution."