UK plans to ban use of offshore centres

UK plans to ban use of offshore centres

By Vanessa Houlder

Published: March 30 2009 00:02 | Last updated: March 30 2009 00:48

Banks operating in Britain will be banned from using tax havens if they sign up to a draft code of practice drawn up by the government to address a row over their aggressive tax planning.

The draft, which also gives the tax authorities the final say over whether they consider a deal to be avoidance, is more radical than businesses expected when it was announced by Alistair Darling last month. But its stringency will add to widespread scepticism that banks will sign up to the voluntary code, fuelling suspicions that it is primarily a political damage limitation exercise.

Some senior bankers who have seen the draft code, to be published in next month’s Budget, have been alarmed by its emphasis on paying tax in accordance with the “spirit as well as the letter of the law”, a subjective concept that would alter fundamentally the balance of power between banks and Revenue & Customs.

The code will only succeed if the government is able to persuade all banks, including UK branches of overseas banks, to sign up to it. The government believes that banks will accept the code because of public anger over avoidance at a time when taxpayers are providing support for the industry. Dave Hartnett, permanent secretary for tax at Revenue & Customs, told the Financial Times he believed banks operating in Britain would sign up to the code after a period of consultation.

The code is designed to stop companies using offshore jurisdictions such as the Cayman Islands that are viewed with suspicion by tax authorities. The ban is likely to fuel the controversy over the “tax haven” label, which has never been defined successfully.

The code is unlikely to curb the use of onshore centres such as Luxembourg, the Netherlands, Switzerland and Delaware for corporate tax planning. It will also permit the use of havens for “non-tax commercial reasons” which could justify many transactions in jurisdictions such as Jersey and the Isle of Man.

In recent weeks, corporate lawyers have fought back against the perception that the use of tax havens is inherently suspect, arguing they are valuable for their tax neutrality and for the ability to sidestep irrelevant complications in the tax code. Miles Walton, a partner of Allen & Overy, a law firm, said they “played a helpful and beneficial part in the world of international finance and investments”.

Lord Myners, City minister, told the House of Lords this week that tax avoidance was a moral issue: “We can no longer hide behind the excuse that there is no acceptable definition of avoidance.”

The code defines tax avoidance as any outcome which could “reasonably be expected to be unintended by parliament or tax authorities” in a move likely to infuriate businesses.

But the attempt to invoke the spirit of the law has shocked some legal experts. Judith Freedman, a professor of tax law at Oxford University, said: “There is a fundamental issue here about the rule of law in how we attempt to control the behaviour of taxpayers. It is whether we use legislation or whether we use the discretion of unelected officials.”

Baroness Noakes, shadow Treasury spokesman, said last week that the complexity of the tax code meant it was difficult to identify its spirit.

“I believe that taxation needs to be imposed by clear law,” she said.

The proposed code would bar any tax planning round the pay and bonuses of senior executives. Mr Hartnett said there was little current evidence of bonuses escaping tax.

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Farmers to cut US planting

By Javier Blas in London

Published: March 29 2009 20:04 | Last updated: March 30 2009 00:13

US farmers are set to sow fewer acres this spring with crops such as corn and wheat, breaking a string of four years of increases in a move likely to support agricultural commodities prices through the economic crisis.

The US Department of Agriculture will reveal its first acreage estimate on Tuesday in its Prospective Plantings report. Because the country exports half the world’s corn, a third of world soyabeans, and a fifth of the world’s wheat, changes in acreage and hence in output have a huge impact in global food prices.

Traders anticipate a drop in almost every major crop with the exception of soyabean, bringing the country’s cropland to about 248m acres, down 2 per cent from last year. Farmers are planting less because reduced profitability on the back of current low prices and high cost for fertilisers.

The overall acreage fall would be the first since 2005 when US farmers started to expand their cropland to cash in on high prices brought by strong consumption from the nascent ethanol industry and developing countries such as China.

Ranchers are also expected to cut sharply their production of meat and poultry this season, the first simultaneous drop in animal protein output since 1973.

Although the drop in cropland and meat output will support prices, analysts were unanimous in warning that the deep global economic crisis’ impact on demand would cap any spike and that a repetition of last year’s record prices was unlikely.

The key US crop is corn and traders forecast a drop in planting to 82-84m acres, down from last year’s 86m and 2007’s peak of 90.5m. “It appears certain that 2009-10 US corn balance sheet forecasts will tighten significantly,” said Lewis Hagerdon, an agricultural commodities strategist at JPMorgan.

Corn prices have fallen to $3.90 a bushel, lower than last Junes’s record high of $7.65, because of lower demand. But prices remain above their 10-year average of $2.75 and the prospect of lower supplies is keeping forward prices for the next crop season at a premium above current spot levels.

Traders said farmers faced high cost for fertilisers, a critical input for corn, and were likely to plant alternatively more soyabean, which requires less fertiliser. Traders see soyabean’s acreage above 80m acres, up from last year’s 75.7m. Cotton planting is likely to hit its lowest level in 26 years as US farmers move away from the fibre amid low returns.

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India looks to China to fill power deficit

By Joe Leahy in Mumbai

Published: March 30 2009 00:07 | Last updated: March 30 2009 00:07

Chinese companies are building $7bn of power plant equipment for customers in India, in a business that is underpinning growing trade between Asia’s second and third largest economies.

Chinese producers are processing orders from India for 20,000 megawatts of boilers, turbines and generators, the main equipment in a power station, according to Lloyd’s Register, which provides third-party assurance certification services for the power business.

“India and China both need each other for growth. There’s huge demand on the Indian side and there’s huge supply available on the Chinese side – and that is creating a big opportunity for trade,” said Swaminathan Krishnaswamy, vice-president for India chemicals and power and Sino-India business development at Lloyd’s Register.

The main Chinese suppliers include Shanghai Electric, Dongfang Electric and Harbin Electric. Indian buyers include industrial groups Reliance, Essar, Adani, KSK Industries, JSW Energy and Jindal Steel & Power.

Bilateral trade between India and China has grown rapidly. It was forecast to reach $20bn last year from just $1.2bn in 1995, and is targeted to double to $40bn by 2010.

The power equipment business shows that differences between the Chinese and Indian development models can lead to trade helping both weather the economic downturn.

While India has specialised in services exports, excelling in industries such as information technology outsourcing, China has developed an unparalleled ability to roll out big-ticket infrastructure to support its huge trade in merchandise exports.

As India becomes more prosperous and seeks to create more manufacturing jobs for its vast pool of unskilled labour, it urgently needs to upgrade its infrastructure.

In the power sector, however, India’s main producer of boilers and other large equipment, Bharat Heavy Electrical, has been overwhelmed with orders.

It has capacity for only about 10,000 MW of power equipment a year compared with the government’s target for the five years ending 2012 to build power plants with capacity of 78,000 MW, forcing India to look to China to help fill the gap.

Another reason many Indian groups are buying Chinese power equipment is that they are able to deliver much more quickly than indigenous groups.

Chinese producers can deliver equipment for a 4,000 MW facility in about 18 months, up to 30 per cent quicker than their Indian counterparts.

This is important when India is facing an annual power deficit between output and demand of about 9-13 per cent.

“Despite strong economic growth, India’s power sector is undercapacity and plagued by inefficiencies in generation, transmission and distribution,” McKinsey & Co wrote in a recent report on India’s infrastructure, “Building India”.

Lloyd’s Register says it has about 75 per cent market share in the third-party assurance market for the China-India power trade with contracts in the area worth about $4m.

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Secrets of success

By Jack Burton

Published: March 26 2009 12:59 | Last updated: March 26 2009 12:59

Singapore has the ambition to become the Monaco of Asia, with all the attributes for which the European principality is well-known.

The south-east Asian city-state held its first Formula One grand prix last September. Super-yachts are berthed at new luxury harbour facilities. The first casino resort is scheduled to open this year. And dozens of international private banks have sprouted since 2004 as the government has made a concerted push to establish the country as the regional centre for wealth management services.

Officials hate Singapore being described as a tax haven. They prefer to say it is a low-tax jurisdiction. Nevertheless, Singapore has long been a favoured destination for the rich to stash their cash. It gained a reputation as a financial bolthole in the 1960s, as ethnic Chinese business tycoons in south-east Asia viewed Singapore as a safe haven to protect their funds from confiscation by local governments that resented the wealth accumulated by the Chinese elite.

Singapore’s rise as a wealth management centre for those beyond Asia got a boost in 2005 with the adoption of the European Union Savings Directive, under which banks in tax sanctuaries such as Switzerland must impose withholding taxes on accounts held by EU citizens if the names of the account holders are not revealed.

In response, Credit Suisse and UBS established their biggest private banking operations outside of Switzerland in Singapore, and were followed by smaller European private banks including Julius Baer and Liechtenstein’s LGT.

What attracted them to Singapore was the bank secrecy laws, which are among the world’s strictest. In addition, the country has no law against international tax evasion. “Under current law, Singapore will not assist in tax evasion cases in foreign jurisdictions,” says Edmund Leow, a tax lawyer at Baker & McKenzie. Wong & Leow in Singapore.

Singapore does not tax the global income of those holding local bank accounts. Residents are subject to a maximum tax rate of 20 per cent on local salary income, and investment income is tax-free. The corporate tax rate will be cut by 1 percentage point to 17 per cent this year, making it among the lowest in the world.

Singapore’s bank secrecy laws are based on British common law, inherited from its former colonial rulers. Although it has signed double-taxation treaties with 60 countries, “Singapore has been much more restrictive than the UK in the exchange of information” under these treaties, says Leow.

An important exception is its qualified intermediary agreement with the US, which requires all foreign banks that operate in the US to disclose overseas bank accounts held by US citizens. Singapore also has laws banning the laundering of money from internationally recognised illegal activities, such as drug trafficking and financial fraud, or funds looted from national treasuries by foreign leaders or their families.

“We do not stand for the abuse of our [banking] laws to shelter criminals,” Lim Hwee Hua, a senior finance ministry official, told parliament recently. But Singapore is under growing pressure from foreign governments to disclose more information about local bank accounts to counter tax evasion.

One crucial test of the city-state’s resolve to maintain bank secrecy has been a demand by the EU that Singapore – along with Hong Kong – accept the EU Savings Directive. So far, Singapore has refused to do so and the dispute has blocked the signing of an EU-Singapore partnership agreement to promote closer co-operation.

In addition, Singapore could attract the attention of the new Obama administration in the US, which has vowed to take drastic actions against countries that it sees as tax havens.

Singapore appears to be softening its stance somewhat. The government is considering adopting standards set by the Organisation for Economic Co-operation and Development for transparency and effective exchange of tax information. “Singapore agrees with the principles behind the OECD standard, which will serve to help government address offshore tax offences,” Lim told parliament.

Under the OECD rules, Singapore would have to assist with information requests on specific tax evasion cases from its tax treaty partners. But the city-state would have the right to reject such a request if its purpose was unclear or it appeared that foreign governments were engaging in “fishing expeditions” to gain information to identify possible tax evaders.

How far Singapore is willing to go to disclose information under the OECD rules will be important for the future of its private banking industry, which is a pillar of the financial services sector. An aggressive enforcement of the rules would probably drive away some private banks.

The sector is already reeling from the effects of the global financial crisis. “High net worth individuals have been among the hardest hit in Asia by the crisis, which has slowed the growth of the wealth management industry,” says Cem Karacadag, an economist with Credit Suisse in Singapore.

However, if the city-state is able to maintain some degree of bank secrecy, the crisis could prove beneficial in the years ahead. “Singapore is likely to see a bigger inflow of money as western countries raise taxes to finance the bail-out of their local banking systems,” says a Singapore-based private banker.