The mainstream media often paints a picture of offshore centers as outposts of unimaginable wealth, with their economies fueled by the proceeds of money laundering, tax fraud, and other illegal activities.
The truth, as is often the case, is very different from the news reports. Some offshore centers—think Switzerland, Singapore, and Hong Kong—are in relatively good shape financially. Their governments can pay bills coming due. Business continues in a relatively "normal" fashion, or as normal as is possible in the grip of the most serious financial meltdown in nearly a century.
Numerous offshore centers now face a perfect financial storm. Their governments spent heavily to beef up infrastructure. But, they also borrowed heavily to finance these expenditures. So long as the global economy continued to grow, it was reasonable to believe they could pay the money back. But in the midst of a global financial collapse, they can no longer afford to do so.
In addition, just as the global economy tanked, the Organization for Economic Cooperation and Development launched a renewed campaign against "harmful tax competition." The targets, as always, were offshore financial centers. So at the same time that offshore centers saw revenues shrinking from due to the economic downturn, the OECD forced them to eliminate bank secrecy with respect to inquiries from tax authorities in high-tax countries.
The British overseas territory of the Cayman Islands, the world's fifth largest banking center, is a case in point. Facing a US$82 million budget deficit, the Caymans last month appealed to its colonial masters in London for permission to borrow US$310 million from banks. And despite the fact that banks had already approved the loans, the British Foreign Office said "no."
The Caymans weren't asking for direct government aid from the British government. But, because the size of the loans would result in a deficit in the government's operating budget, the Caymans had to ask for London's permission to borrow the money.
In response to the request, Foreign Office minister Chris Bryant suggested that Cayman introduce—gasp—new taxes. "I fear you will have no choice but to consider new taxes – perhaps payroll and property taxes," Bryant wrote to McKeeva Bush, head of the Cayman government.
For the moment, the Caymans have rejected the idea of direct taxes. Instead, the government will raise customs duties, licensing fees, and other indirect taxes. It also plans to sharply cut spending.
However, the global financial crisis isn't going away. Neither is the OECD. That means the Caymans and other offshore centers will come under increasing pressure to balance revenues and expenditures. For now, direct taxes on income or property are off the table. But there's zero assurance that the governments of offshore centers may impose them in the future.
Copyright © 2009 by Mark Nestmann





