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By
Marshall J. Langer, London, UK
The first half of this column appeared in the January issue of Offshore Investment.
Until about 1970, it was acceptable to use tax havens, but not to speak or write about them. Little was known about many of the tax havens and how they compared with one another. I wrote an article on Tax Havens of the World that was published in about 1969 in the Bulletin for International Fiscal Documentation. I then began serving as chairman of annual seminars on foreign tax havens run by PLI – the Practising Law Institute – and spoke at World Tax Haven Conferences in Paris, Amsterdam and Zurich.
Milton Grundy, another speaker at these conferences, organised the ITPA (International Tax Planning Association) in 1975, the year in which my first book – How to Use Foreign Tax Havens – was published. Before completing that book, I tried to visit almost every major tax haven at least once, including such out-of-the-way places as the New Hebrides (now Vanuatu) and Nauru.
My first book was translated into Japanese by Masaaki Imai and I lectured at a couple of one-day seminars he organised in Tokyo for middle-level managers of Japanese companies. I spoke from notes. The seminar provided consecutive rather than simultaneous translation. I would say a few sentences and the translator then attempted to repeat what I said in Japanese since many of those attending did not speak or fully understand English. Imai had warned me not to tell any jokes, but I ignored his warning and told one anyway. I stopped, waited for the translator to finish, and began again after the audience laughed. Over drinks that evening, Imai told me he didn’t think the translator understood my joke very well. After trying to decipher my joke, the translator had said: “Professor Langer told funny story – you laugh.” And, they did.
When the second edition of that book was published in 1979, we changed the name to Practical International Tax Planning in recognition of the stigma that was already being attached to the term tax havens. Subsequent editions have continued to use this more politically correct title.
Let’s look now at a few of the offshore financial centres with which I have been actively involved during the past half century.
The Netherlands Antilles
The 1948 Netherlands-US tax treaty was extended to the Netherlands Antilles by a 1955 exchange of notes. I first spoke about using Curacao companies to invest in the US at a University of Miami Tax Conference in 1959. Shortly thereafter, I assisted in establishing North American Investment Fund N.V., one of the first offshore investment funds formed in the Netherlands Antilles. The Antilles-US treaty was heavily used during the 1960s and 1970s by foreign persons investing in US real estate and securities. The treaty initially offered several benefits, some of which were partially curtailed by a 1963 protocol when it became fully effective in 1967:
• US dividends paid 15% US tax and about 2% Antilles tax for a total of about 17%, much less than the statutory 30% US tax.
• US interest income paid no US tax and less than 3% Antilles tax instead of the statutory 30% US tax that was then imposed on most US interest (other than bank-deposit interest).
• In those days, Antilles companies could be used to avoid both US and Antilles tax on some US real estate gains.
• The use of Antilles companies also avoided US taxes on gifts and at death.
• US multinational companies issuing bonds in the Eurodollar market did so through Antilles companies used to avoid US tax on interest paid to bondholders. Since about 1985, such “portfolio interest” bonds are tax-free without the need to interpose an offshore finance subsidiary.
The Cayman Islands
I first began travelling regularly to Grand Cayman during the early 1960s. Grand Cayman was being used as a fuel stop on planes flying from San Jose, Costa Rica to Havana and on to Miami. On one of many such trips from Costa Rica, I arranged to stop over to see whether Cayman could serve as a back-up to the Bahamas which was undergoing significant pre-independence changes. Cayman was quite primitive in those days, with a massive mosquito population.
Some European clients set up an offshore bank in Cayman in 1973 and I served as the bank’s chairman for more than 25 years. During the past half century, Grand Cayman has grown from a sleepy little island into one of the world’s most important financial centres. It is interesting to look back at some of the fascinating developments that have occurred there during my lifetime.
Before Jamaica attained its independence in 1962, Cayman was a dependency of Jamaica. It had a commissioner (much lower in status than a governor) who reported to the Jamaican government which in turn reported on to London only those things that it considered to be sufficiently important. Someone later remarked that it was hard to get much lower than that.
Cayman decided to separate itself from an independent Jamaica and to become a direct British colony. Although Cayman now has its own governor and considerably more self-government than it had in those days, Cayman is still a British dependent territory (today’s politically correct term for colony) and there seems to be little or no desire on the part of its people to change that status.
The currency in use at that time was the Jamaican pound which was worth about the same as the British pound, then about USD2.40. Jamaica switched its currency to the Jamaican dollar on a two-for-one basis, making the Jamaican dollar worth about USD1.20. A few years later, Cayman’s Treasurer, Vassel Johnson (now Sir Vassel Johnson), arranged for Cayman to switch from using the Jamaican dollar to its own Cayman dollar which was then also worth about USD1.20. In retrospect, that was a very smart move. The Cayman dollar is still worth about USD1.20. The Jamaican dollar is now worth less than two cents (USD0.02).
Sir Vassel was also the principal architect of the movement to turn Cayman into an offshore financial centre. Cayman’s first banking law was copied from the banking legislation enacted by the Bahamas about a year earlier. It even contained the same list of banks that were automatically authorised to carry on business without further government review and approval. This was apparently done intentionally to encourage some of the major banks operating in the Bahamas to open branches in Cayman. It obviously worked. Cayman then had only three banks; it now has several hundred licensed banks and trust companies and about 8,000 mutual funds.
Going even a bit further back, we note that Grand Cayman didn’t even have an airport until sometime during the Second World War. In fact, I once saw a copy of the 1937 annual report from Cayman’s commissioner to his superiors in Jamaica which read something like this:
“On 12 May 1937, in honour of the Coronation of Their Majesties King George VI and Queen Elizabeth, an airplane flew over Grand Cayman.”
Caymanians are very proud of their world-famous “Seven-Mile Beach” with its beautiful white sand. A New Yorker magazine article written many years ago stated that Cayman’s Seven-Mile Beach used to be known as Six-Mile Beach, and before that as Five-Mile Beach. The article claimed that the beach is actually about 4.7 miles in length. Regardless of its actual length, everyone agrees that it is a beautiful white sands beach.
Bodden and Ebanks are probably the most common names in Cayman, something like Chan and Lee in Hong Kong or Smith and Jones in America. Some of us began assisting clients to form Cayman exempted companies shortly after these were first authorised. One small problem in those days was that Britain’s exchange control rules applied in the colonies as well as in Britain. The rules required anyone incorporating a Cayman company to designate the name of the company’s beneficial owner on a sheet attached to the incorporation documents. That was no problem; a typical foreign client already had a Liechtenstein entity called an anstalt (establishment) that he/she used to hold his/her other offshore assets. One day, I brought the incorporation documents for a new company to the controller of exchange for his approval. He looked at the name given for the beneficial owner, “Aardvark Anstalt, Vaduz, Liechtenstein,” and simply remarked that the Anstalt family in Liechtenstein must be very large, like the Boddens and Ebanks in Cayman.
When the late Jim Bodden, one of Cayman’s national heroes, first began work on establishing an airline for Cayman, the original name proposed for the company was Cayman International Airways. This sounded great until someone realised that the airline’s principal route would be from Miami to Grand Cayman and that all these flights go directly over Cuba. It wouldn’t do to have “CIA” as the airline’s initials. The name was quickly changed to Cayman Airways which it has been ever since.
Cayman is one of a few places in the world that still manages to function without an income tax on either companies or individuals. Like all governments, Cayman needs revenue. They meet this need by imposing a duty of about 25 or 30% on everything that is imported. It still surprises some to learn that the US had the same tax system from 1776 until 1912, except for a few brief periods during wartime.
In addition to not having an income tax or capital gains tax, Cayman has no death tax, no gift tax, no wealth tax and no general sales tax or VAT. The government obtains sufficient revenue from import duties and annual fees imposed on banks, trust companies, insurance companies, mutual funds, companies and other entities and businesses to meet its revenue needs.
Switzerland
I moved to Neuchatel, Switzerland in 1985 and lived there for the next five years. There is a cute story that illustrates the differences between Switzerland and its neighbours. If you ask a young German boy where babies come from, he will tell you that they come from the stork. If you ask a young French boy the same question, he will tell you that it has something to do with sex. Finally, if you ask a young Swiss boy where babies come from, he will look at you very knowingly and say “It’s different from canton to canton.” This is a very safe answer because in Switzerland everything is different from canton to canton. The 26 Swiss cantons have much greater supremacy than US states or Canadian provinces.
Switzerland has long been a favourite haven for rich and famous tax exiles from all over the world. It is not the easiest country in which to acquire residence but it is possible to do so, particularly if the applicant is a citizen of an EU or EEA country. A retired foreigner may be able to obtain a residence permit and a lump-sum tax arrangement (forfait).
An individual residing in Switzerland generally pays federal, cantonal and local income taxes on most of his/her worldwide income. His/her income derived from foreign real estate or from a personally-owned foreign business is exempt from tax, but that income is taken into account in determining the tax rate on other income; this is called “exemption with progression.” Most capital gains are not subject to Swiss federal tax. The Swiss federal government does not tax his/her wealth, but the cantonal and local tax authorities do. He/she also pays a relatively low 7.6% VAT on all purchases. Under the Swiss Constitution, the maximum Swiss federal income tax rate is only 11.5%, a rate much lower than that imposed by many other countries. However, cantonal and local income and net wealth taxes typically raise the overall tax burden to 30% or more for individuals with a substantial income. Despite all these taxes, Switzerland is an attractive destination for new immigrants from other countries, primarily because it is one of the world’s safest and most stable countries. Switzerland is clean, orderly, safe, stable and prosperous. Everything works and most things work well.
Despite recent harmonization of some tax rules, the Swiss cantons have not harmonized their tax rates. These can differ considerably from one canton to another and even from one commune to another in the same canton. Some cantons enjoy a broader tax base than others and they are consequently richer than their neighbours.
Tax Exiles and Second Citizenships
Over the years I have assisted many clients in obtaining new residences and second citizenships. Some of the countries that previously offered a second citizenship without requiring a long period of prior residence no longer do so. These included Belize, Cape Verde, Grenada, Ireland and Seychelles. Dominica and St. Kitts-Nevis still have economic citizenship programmes. Hong Kong and Singapore have viable residence programmes and Singapore goes even further and permits wealthy qualified applicants to obtain citizenship. These programmes remain attractive to those coming from troubled areas of the world.
The Future of Tax Havens
In late 1975, I was the dinner speaker at a meeting of the Bahamas Chamber of Commerce at the British Colonial Hotel in Nassau. My subject was “The Future of Tax Havens.” I ended my talk by stating that by the year 2000 (then 25 years away), the only surviving full tax haven would be some exotic island in the South Pacific where, if a revenue agent came from a high-tax country, he would be eaten. Looking back at that prediction, I don’t think it was completely wrong. However, I am less pessimistic today.
Many tax havens have reinvented themselves as offshore financial centres, some have signed tax treaties and have gotten some benefits in return for their co-operation in sharing tax information, and others have been (or are being) compelled to sign TIEAs (tax information exchange agreements). Thus far, there have been relatively few TIEAs signed, but I fully expect hundreds of them to be signed in the next few years.
Most of the high tax countries that are demanding TIEAs treat the other party to these agreements as unworthy junior partners. They use various forms of coercion and they do not give the junior party to these agreements any benefits. The high-tax countries are deluding themselves; they will get minimum co-operation at best unless they begin to give their junior partners meaningful benefits.
The offshore centres most likely to succeed in the future are those that are successful in concluding tax treaties. Many of the old timers among the jurisdictions in the offshore world have always had a considerable number of tax treaties and regularly continue to add new countries as tax treaty partners. These include places such as Cyprus, Ireland, Luxembourg, Malaysia, Malta, the Netherlands, Singapore and Switzerland. Other countries that have been making a serious effort to build up a meaningful network of tax treaties include Bahrain, Barbados, Botswana, Hong Kong, Iceland, Mauritius, Seychelles and the UAE (United Arab Emirates). Some of these comparative newcomers to the tax treaties world have enjoyed considerable success as gateways into countries such as China and India.
Even though Canada has a good network of tax treaties, many Canadian multinational companies continue to carry on their offshore operations through subsidiaries based in Barbados, using that country’s growing network of tax treaties.
US multinational companies complain that the US lacks tax treaties with major US trading partners including Argentina, Brazil, Chile, Hong Kong, Malaysia, Singapore, Taiwan, Vietnam and the UAE. US multinationals often have little choice but to find other bases through which to conduct their business operations in these places. Offshore financial centres with growing treaty networks will vie with each other to fill this gap.
Please send your comments to marshall@mjlanger.com with a copy to editorial@offshoreinvestment.com.
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