Keeping pace with change can be difficult sometimes, whether it is the latest trends in fashion or mobile phone applications, and we can now add doing business internationally to that list. While improvements in world travel, telecommunications and infrastructure have made doing business practically seamless across jurisdictions, G-20 governments, struggling to balance their budgets, have led the charge to frustrate the process through the implementation of various rules, regulations and protocols.
In the last decade, there have been several restrictions on business activities and increased compliance measures designed to monitor and control foreign investments, prevent money laundering and keep corporate profits at home and subject to domestic taxation. The G-20 countries, either unilaterally or through their own member organisations, like the Financial Action Task Force and the Organisation for Economic Co-operation and Development (OECD), have imposed a number of stringent requirements ranging from Basel III on financial regulations, Solvency II on insurance, the Foreign Account Tax Compliance Act, the Base Erosion and Profit Shifting initiative, and the soon to be implemented Common Reporting Standards. These requirements and their heavy compliance costs have overwhelmed regulators and service providers across all jurisdictions. Moreover, many of these directives challenge the validity of previously signed double taxation treaties between international jurisdictions and G-20 countries, creating both diplomatic and legal issues.
Thus, planning for cross-border transactions has become a delicate operation, with substance and transparency becoming key words. Governments are eager to exchange tax information and challenge the implementation of tax minimisation strategies. In October 2014, 54 countries signed a multilateral competent authority agreement to exchange information automatically and at June 2016, the total numbers of signatories' had increased to 83. This initiative is likely, eventually, to evolve into an interconnected tax world with instant exchange of information.
Yet, if anything, these changes have led to a renaissance of sorts in international financial centres (IFCs), with the development of products outside of the normal incorporation of an international company. Wealth protection and succession planning are becoming an important part of the landscape, and the planning tools have evolved to include investment funds, trusts, foundations, protective cell companies and philanthropic charities. These tools provide the flexibility for sophisticated planning for multiple generations, across jurisdictions. The actual planning vehicle used by the prudent tax planner would depend on nationality, residency, local laws and, indeed, the degree of wealth of the individual.
The profile of jurisdictions involved in the facilitation of cross-jurisdictional business is now high on the agenda of the OECD. These jurisdictions are being forced to embrace the demands and costs of the ever-changing compliance rules, yet some of them have seen robust growth - the British Virgin Islands, Cayman Islands and the Seychelles, to name a few. This resilience seems to suggest that, in most cases, IFCs are seen as better regulated than most 'onshore' jurisdictions, and there is a strong belief that, as long as wealth protection drives offshore investment, then cross-jurisdictional business will continue to provide the interface for worldwide tax systems and, hence, global trade.
The cliché "the more things change, the more they remain the same" is now very relevant to IFCs, most of which have built their industry on three essential pillars:
- Strong legislation
- Efficient judicial systems
- Specialised knowledge and expertise.
Additional changes in this business environment are inevitable, but one can expect that amidst the changes, those jurisdictions, entities and service providers, who are plying their trade across borders, will strike the right balance between risk and reward, to ensure that substance, quality and profitability are not compromised.
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