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30 October, 2009 - Published 12:34 GMT

Taxing times for UK territories

The UK's Overseas Territories and Crown Dependencies have been told to improve standards of regulation, and find new methods of raising tax.

A British government-commissioned report suggests changes offshore centres need make to meet international standards.

The UK wants to reduce the amount of tax revenue still going overseas.

Michael Foot, the report's author, said that several jurisdictions had "a good story to tell, but others had more to do on regulation and tackling financial crime".

He investigated the economies of Britain's Caribbean territories - Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands and the Turks and Caicos Islands.

Also reviewed were Bermuda, Gibraltar, the Channel Islands of Guernsey and Jersey and the Isle of Man.

The role of offshore centres came into focus after last year's financial crisis.

The global recession has hit some of the island economies hard, and many now face serious problems balancing their budgets.

Rock-bottom

In his report, Mr Foot encourages them to find ways of diversifying their tax bases.

He does not specify the action that should be taken in every case, but it could include raising significant extra revenue through income tax, value-added taxes, a consumption tax and corporation tax.

The British Overseas Territories and Crown Dependencies have sovereignty over their own tax affairs. Many will fiercely defend their reputation as low-tax economies.

Caribbean tax centres have traditionally used their rock-bottom rates to attract thousands of multinational corporations, hedge funds, and rich clients.

The nine British territories comprise nearly two-thirds of the offshore market, according to the report, which noted that the Caymans and Bermuda also handle large chunks of the US overnight banking and American reinsurance business.

But Mr Foot said that many of the territories were running out of money as tourism and finance withered away amid the worldwide economic meltdown.

Great strain

The Turks and Caicos have already exhausted their government reserves, while in Anguilla reserves are forecast to run dry by the end of the year, the report said.

Leaders of the G20 group of leading economies have made repeated calls for action to curtail business in "tax havens", and close "loopholes".

At a time of great strain on public finances, the UK government is worried that valuable sources of tax revenue are still being channelled overseas.

Officials believe that, after years of leniency, the prevailing wind is now blowing against the offshore havens.

"This report sends a strong signal that overseas financial centres must ensure they have the correct supervision and regulation," said financial secretary to the UK Treasury Stephen Timms.

Officials say there will be a combination of "carrots and sticks" to encourage all the offshore centres to come into line. If they do not by March 2010, the G20 could impose a range of economic sanctions.

Short of sanctions, there is little the British Government can do directly to end tax evasion overseas. But UK officials think sustained international pressure has already brought significant progress.

Net financing

It has always been extremely difficult to estimate how much tax is lost when companies or individuals move offshore. The UK Treasury would like to see greater transparency, in order to obtain a better idea of the "tax gap".

One estimate provided in a separate study for the UK government by Deloitte is that the decision of companies to locate in British Overseas Territories and Crown Dependencies means that up to 2bn (US$3.3)a year is lost in corporation tax.

Niche positions
• BERMUDA is the third largest centre for reinsurance in the world and the second largest captive insurance domicile. It is the leading non-United States supplier of reinsurance to US insurers.
• THE CAYMAN ISLANDS are the world’s leading centre for hedge funds and also a significant wholesale banking centre, with high volumes of overnight banking business from the US.
• THE BRITISH VIRGIN ISLANDS are the leading domicile for international business companies, with much business coming from the Far East in addition to strong links with the US.
Foot report

But Ronnie Ludwig, partner at accountants Saffery Champness, said money also flowed the other way.

"In the second quarter of 2009 alone, the Crown Dependencies provided net financing to UK banks of about $333bn ($551b)- a vital liquidity boost," he said.

"There is also a lack of clarity in the Foot report on how different jurisdictions can be affected.

"Specifically, the UK may not be able to impose changes in Guernsey or Jersey's tax regime without EU sanction as these jurisdictions have been granted tax havenship in perpetuity under the Treaty of Rome," he added.