Sun, Jul 01, 2012 - Page 9 News List

Channel Islands tax haven threatened by financial reforms

The economies of Jersey and Guernsey are dominated by a financial sector offering offshore services and tax planning for big business and the world’s super-rich

By Simon Bowers  /  The Guardian, in Jersey and Guernsey

Illustration: Kevin Sheu

Only in private will a small number of Channel Islands politicians and executives betray any trace of personal misgivings about the manner in which the local finance industry trades on complex tax structures to help big business and super-rich individuals cut their tax bills.

“When a horse falls from heaven you don’t check its teeth, do you?” said one government figure, who asked not to be named. “And the finance industry is like that here.”

Another lawyer who works in Jersey’s trust industry, looking after assets of overseas millionaires, explains over a beer that local rules mean he must know the commercial rationale for the structures he administers.

“The answer is generally always tax. Tax and inheritance planning,” he said.

He, too, spoke only in confidence.

Five years ago, at its peak, the value of assets held through Jersey — its offshore banks, trusts and investment funds — was estimated at £700 billion (US$1.09 trillion) to £800 billion, according to the island’s former chief adviser Colin Powell. The figure is equivalent to about half of the UK’s annual economic output.

Finance dominates life in the Channel Islands, particularly Jersey and Guernsey, where it accounts for almost half of all economic activity. The island capitals of St Helier and St Peter Port are dotted with familiar named banks, many of them institutions that have survived only after bailouts from taxpayers elsewhere in the world.

If the past five years of global financial turmoil have not entirely passed the islands by, they have left them relatively unscathed, even though the economic output of Jersey’s financial sector has shrunk by almost a third.

While other small nations with large banking sectors, such as Iceland and Ireland, have been undone by their reckless lending practices, the debt-free Channel Islands have always positioned themselves as dependable repositories of riches.

Visitors touching down at airports in Guernsey or Jersey are confronted with advertising hoardings promising “wealth management,” “asset protection” and “tax advice.” This is what the islands are good at.

From the start of the 1970s, the Channel Islands enjoyed almost four decades of near uninterrupted growth, driven by ballooning financial activity. Bank deposits grew from £500 million in 1970 to £220 billion in 2007.

Over the same period the number of active companies incorporated on the islands rose from about 550 to more than 33,000, including FTSE 100 firms such as Glencore, Shire Pharmaceuticals and advertising group WPP.

With the boom Jersey’s population has expanded by 40 percent since 1970 and now stands at 98,000, with a quarter of working-age adults employed in finance last year. Just over 40 percent of these finance workers were born in Jersey while almost an equivalent number hail from the UK. Despite the impressive roll call of corporate and investment names on the island, for many multinationals their Jersey presence is a flag of convenience. The islands are a tax-neutral conduit for these groups, a popular component in the financial plumbing that connects assets and investors around the world.

However, for workers in St Helier perhaps the most lucrative corner of Jersey’s financial sector is the offshore trusts industry catering to the international super-rich. Efforts by the UK to prevent its wealthy residents from using Jersey trusts to shelter assets from the taxman date back at least to the 1920s. Today, Jersey and Guernsey attract wealth from across Europe, the Middle East and beyond, as well as being the jurisdictions of choice for the UK’s non-domiciled (non-doms) super rich — the wealthy figures who have told Her Majesty’s Revenue and Customs (HMRC) they are not permanently based in the UK for tax purposes.

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