Offshore Opportunities in Emerging Market Economies
2nd July 2007
This decade has been marked by enormous changes in the distribution of wealth across the globe, driven primarily by the increased globalisation of economies. One striking feature of these developments has been the unlocking of the latent economic sway of the BRIC economies (Brazil, Russia, India and China). As these countries have emerged onto the global stage then their relationships with the key financial centres of the world has evolved considerably. It has become commonplace for companies incorporated in these jurisdictions to seek access to capital and services offered by centres such as the City of London. London is indeed performing well in the contest to win stock market listings. The UK capital has accounted for five of the largest global stock offerings this year and most of them are from BRIC economies.
With some 300 ‘international’ companies listed on the Alternative Investment Market (“AIM”) – many originating from emerging markets – then access to London’s capital markets has become increasingly attractive to companies seeking growth and presence in the Western world.
Many of these companies have been routed to London via offshore centres such as the Isle of Man. A recent report by independent research agency Hemscott identified that 15 of the top 100 companies listed on AIM are incorporated in the Isle of Man followed by Bermuda with 6 and the BVI and Guernsey with 4 each. The combined market capitalisation of AIM 100 companies incorporated in the Isle of Man is in excess of £5 billion.
Offshore centres have therefore enjoyed a symbiotic relationship with the City of London as such companies have opted to access capital markets in this fashion.
The route to AIM has been a key part of the interaction between the emerging economies and the offshore world. Often this path has been dictated by domestic regulatory requirements which may, for example, prohibit domestic companies being listed directly on overseas exchanges. Listing an offshore entity can be advantageous from a tax perspective both in terms of corporate tax and distributions to shareholders. In the Isle of Man, similar to other leading offshore centres, a zero rate of corporate tax applies to all businesses (except banking) and distributions to non-resident shareholders are not subject to withholding tax.
Although the use of offshore vehicles on AIM and other stock exchanges has been the most visible form of the relationship between emerging countries and the world’s offshore centres; there are other key areas where offshore centres are seeking to add value. Of particular interest is the use of tax neutral jurisdictions where emerging market companies are embarking on global acquisitions. Whilst for many years Western businesses have utilised no/low tax jurisdictions to create global platforms – this too is becoming a consideration for acquisitive emerging market companies. Offshore jurisdictions have been keen to promote accessibility to such global platforms as an integral part of international trade. Private equity arrangements are also being routed via offshore entities both in terms of inward and outward investment. Offshore banking and private wealth management are additional business lines being investigated. Likewise investment products and services targeted at non-resident nationals can benefit through the use of offshore structures. Offshore jurisdictions can be useful for structuring cross-border joint venture arrangements or SPV transactions where the parties feel secure in the system of law which applies to their arrangements. Reassurance can be given on matters such as regulatory simplicity, tax neutrality, contractual certainty, transparency of security and ease of enforcement. These factors have led to a broad spectrum of banking and commercial matters being routed offshore – similarly asset finance transactions involving corporate jets and mega-yachts are becoming increasingly appealing to BRIC domiciled HNW individuals and corporates alike.
It should be noted that territories themselves are seeking to invest their foreign reserves on a global basis. China has US$ reserves in excess of $1 trillion – the recent investment in Blackrock will no doubt be a taste of things to come. London has attracted the largest share (15%) of all Chinese Foreign Direct Investment into Europe since 2002. In recent times Indian investors have become amongst the most prolific in the City. Again, use of offshore structures and centres are featuring prominently in such investments.
The emerging economies do present a gateway of opportunity for offshore law firms, but this is not without its challenges.
Although the BRIC economies are not currently part of the OECD, there will no doubt be an increased engagement and dialogue as these countries take on a new importance in the world economy. The OECD has for many years encouraged offshore centres to move away from being ‘concealment’ centres and to become ‘service’ centres. The key standards required by the OECD are transparency and effective exchange of information in tax matters. Factors such as these are shaping the modern face of the offshore world. In a recent interview with Jeffrey Owens, head of the Centre for Tax Policy and Administration at the OECD, he noted that you should “distinguish between the advantages offered by low-tax jurisdictions as places that a multi-national enterprise can legitimately use to lower its global effective tax rates and the tax havens that are also used to lower tax rates but which do so by breaking the law.” Ultimately the continued acceptance and success of offshore jurisdictions in both the old and new world economies will be heavily influenced by how offshore centres react to OECD initiatives and hence strengthen and maintain their reputations. As per OECD countries, offshore centres will need to be viewed as adding value to BRIC economies and not a means of their citizens avoiding or evading tax.
The Isle of Man Treasury Minister, Allan Bell, believes that the Isle of Man economy and reputation is enhanced each time the Island concludes an international tax treaty. Agreements are currently in place with the USA and the Netherlands and negotiations are ongoing with a number of other countries. The Isle of Man is keen to promote tax information exchange agreements as one element of a potential package on offer; other arrangements include trade agreements, regulatory memoranda of understanding and ultimately double tax agreements. Similar options could be employed with BRIC economies in order to forge strategic partnerships. The ability of the Isle of Man to negotiate such agreements on a global basis was recently enhanced by a landmark declaration signed on behalf of the UK by the Lord Chancellor. The document reinforces the Island’s separate status within the context of its constitutional relationship with the UK and gives enhanced clarity for the Isle of Man in dealing in its own right with governments and organisations around the globe.
It should also not be forgotten that the traditional economic powerhouses such as the UK and US will have to work hard to compete for business that the emerging economies are offering e.g. the listing of Chinese entities in London has been reduced significantly since rule changes in the PRC made offshore listing more difficult. Chinese companies are currently being actively encouraged to seek domestic listings. Offshore opportunities will therefore be influenced greatly by local/political considerations as to how the emerging economies interact with existing financial centres and markets. Although the UK does have strong trade links with China and India there are other financial centres which are actively seeking their business such as Hong Kong and Singapore. Offshore firms will need therefore to continuously review and adapt their product offerings accordingly to fit with global trends.
For more information contact: Daniel Mackelden. |
