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A Provocative Dependence? The Global Financial System and Small Island Tax Havens

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Global Governance, Conflict and Resistance

Abstract

The global financial system may be seen as an arena within which global governance is regularly contested. This chapter examines one particular aspect of global finance, offshore finance, and its global level regulation, and considers small island tax havens and their resistance to forms of global governance. Over the last 40 years many small island economies (SIEs) — defined as having under 1.5 million populations (Commonwealth Secretariat, 1997) — have come to host offshore finance centres (OFCs). OFCs are located around the European periphery (for example, the Channel Islands, Isle of Man, Malta, Cyprus); in the Caribbean (Cayman Islands, British Virgin Islands (BVI), The Bahamas); the Pacific (Vanuatu, Cook Islands) and Indian Ocean (Mauritius, Seychelles). Many SIEs have become highly dependent upon hosting OFC activities with extreme examples such as the British Channel Island of Jersey having over 90 per cent of its government revenues from such activities, and the OFC directly employs up to 20 per cent of the local labour force.1

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Notes

  1. Data analysed John Christensen, then Economic Adviser to the Jersey government. As in many microstates, there are considerable problems with the reliability of official GDP figures (Hampton and Christensen, 1999).

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  2. An associated phenomenon, the vast Eurocurrency markets located ‘offshore’ initially in London have an extensive literature including the work of Einzig (1967), Strange (1971) and Little (1975).

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  3. The UK Overseas Territories are 13 remnants of the British Empire including many OFCs (the Cayman Islands, the BVI, the Turks and Caicos Islands etc.). However, the three British Crown Dependencies (the Isle of Man, Guernsey and Jersey) are ancient jurisdictions under the Crown, have their own parliaments, and are not within the United Kingdom.

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  4. The ring-fencing of fiscal schemes for non-residents (e.g. offshore companies such as IBCs that offer effective tax rates of as low as 0.5%) from the host’s domestic economy is a key tax haven characteristic identified by the OECD (1998). IBCs illustrate the disingenuous argument of many OFCs that they are low tax jurisdictions and thus should not be penalised. However, ring-fenced offshore schemes prevent residents from using IBCs which are only available to non-residents.

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  5. Banking secrecy and confidentiality can be distinguished. The latter is the reasonable right to privacy in one’s affairs, whereas the former goes beyond this. For example, in the case of an offshore bank account, if one has nothing to hide, then legitimate inquiry by the state does not breach the confidentiality expected in banker-client relationships. Bank secrecy in many OFCs prevents such legitimate inquiries. However, bank secrecy appears to be under growing threat of extinction as exemplified by Switzerland’s increasing willingness to freeze assets pending court actions.

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  6. It can be argued that — excepting the CI and Isle of Man — the majority of Group I jurisdictions are atypical OFCs and have more features common to regional financial centres than pure ‘offshore’ centres such as many Caribbean OFCs. For instance whilst Singapore has an offshore function (as do London, New York and Tokyo) it is more accurately described as a regional onshore financial centre (Hampton, 1996b).

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  7. For example, the Jersey parliament (the States of Jersey) consists 53 elected members: 12 Senators, 29 Deputies and 12 Constables, but elections are held at different periods, and the period in office also varies. Thus the electorate does not vote in (or out) a particular administration with any form of General Election (Mitchell and Sikka et al.,, 2002).

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  8. Most OFC islands have warm climates whether Mediterranean, sub-tropical or tropical. Of the temperate island OFCs, the Channel Islands’ southerly location gives milder winters and warmer, sunnier summers than mainland Britain averages. The Isle of Man is the most northerly island OFC and (perhaps coincidentally) has a smaller OFC sector relative to other sectors of its economy, is further from London, and has fewer wealthy immigrants than the CI.

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  9. The Jersey Limited Liability Partnership (LLP) Law was devised by two of the largest accountancy firms Price Waterhouse (now PriceWaterhouseCoopers) and Ernst & Young to protect partners’ personal assets. The LLP bill was ‘fasttracked’ through the Jersey parliament in 1996 and the law drafting process privately funded by the two accountancy firms leading to controversy within the OFC and in the international media (Christensen and Hampton, 1999; Mitchell and Sikka et al.,, 2002).

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© 2003 Palgrave Macmillan Ltd

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Cochrane, F., Duffy, R., Selby, J. (2003). A Provocative Dependence? The Global Financial System and Small Island Tax Havens. In: Cochrane, F., Duffy, R., Selby, J. (eds) Global Governance, Conflict and Resistance. Palgrave Macmillan, London. https://doi.org/10.1057/9781403943811_11

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