Caribbean Tax Havens under fire

There are more than 20 offshore tax havens in the Caribbean and Central America, and commentators argue that their day in the sun is almost over.

The list of adverse factors is daunting. First of all, the gradual reduction in tariff barriers worldwide has undermined the Caribbean islands' reliance on subsidized exports of sugar and bananas. Then, the fierce attacks by the USA, the FATF and other bodies on money laundering and terrorist financing have forced the IOFCs to eschew many of their traditional clientele. The OECD is pressurizing many OIFCs to harmonize their offshore and offshore regimes and, to cap it all, a many of them are dependent territories of the UK and have been forced to adopt the odious EU Savings Tax Directive.

It's this last problem that may be disastrous in the short term as investors shy away from the EU's spotlight. Not coincidentally, the British Virgin Islands have seen a 20% drop in revenue in IBC registrations last year. With such a wide choice of OIFCs available world-wide, the uncomfortable demonstration that Britain's dependencies had no choice but to knuckle under to the FCO hardly helped them.

A recent report pointed out that all 14 of the independent countries in the Caribbean Community (CARICOM) are among the 30 most heavily indebted emerging-economy governments, with seven of them in the top ten. An official with the IMF's Western Hemisphere Department, suggested recently that a continuation of current policies endangers the Caribbean's macroeconomic stability. The IMF says that the Caribbean economies have managed an average growth rate of barely 2.5% in the last 25 years.

However, the "gloom and doom" may be overdone. The BVI has still managed to grow last year, helped by tourism, increased business in financial services and substantial asset flows from booming China. Other jurisdictions in the region have been reporting increased business, and most are aware that they have to change their fiscal models for the reason that regional integration is undermining tariff revenues which underpin budgets. Ratings agencies have had hard words for Belize and Barbados but complimented the Cayman Islands. And the IMF has been favorable in its regional assessments. The dark cloud of the Savings Tax Directive may not persist - in reality, it is easy to escape the Savings Tax in a number of perfectly legal ways and, once the dust has settled, the convenience of the Caribbean for US and Europe investors may outweigh their concerns.