BVI Offshore Business: Grey Area

Sweden organized co-operation with the neighbor countries to put more pressure on tax havens and make them loosen their secrecy laws allowing people to avoid paying Swedish taxes. The Copenhagen-based Nordic Council has been negotiating with several jurisdictions which have rules and regulations making it easier for people to avoid paying Swedish taxes. During this year, Swedish tax authority, Skatteverket, is likely to sign an agreement with at least one offshore jurisdiction that will allow the agency to access information on companies, accounts, and banking transactions. Among tax havens with which discussions on this agreement have been commenced there are the Cayman Islands, the British Virgin Islands, Guernsey, Jersey and Bermuda. The full list of countries has not been made public.

Swedish Tax Authority has reckoned that the country loses annually about $7.65 billion in tax revenues because of people placing their money offshore. However, by words of Torsten Fensby, project leader for Nordic Council’s tax haven project, even this agreement with one of the above-named offshore jurisdictions would not affect tax revenues in Sweden. The capital will likely shift to another country with secrecy laws, but with every new agreement the possibilities for international tax avoidance will be reduced.

The UK Guardian has revealed that multinational banana companies are using tax haven jurisdictions to avoid paying tax on their profits in the UK and in developing countries. In the course of international investigation into banana firms, it was found that they established structures to move profits through subsidiaries to offshore jurisdictions such as the Cayman Islands, Bermuda and the British Virgin Islands.

Dole, Chiquita, and Fresh Del Monte, the three companies that control between themselves more than two thirds of the worldwide banana trade, are moving offshore to avoid paying money to tax collectors in the countries where they are producing their goods, and in those countries where they sell the largest part of their products.

To illustrate this fact: in the last five years, the three companies generated over $50 billion of sales and $1.4 bn of global profits. However, the analysis of their financial accounts shows that, over the same period, they paid just $200m in taxes between them – that is just over 14% of profits. In some years, the banana companies have paid an effective tax rate as low as 8%, although the standard rate in the United States where they have their full accounts is 35%.

Fresh Del Monte is registered in the Cayman Islands, which have a zero rate of corporation tax, and has more than 30 Cayman-based subsidiaries. The company also has subsidiaries in other tax havens including the British Virgin Islands, Gibraltar, Bermuda, and the Dutch Antilles. Over the last five years, actual tax paid has been as much as $69m a year - less than tax calculated at the standard US corporation rate. The other two companies, Dole and Chiquita, also pay actual tax below the standard rate, using subsidiary companies in Bermuda, Liberia and Puerto Rico.

The Guardian received comments on its investigation from John Christensen, the director of the campaign group Tax Justice Network, and a former economic adviser to the Jersey government. Speaking about the continuing flight of capital to offshore jurisdictions, he said, “The trend in the last 30 years has been to shift the burden of tax away from companies on to the consumer and labour. Capital is increasingly going untaxed.”

The banana companies are not the only ones to hide taxes using offshore jurisdictions. According to the OECD, about 60% of world trade now consists of internal transfers within transnational companies. The corporations can make little taxable profit in the high-tax countries, moving their real profits towards subsidiaries they have set up in jurisdictions that charge little or no tax.

Since the British Revenue & Customs Authority started to get from the banks the details of their customers’ accounts in offshore jurisdictions, many offshore schemes have been revealed. Probably these schemes were planned and used illegally to avoid taxation. In the cases with real estate objects registered on offshore companies, mostly based in BVI and Channel Islands, most offences uncovered concerned evasion of inheritance taxes.

One of the last noted stories concerns Bob Geldof, the rock star and Third World debt campaigner, who has been recently accused by newspapers of claiming Irish residency to avoid Inheritance Tax. Bob Geldof is an Irish citizen who is living in two properties in England. One of these properties, a luxury apartment in South London, is reported to be owned by a company called Quiet Ventures, the second one, located in Kent, is owned by Bandol Holdings. Both are offshore companies, registered in the British Virgin Islands but having London contact addresses.

Geldof is accused of avoiding payment of £2.25m, by saying that he lives in Ireland. Geldof being a non-domiciled taxpayer, the houses, which are together worth an estimated £4million, would avoid the normal inheritance tax of 40%, or £1.6million. Geldof himself declined to comment the situation.

It was stated by tax expert Mike Warburton that owning property through companies based in tax havens (namely, in BVI), was a classic scheme that allows non-domiciled citizens to escape taxation. By his words, this provides for non-paying inheritance tax, and avoiding capital gains tax if the owner sells a property where he does not reside. Moreover, stamp duty on purchasing the UK property that costs more than £500,000 can be reduced from 4% to 0.5% by complicated deals between the holding companies.

Last week two senior figures of Labour Party raised the problem of a property tax dodge which helped the rich people to escape stamp duty and cost the Treasury of UK tens of millions of pounds a year. The tax gap was mainly used for homes costing more than £5mn, and became common at the top end of London’s overheated property market.

Usually purchasers paying more than £500,000 had to pay 4% top rate stamp duty, but by transferring ownership of a property to a trust or company in one of offshore tax havens they reduce the bill to the 0.5% corporate rate. If property costs  £5mn, setting an offshore company or trust cuts the tax rate from £200,000 to only £25,000. However, for most home purchasers high cost of setting up an offshore trust outweighs savings that could be gained by going offshore. The loophole is therefore used by super-rich, and ordinary people are forced to pay the top rate this year.
The latest figures presented by Land Registry show that a total of 827 London homes are sold for between £500,000 and £1mn in February 2007; 207 homes are sold for the sum between £1mn and £2m; 64 are sold for more than £2mn. Recent study by leading property agents shows that of the 300 London homes sold for more than £5mn in 2006, only 118 were registered with the Land Registry. That means that all the rest homes are owned by offshore companies or trusts. For example, in one of the most exclusive London’s addresses, almost 40% of the 83 houses are owned by offshore entities registered in the British Virgin Islands, Channel Islands or Liberia. The same situation is on Kensington Palace Gardens, which is probably the world’s most expensive residential street.

British Virgin Islands is a very popular jurisdiction for registering an offshore tax-avoidance vehicle and transferring property into it. The homes transferred into BVI or similar tax havens no longer have to be recorded at the Land Registry when they change their owner.

The existing stamp duty loophole for wealthy is actually part of earlier discussed problem with enormous sums of taxes hidden in offshore tax havens, including British Virgin Islands. This question was raised up by Revenue & Customs, after they received from the banks personal details of 400,000 customers with offshore accounts.