Caribbean countries make efforts against new tax haven regulations

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In January 2024, a court in Miami is set to commence the trial of Andrew Fahie, the former elected leader of the British Virgin Islands. Back in 2022, he was apprehended in the United States. American authorities allege that he committed an undercover informant, working on their behalf, wherein he would permit illegal drugs bound for the United States to pass through the ports of his territory in exchange for a fee. Presently under house arrest in Miami, Mr. Fahie has entered a plea of not guilty.

Over the past 40 years, these islands in the Caribbean have derived a significant portion of their income by selling fictitious companies to foreigners – companies that exist largely on paper, with no actual staff or offices. This enterprise has, in certain years, funded more than two-thirds of the government’s financial resources, elevating a territory with only 33,000 inhabitants to prominence in the business realm. Natalio Wheatley, who succeeded Mr. Fahie as premier, acknowledges, “The financial sector has served us very well.” The offshore financial and corporate services are constituting a third of its GDP, supporting roughly a fifth of its workforce.

Nonetheless, recent global endeavours aimed at curtailing money laundering and tax evasion have begun to burden the British Virgin Island’s financial industry; the total count of registered companies there has diminished by over a fifth since 2011. And they’re not alone: almost all the Caribbean countries are facing similar problems.

The Bahamas achieved considerable success in this business; it currently derives 10-15% of its GDP from financial services, particularly private banking. Yet, the territories most reliant on offshore activities are the Cayman Islands, the British Virgin Islands, and Bermuda. All three are self-governing British territories, depending on the UK for defense and substantial diplomacy matters, but exercising autonomy in most other affairs.

Offshore centers offer an array of valuable and legitimate services. However, it’s the occasional use of Caribbean islands by criminals and corrupt officials that frequently sparks debate among the general public. The Tax Justice Network (TJN), a non-governmental organization based in Britain, approximates that schemes involving Caribbean and Bermuda financial centers contribute about 20% of the estimated $472 billion that governments globally lose annually to cross-border tax evasion and minimization tactics.

This industry is currently endangered by a new wave of international regulations. In the Caribbean, two initiatives, in particular, are of immediate concern. The first pertains to corporate transparency. Starting in 2016, Britain initiated the public disclosure of the owners of companies within its mainland through a public database, a first among major countries. Now, Britain aims to have its overseas territories follow suit by the end of 2023. The rationale behind this move is to enable journalists and non-governmental organizations (NGOs) to access records that currently only law enforcement and relevant authorities can view, thereby simplifying the detection of tax abuse and fraud. However, offshore centers are hesitant, likely fearing that public registers could adversely impact sales.

The second pressure stems from a global corporate tax agreement made by approximately 130 nations in 2021. Over the years, multinational corporations have exploited legal loopholes to declare profits in tax havens with low or no taxation, rather than where their actual sales occur. In the future, these companies will be required to pay additional taxes wherever they conduct business. Another goal is to ensure a minimum of 15% tax on their profits, regardless of where in the world those earnings are recorded.

The extent to which Caribbean centers profit from the type of corporate “profit-shifting” targeted by this agreement varies widely. While a global minimum tax might reduce incentives for large corporations to establish a presence in idyllic locations, it might not eradicate the practice. The Bahamas and Bermuda are contemplating tax increases for major foreign corporations; their reasoning being that if multinationals are obligated to pay more taxes, they might as well channel those funds into their coffers. The Cayman Islands and the British Virgin Islands are still deliberating their responses.

The Virgin Island’s economy is more susceptible to these regulatory changes compared to its Caribbean counterparts due to its less diversified financial sector. The Cayman Islands is a major address for hedge funds, and Bermuda is a central hub for insurers. By comparison, the incorporation work in which the Virgin Islands excels is easier to replicate. The territory has lagged behind its neighbours in cultivating expertise in other types of financial and corporate services, which would offer greater stability as its capacity to provide tax advantages and confidentiality erodes. Attempts to diversify pose inherent risks. The Bahamas sought to embrace cutting-edge finance, only to find itself harbouring crypto-currency speculators.

Residents are optimistic that the territory is making significant progress, even if the business sector is not performing well in the last years. The new Ministry of Financial Services aims to safeguard the British Virgin Island’s incorporation business while encouraging the growth of value-added services around it. Also, the Government has plans regarding “blue finance,” where the islands could attract investments from international sources by protecting their waters and reefs. Additionally, tourism is rebounding from the pandemic’s challenges, with visitors now able to reach the islands directly from Miami.

It becomes evident that these picturesque Caribbean territories are now facing both unprecedented challenges and new opportunities. The once-booming offshore financial sector is now confronting headwinds from global efforts to combat tax evasion and increase corporate transparency. However, as this sector adapts to changing regulations, these countries are poised to reinvent themselves.

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