Growing international pressure on tax havens and local corruption probe put the territory’s business model at risk.
The idyllic, clear water enclaves of The British Virgin Islands (BVI) could soon be losing its clarity for those who have sought the murky and secretive world of anonymity and highly lucrative tax breaks via “offshore” international trading companies.
The British government inquiry into allegations of corruption on the island is impending, reports are scheduled for Q2 ’22, (to be confirmed) and coupled with the economic crimes bill currently being pushed through Parliament back home, it is sending ripples through the High-Net-Worth community.
It will obligate offshore companies holding UK property to disclose their beneficial owners.
Anti-Tax haven supporters are dancing around the Mulberry Bush with glee at the looming calamity of the private and wealthy. A little telling considering this act was performed by prisoners in the cold and dreary courtyard of a West Yorkshire prison entertaining their children.
BVI is not alone, the Cayman & Channel Islands are also in the Robbin Hood crosshairs of potential tax evasion. The difficulty is proving any wrongdoing, when many insist that it is perfectly correct and right to mitigate tax liabilities by legal means, to protect chattels from the capricious currency markets and global economic volatility.
These threats to the BVI and offshore industry come amid a hardening of attitudes globally, a spate of highly publicised leaks of confidential files starting the slide towards detailed scrutiny. The documents showed how some of the world’s politicians and wealthy businesspeople used the secrecy offered by offshore jurisdictions such as the BVI to hide their gains. The local community are far more bullish about weathering this storm, but international experts are not so confident, some question whether the offshore finance industry is sustainable in its current form.
Whilst tax advantages have petered out over the last twenty years, the age of the internet and social platforms as a further medium for “tabloid” gossip has only heightened the appeal for many to conceal their commercial affairs.
So, what questions do the latest threats to the BVI and tax havens generally pose for wealthy UK-based investors, both for those who are domiciled for tax purposes and those who are non-domiciled, usually because they are foreign citizens or have other strong links with other countries?
The tourists visiting these beautiful islands, part of a volcanic archipelago in the Caribbean, have little concern for financial foibles and are probably unaware of the offshore industry altogether. Topping up their tans, sipping pina coladas and SCUBA diving the clear waters are their focus. From the air, the green covered mountains drop down to golden beaches, caressed by dreamy blue seas, it's impossible not to be seduced by these images of paradise. The marina is packed with expensive mega yachts and cruise ships and the architectural styles of the homes are influenced by Ameridian, African, Dutch, Spanish, French, English and other European Colonial cultures. What’s not to love.
The 350,000+ companies registered are an integral part of the structure and economy of the islands. A 2017 study by Capital Economics estimated that $1.5tn in chattels was controlled by BVI entities; but this hasn’t been formally verified. The IMF puts total personal wealth in tax havens from $8.7tn to $36tn. This range merely highlights how little is made public.
The process is simple when setting up a BVI company, along with guaranteed privacy, it has long made it a popular port of call with wealthy individuals and large corporations looking to shelter assets. That anonymity is likely to be threatened by the economic crime bill once it completes its passage through the House of Lords. The Commons has approved the measure. Also, owning UK assets via BVI companies will not help Russian overlords navigate sanctions over the Ukraine war; the islands have pledged to help the UK government enforce any punitive measures.
Holding non-property assets such as trading companies, shares or bonds is a popular choice. A common structure might involve an investment portfolio owned by a BVI company, which is in turn owned by an offshore trust located either in the BVI or another jurisdiction such as the Channel Islands. Under such an arrangement, UK inheritance tax and capital gains tax can be mitigated for non-domiciled individuals in the UK, even after 15 years when they become “deemed domiciled” in the UK, meaning that they are regarded in law as domiciled. Moreover, as tax havens have come under greater international scrutiny following the leaks of confidential papers, lawyers have noted that hubs with better legal reputations have become more popular at the expense of others, a shift that has benefited the BVI, along with the Cayman Islands and the Channel Islands.
Following on from the Panama Papers and the Paradise Papers, there has been a flight to quality. High net worth individuals are worried about reputational risk, and the reputational risk associated with certain jurisdictions is higher than others.
One of the last remnants of the British empire, the BVI is governed under a quirky arrangement with power shared between a governor sent by the Foreign Office and a locally elected premier. Of course, this could also change. There are whispers that BVI is reviewing its “association” with the U.K. They are not alone, with others taking a more public approach during the recent Royal tours, Jamaica being one of them. Any final move away from the constitutional monarchy won’t happen overnight but the flags have been planted firmly in recent months.
The publication of the Panama Papers in 2016 marked a turning point in public attitudes. Millions of leaked files from the Mossack Fonseca law firm revealed information on offshore entities, more than half of which were in the BVI.
The following year, the BVI introduced BOSS, a computer system for searching company records for details of beneficial owners. Foreign law enforcement organisations and courts can access the system, something the BVI holds up as an example. Today, a host of websites tout BVI company incorporation services, promoting the low cost, convenience, and confidentiality. For as little as $1,000, corporate service providers will set up a BVI entity within two working days and provide articles of association and a certificate of incorporation. Paperwork is minimal.
Demand from discretionary clients is global. According to the 2017 report by Capital Economics, 42 per cent of the beneficial owners of BVI companies were from Asia, 18 per cent Latin America, 10 per cent the UK, 8 per cent the EU and 7 per cent US and Canada. Russians made up 3 per cent.
BVI authorities say that company agents carry out “know your customer (KYC)” checks on the names of company directors and shareholders and enhanced due diligence on politically connected individuals. They are at pains to promote this scrutiny is stricter than the UK, where individuals can register a company online without checks. The hardening of international attitudes to tax avoidance and financial secrecy poses the biggest challenge yet to the territory’s business model. The BVI has signed up to the OECD tax initiative but the 15 per cent minimum tax rate only applies to companies with an annual turnover of more than €750mn and the BVI has very few of these. Many BVI companies do not trade; they simply hold assets.
The conclusion that will probably align is that there will still be a role for offshore finance centres, the question will be…do we need all of them — Jersey, Guernsey, BVI, the Cayman Islands et al...
Islanders insist their resilience will ensure the British Virgin Islands continue to thrive.