The UK's offshore financial centres must diversify and become less reliant on low tax rates or risk the wrath of the UK government, says a report from a former financial administrator.
The report, which was written by Sir Michael Foot, a former Bank of England official and Bahamas bank inspector, explains that the UK's crown dependencies and overseas territories need to urgently change their tax bases.
Most controversially, the report argues that many of the jurisdictions, which have promoted themselves as tax havens, will have to diversify their tax base by raising tax revenues through increases in sales or income taxes.
Foot explained that this diversification would make them less vulnerable to global financial events. The report was commissioned by Chancellor Alistair Darling in December 2008 to identify the opportunities and challenges generated for UK offshore financial centres by turmoil in the financial markets and the subsequent impact on the world economy.
The report also mentioned that the UK government should reconsider governance arrangements if the centres do not improve their standards.
"Meeting international standards on tax transparency, financial sector regulation and financial crime is an absolute must if the jurisdictions wish to continue to hold themselves out as internationally active financial centres, but international pressure must also be maintained on competitor jurisdictions to raise their standards," said Foot.
The recommendations made to these jurisdictions cover: the quality and extent of economic planning; meeting international standards on tax transparency, financial sector regulation, and tackling financial crime; ensuring that deposit protection schemes can be understood by depositors; and crisis prevention and resolution measures.
Of the nine territories investigated in the report, Foot explained that some jurisdictions would require large-scale reforms.
Concerns were raised over the Caribbean territories of Anguilla, Montserrat and the Cayman Islands. These locations have been severely affected by a drop in the demand for financial services.
[W]e welcome the constructive observations and recommendations put forth by the review team," said McKeeva Bush, of the Cayman Islands government.
However, praise was heaped on some locations including Jersey and the Isle of Man.
"I am pleased that Foot was able to acknowledge that the Isle of Man makes a significant contribution to the UK economy, by providing a gateway to route funds to the City and by servicing the financial needs of many UK nationals living abroad," said the Isle of Man's Chief Minister, Tony Brown.
Foot praised the Isle of Man's for agreeing to adopt automatic exchange of tax information by July 2011 and he urged other jurisdictions to follow suit.
"Even those jurisdictions which are not under immediate fiscal pressure may wish to consider whether existing tax regimes expose them to international pressure which might ultimately have a material impact on their economic sustainability whilst potentially also reducing their 'tax take' more than necessary," said Foot.
"We have a constitutional relationship with these countries so we are not going to cut all ties, but they have been told to change their systems by the G20, the UK and now by Foot so there is no reason for them to be complacent," said a UK Treasury spokesperson. "But we will think twice about supporting them if they do not change."
