Transparency and tax campaigners are clashing with officials from the British Virgin Islands (BVI) over a new report claiming the Caribbean islands are not a tax haven.
The report, written by Capital Economics and commissioned by BVI Finance, which promotes the country’s financial sector, said the islands are strong contributors to the global economy and help facilitate international trade and investment.
But campaigners contend that the report paints a too-rosy picture of the islands. They argue the BVI’s commitment to zero tax and levels of secrecy encourage financial crimes and allows corporations and individuals to evade tax.
Capital Economics’ report estimates that $US1.5 trillion worth of assets currently move through the BVI. It calls BVI a “sound and reliable centre which has worked harder than many bigger nations to meet international standards, and not some supposed tax haven.”
Mark Pragnell, who authored the report, says companies are no longer using the BVI for tax benefits alone: one of the BVI’s most attractive features is their strong and easy to understand legal framework, he said, which draws heavily on US law and helps facilitate cross-border transactions. The report also found that the BVI has made efforts to increase transparency and information sharing.
“We want to dispel a lot of the myths about how the BVI is used,” Lorna Smith, interim executive director of BVI Finance, told Business Insider. “We really want to talk about the use of BVI companies in a positive way.”
‘The ‘not a tax haven’ line is only one you ever hear from tax havens’
But critics have questioned whether a strong legal framework, which is available in other countries, is really what makes the BVI such an attractive destination for investors and businesses. Tax campaigners point to the fact that the islands do not charge capital gains or corporation tax and, are known for being secretive about who owns the companies that are registered there.
“The ‘not a tax haven’ line is basically only one you ever hear from tax havens,” Alex Cobham from the Tax Justice Network told Business Insider. “It doesn’t look like good PR to me.”
Capital Economics claims that the BVI is a “substantial net benefit to governments worldwide,” even when taking into account the “maximum tax leakage” (money that businesses avoid paying by routeing money through BVI companies). It estimates that, globally, $US750 million is lost to this leakage, compared to $US15.7 billion that is generated. In the UK alone, it estimates investments made via BVI companies generate $US3.9 billion in income and corporate tax.
The Tax Justice Network strongly disputes this, estimating the amount of tax lost to leakage at $US37.5 billion every year.
‘Make the registers public’
The BVI says it has also taken steps towards greater transparency — companies must now disclose who their directors and beneficial owners are, for example. But ownership information can only be obtained through a court order or with the company’s permission. In the UK, the legal obligation to publicly disclose beneficial ownership was cemented in this year’s Criminal Finances Act. The obligation was not extended to the UK’s Overseas Territories (OT), of which the BVI is one.
“If the BVI was serious about wanting to get rid of the label of ‘tax haven,’ they would make the registers public,” says Cobham. “That would immediately put them streets ahead [of other low or zero tax jurisdictions].”
Instead, he says, they have resisted attempts to increase transparency. This encourages unsavoury individuals who otherwise “wouldn’t or couldn’t invest.” Since globally there are many low or zero tax jurisdictions — “the BVI have no competitive edge in that space,” Cobham says — maintaining secrecy is important.
Hames says: “The secrecy offered by the British Virgin Islands allows corrupt individuals who steal public funds to hide them around the world. More than half of the companies uncovered by the Panama Papers leak were registered in the BVI.”
In April 2016 the prime minister of Iceland, Sigmundur Davíð Gunnlaugsson, resigned after the Panama Papers revealed he had owned a company in the BVI when he entered parliament in 2009, which he had failed to disclose. The company, in turn, had owned millions of dollars worth of bonds in some of the major Icelandic banks that collapsed during the financial crisis – despite Gunnlaugsson having been elected to power in 2013 on the promise that he would prioritise the national interest over financial interests.
The Papers also revealed that Ukrainian President Petro Poroshenko had moved his confectionary business to a holding company in the BVI in 2014, despite having promised to sell it if elected.
Lorna Smith, interim executive director of BVI Finance, disputes Hames’ assessment. “The BVI is not a secrecy jurisdiction,” she says. She stresses that, if there is evidence of wrongdoing, the relevant information will be handed over to the appropriate authorities, and counters that public registers are “not the global standard.”
Smith emphasises the importance of differentiating between secrecy and privacy. “Privacy is a universal human right and I don’t see why, for instance, I should know how much money you have in the bank,” she says.
‘The BVI is yet to publish a money laundering risk assessment’
Offshore and low tax jurisdictions have been increasingly criticised since the 2008 financial crisis and the 2016 Panama Papers scandal. Campaigners say they are used by individuals to evade tax and help facilitate financial crimes like money laundering. (Capital Economics says the report is not a response to the Panama Papers, and was commissioned prior to the 2016 leak.)
Earlier this year, the Cayman Islands, another offshore jurisdiction, released a risk assessment on anti-money laundering. The BVI is also committed to publishing one, although has not done so yet.
“As well as failing to reveal the true owners of companies, the BVI is yet to publish a money laundering risk assessment, so in this respect it is lagging far behind global standards on anti-money laundering,” Duncan Hames, Director of Policy at Transparency International, told Business Insider.
BVI authorities say the assessment has been completed but must go through the House of Assembly before it can be published, the timescale for which is unclear.
In 2016 Capital Economics wrote a report for Jersey — another zero tax jurisdiction — about its economic value to the UK, which bears similarities: both reports emphasise the importance of the territories for encouraging investment that ends up in the UK, routed through a zero tax area, which they say otherwise would not have been made.