Hurricanes wreck tax havens (Part 1): The worst-hit British Overseas Territories

British tax havens hit by hurricanes
Donald-Drysdale By Donald Drysdale for ICAS

25 October 2017

In this the first of three articles on the plight of storm-ravaged British Overseas Territories in the Caribbean, Donald Drysdale sets the scene before raising some controversial questions on aid and taxes. Any views expressed are his own and not necessarily those of ICAS.

Caribbean crisis

Hurricane Alley is a belt of warm water located across the Atlantic, the Caribbean and the Gulf of Mexico – prone to extremes of tropical weather, especially through August and September.

Earlier this summer, forecasts suggested that the 2017 Atlantic hurricane season might be more active than historical averages.  Notwithstanding the advance warning, the world is horror-struck by the scale of destruction wrought in the Caribbean region since early August by major hurricanes Harvey, Irma, Jose, Lee and Maria, and other tropical storms.

Parts of the USA have been badly hit. Several British Overseas Territories in the region, including the British Virgin Islands (BVI), Anguilla and the Turks and Caicos Islands (TCI), were severely damaged by Hurricane Irma on 6/7 September.  BVI was further affected by Hurricane Jose on 9/10 September and Hurricane Maria on 20 September.  Other territories including Monserrat have also suffered damage, though less severe.

Throughout the Caribbean, violent weather conditions destroyed homes, businesses and infrastructure, causing loss, injury and death. It is heart-rending to read of the disruption and misery caused by the large-scale evacuation and obliteration of whole communities.  Their economies have suffered huge setbacks, and the scale of human suffering has prompted global appeals for help.

Theresa May announced that the UK would provide aid worth £57 million to the region, and up to £3 million more matching public contributions to the British Red Cross Hurricane Irma Appeal.

The British Virgin Islands

BVI, 59 square miles in size, has a population of 30,000.  The Queen is Head of State and her representative, the Governor, is responsible for external affairs, defence, internal security, the civil service and administration of the courts.  BVI controls its own internal affairs under its elected Premier, Ministers and House of Assembly.

Apart from its success as a tourist destination, BVI has developed as a major offshore financial services centre generating more than half the territory’s income and thought to be dealing with over 520,000 companies and trusts.  A significant proportion of the world’s offshore companies were formed in BVI.

Tax haven status

The British Overseas Territories in the Caribbean basin – BVI, Anguilla, TCI, the Cayman Islands and Monserrat – are notorious as tax havens.

In December 2016 all five appeared on the EU's blacklist of the world’s 30 worst-offending tax havens – a list to which (conspicuously) the UK provided no input.  In the same month the Cayman Islands and BVI were on Oxfam’s list of the world’s 15 worst corporate tax havens.

In April 2016 the Panama Papers disclosures exposed BVI and Panama as the tax havens most widely used by clients of Mossack Fonseca & Co, and revealed that BVI-registered entities owned more than 22,800 UK buildings – the largest single source of foreign ownership of UK property.

Successive BVI governments have argued that BVI is not a tax haven – claiming that recent developments in the international exchange of tax information and registers of beneficial ownership disprove this and, indeed, are denting their financial services industry.

Financial secrecy

The Tax Justice Network (TJN) is an independent international network dedicated to mapping, analysing and explaining the role of tax and the harmful impacts of tax evasion, tax avoidance, tax competition and tax havens.  TJN publishes a Financial Secrecy Index ranking countries according to the financial secrecy they provide, weighted by reference to the scale of their offshore financial activities.

The Financial Secrecy Index for 2015, the latest index which TJN published, covered 92 countries. Surprisingly, this listed Montserrat in 92nd place (the least secretive) in spite of its tax haven reputation.  Switzerland, renowned for banking secrecy, topped the list.  The USA took 3rd place – being the largest global player in offshore financial services and generally reluctant to cooperate in international efforts to crack down on tax evasion, money laundering and financial crime.

The UK was in 15th place – largely on account of the complexity of its tax regime, the scale of its economy, and its high levels of financial crime.  The UK came out better than only one of its Overseas Territories – the Cayman Islands, which was in 5th place. If viewed collectively, the UK and all its Overseas Territories would have beaten Switzerland into 1st place by a large margin.

Tax in BVI

BVI’s annual budget for 2017 sets out government action to protect lives and maintain a resilient, sustainable economy and society – fostering comprehensive disaster management and climate change adaption as a way of life.

Estimates for 2017 show GDP as US$1,028m – being US$34,250 per capita. Revenues of US$323m include US$170m (53%) from corporate registration fees, US$52m from payroll tax, and US$43 from import duties.  There are no taxes on income, capital gains or wealth. After recurring public expenditure of US$280m, plus capital expenditure and debt financing, the overall deficit for the year was expected to be US$31.5m.

Anguilla and the Turks and Caicos Islands

Anguilla has a population of only 16,000, and per capita GDP of only US$12,000. Its government’s revenues for 2017 were budgeted at US$79.6m, of which some 25% derive from its financial services industry which looks after some 20,000 companies and trusts. Public expenditure is funded by various indirect taxes.  There are no taxes on income, capital gains, estates, profits or other forms of direct taxation on individuals or corporations, and no value added tax.

TCI has a population of 49,000 with per capita GDP of US$29,000. It imposes no taxes on income, capital gains, wealth, property, gifts or inheritances. Its government is funded by consumption-based taxes, primarily customs duties.  Surprisingly, government revenues of around US$7.3m from financial services barely cover their costs of collection, in spite of the fact that the territory appears to provide services to some 21,000 companies and trusts and offers a favourable environment for offshore and captive insurance companies.

What next?

In the next two articles in this series, I shall question how future costs of humanitarian relief and reconstruction might best be funded to meet such natural disasters, looking particularly at the role of taxes and the impact of tax avoidance and evasion.

Article supplied by Taxing Words Ltd

Topics

  • Tax

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