The Future for International Financial Centres Gresham Symposium London 27 March 2014

1. The Future for International Financial CentresGresham SymposiumLondon27 March 2014 Richard HayStikeman Elliott (London) LLP

2. Presentation Overview • why IFCs exist • tax and morality • regulation • globalisation • the future for IFCs

3. Civil Society and International Business: Common Ground? • prosperous economies support healthy public finances, private investment, development and poverty alleviation • do we value the business contribution to trade, economic growth and jobs? • business needs infrastructure- not just roads, schools and hospitals, but also a sound legal system, trained professionals, and finance

4. Why IFCs Get Bad Press • IFCs conduct financial services • IFCs facilitate business, and globalisation • offshore finance is, by definition, foreign to the country where the criticism arises • IFCs seldom explain why their activity is socially or economically constructive

5. The Role of Financial Services • financial services conduct capital formation and transmission to support trade and economic growth • financial services are strategically important and generate good jobs in the information economy • countries compete to host this important activity

6. International Financial Centres: Why? • the world is politically segmented, but economically integrated • tax systems are national fiefdoms, ill suited to cross-border business • are international financial services a giant criminal enterprise? • regulation: do we need cost / benefit analysis?

7. Who Uses IFCs? • MNCs • hedge funds • private equity • venture capital and infrastructure funds • insurance, including catastrophe bonds • ordinary people?

8. How a Cayman Fund Works Private Investors Other Institutional Investors Pension Fund Taxable in country of residence Tax neutral so no third layer of tax Governed under British-based Cayman law Investment Fund in Cayman Taxable in source country China Africa G8 Country

9. Why International Investors Use Offshore Companies • * Investors benefit from: • British-based • law • courts • professionals Loan Chinese Company Bank Cayman Company Infrastructure Projects in China

10. Tax and Morality • morality is important in making the policy choices in tax system design • when it comes to tax compliance and enforcement, it must be done according to law- there is no other way (Michael Devereux, Oxford Centre for Business Taxation) • countries create incentives to attract international capital • politicians often condemn the use of incentives which their governments created

11. Tax Competition • tax and regulatory competition – US and EU differ on its benefits • is tax competition ruining EU government finances? • European states tax and spend nearly 50% of GDP • (Singapore and Hong Kong spend 22% of GDP)

12. The CAGE-Chatham House Series, No. 4, February 2013 Tax Competition and the Myth of the ‘Race to the Bottom’ Vera Troeger

13. Angela Merkel • Europe has • 7% of the world’s population • 25% of its total GDP • 50% of its social welfare spending • enhanced tax collection and reform alone are not enough to achieve sustainable finances in Europe • Europe also needs structural changes in government expenditure to achieve sustainable public finances

14. Regulatory Standards • regulation may be used as a tool to secure a competitive edge or challenge competitors • IFCs and financial data collection and exchange: do the small centres lag or lead international regulatory standards? • British offshore centres, Benelux and Switzerland have collected beneficial ownership data on companies and trusts for a decade.  Do G8 countries match this standard? • A level playing field? Bring it on…

15. 2003 2006

17. Cayman Islands Jersey Isle of Man BVI Bermuda UK US

18. Financial Services and Globalisation: Impact on Developing Countries • China’s increasing prosperity has been symbiotic with the rapid growth of the financial centres in Hong Kong and Singapore • international finance is required for investment and development • does offshore finance curtail crony allocation of capital? • does Africa suffer from a dearth of proximate financial centres?

19. The Future for IFCs • upgraded regulation should take cost / benefit analysis into account (FATF, FATCA) • IFCs support the international investment and trade which supports globalisation • countries don’t have friends, they have interests • G20 countries will protect facilities for cross-border finance, in their own interests

20. Globalisation: Good or Bad? • is it economically or morally desirable for unskilled western workers to earn fifty times the wages of their developing country competitors? • IMF: “Globalisation has delivered extraordinary progress for people living in developing nations.” • World Bank: “Globalisation has reduced poverty and global income equality.  Income per person grew 3½ times faster in globalising developing countries than in those which have not globalised.”

22. UK Income Distribution, After Tax and Benefits

23. Regional disparities in poverty reduction1970–2000 Sala-i-Martin, X. "Falling Poverty and Income Inequality: A global phenomenon" Quarterly Journal of Economics, MIT Press: Cambridge, MA. 2006, 121: 2.