Cayman NetNews is on the ball, as usual, this morning. Reacting to the US GAO report on major US compnaies using tax haven subsidiaries it says:
Needless to say, some US politicians have pounced on the GAO report as further justification for proposed legislation aimed at offshore financial centres.
According to Reuters, two Democratic senators said they would introduce legislation to stop US companies from using offshore havens that deprive the Treasury Department of an estimated $100 billion annually in lost tax revenues.
Equally predictably, the banks involved will attempt to justify their offshore operations.
Which group is likely to prevail? It is hard to tell at this point but two of the largest recipients of government assistance - one on each side of the Atlantic - the Royal Bank of Scotland (RBS) and Citigroup - have operations of some kind in the Cayman Islands. RBS has a banking licence in its own name and also operates here as RBS Coutts. Similarly, Citigroup is also licensed in the Cayman Islands as Cititrust.
On the premise that forewarned is forearmed, it would behove both public and private sector leaders to immediately take urgent steps to identify the possible exposure of our financial services industry to a mass pullout by foreign banks now controlled by their respective governments and the economic and social implications such an event will have on the Cayman Islands.
Who says things aren't changing?
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Its increasingly hard for the majority of offshore jurisdictions to justify retaining largescale international banks operations. Apart from the obvious issues highlighted in the Cayman article, the offshore jurisdictions also need to weigh up the real risk/return equation from having high levels of bank deposits there. The commercial risks of a bank failure are now only too evident (just look to the Isle of Man re. Kaupthing and to Guernsey re. Landsbanki), and its already crystal clear from those two collapses, even with no hint of fault being attributable to the offshore operations themselves or their regulators, that the resulting reputational risk to the jurisdiction is disproportionate. Even the UK and Ireland are really unable to afford to bail out collapsed banks.
The offshore jurisdictions also generate next to no tax revenue from having large bank deposit levels booked there, either due to low corporate taxes on profits earned from slim interest margins, or in Cayman’s case due to nil corporate taxes and merely receiving a fixed annual licence fee. Employment created locally from servicing pure bank deposits is minimal as so much of the servicing is fully automated with good systems, and of course the EUSD’s primary focus to date has been on bank deposits. With such low interest rates set to be with us for several years as the world economies recover, any possible advantages of offshore banking seem negligible as the potential for meaningful tax savings or tax deferral is minimal. Unless of course the customer is more concerned about simply hiding the money for illicit reasons, in which they are likely to head for or already be using the banks in Singapore, Switzerland, Cayman, Austria or Panama where stricter bank secrecy laws might protect them, although probably for not much longer.
Really, unless an offshore bank is also generating significant fee-based, value-added services such as fund administration, fiduciary services or asset management, the offshore jurisdiction is better off without those other banks who just have massive balance sheets from booking deposits offshore. I have been anticipating this particular trend for the past 4 or 5 years so its not a great surprise, and in Cayman’s case to be the world’s 5th biggest banking centre in terms of deposits (US$1.3 trillion), with 279 banks and just a 50-odd thousand population, did always seem to be unsustainable. The only surprise is that it has lasted so long. But would Cayman miss the banks ? They don’t pay any tax on profits and the 260 truly offshore banks (unable to conduct local domestic business) seem to only pay an annual government licence fee of around US$50,000 to the Cayman Islands government, so whilst the risk/reward equation re. each individual bank seems to be skewed completely the wrong way, its still generating US$13 million of annual government fees. Surely they would be better off getting rid of that sector and replacing the US$13m with a small local income tax to replace the current nil rate. Even the 19 domestically-licensed banks only pay around US$500,000 for a licence, so the total government revenue from the entire banking sector holding US$1.3 trillion seems to be less than US$25m. Am I missing something ? Presumably they are also earning an annual stanp duty based on the paid-up share capital of those banks. That might of course be very substantial.