Mobile people, mobile capital and tax neutrality: sustaining a market for Offshore Finance Centres

(ENG) This paper examines the self-reported effects on business performance, sustainability and confidence following international initiatives to regulate Offshore Finance Centres (OFCs). Since the late 1990s small countries and territories have been encouraged and pressured by multilateral organisations and supranational institutions to exchange information on civil and criminal tax matters. Interview based research in Australia, Andorra, Guernsey, Samoa and Singapore has been carried out to determine how OFC clients have reacted to these initiatives along with their impacts on the offshore sector, including local economies and societies. This paper shows that these international programs have caused contraction and reorganisation in leading OFCs. However, their diverse clientele and access to established markets for global financial services continues to make them attractive locales for fund management, trusts, captive insurance and private banking. The effects on OFCs located in smaller, developing countries have been much more severe, with reports that these jurisdictions are facing major problems sustaining a share of the worldwide market for financial services and products. This suggests that because of the uneven consequences of international efforts to regulate offshore finance in selected jurisdictions, these initiatives may actually increase tax competition rather than reduce it, at least in the short term. For multilateral policies to be effective, it may well be necessary for wealthy and poor nations, including OFCs (which include some of the world's poorest and wealthiest jurisdictions) to determine if tax competition contributes to or ameliorates the inconsistencies and contradictions of globalisation and the uneven development that it produces on a worldwide scale. Regulatory dialogue between states with widely diverging tax systems has emerged as a key feature of Organization for Economic Cooperation and Development (OECD), International Monetary Fund (IMF), and European Union (EU) initiatives on Offshore Finance Centers (OFCs) or tax havens. This has brought together states of differing dimensions in size, population, economy, and power. Where there is such a discrepancy in power between states there is often a temptation to assert a command-and-control regulatory approach. This was the initial reading of the OECD's Harmful Tax Practices Project that demanded tax havens'mostly small states in Europe, the Pacific, Indian Ocean, and the Caribbean?repeal financial secrecy legislation and commit to Tax Information Exchange Agreements (TIEAs). As these initiatives have unfolded there has been a transition away from regulation by command-and-control towards responsive regulatory dialogue in which tax havens have been encouraged to cooperate through engagement and active participation. Based on qualitative research with key stakeholders in OFC jurisdictions and multilateral organizations, this article explores this transition towards meta-principles of responsive regulation. The preservation of tax bilateralism has limited the capacity of multilateral organizations to deploy the full range of regulatory techniques, particularly those involving penalty and coercion. Instead all parties, tax haven states and multilateral institutions alike, have been confined to the broadest base of the regulatory pyramid. Responsive regulation can end up having the opposite effect from what is intended where the enforcement peak of the regulatory pyramid is absent. This has resulted in strengthening the sovereignty of small OFC states and has increased international tax competition, rather than reduced it.