BVI Offshore Business: Grey Area

The Duke of York has provoked crytics and even indignation after he urged the UK Government to preserve a controversial loophole that allows Britain’s wealthy residents to avoid paying millions of pounds in tax each year. Now he is condemned for supporting wealthy foreigners and their tax advisers who are interested in protection of the ‘non-domicile’ loophole.

The political debates started when UK Premier Gordon Brown has proposed to toughen the rules allowing wealthy ‘non-domiciled’ foreigners living in Britain to escape UK tax on foreign earnings which they keep abroad.

The main reason why the comments of the Duke of York sounded controversial, was his friendship with affluent tycoons who could incur losses from any rule change. One of the close friends of Prince Andrew, who would benefit from the present tax regime is Goga Ashkhenazi, a 29-year-old businesswoman. She is registered at companies House as a Russian citizen, but is in Britain for many years, being listed as living in a £3million apartment in Belgravia, Central London. The British Virgin Islands-incorporated company owns the leasehold of this property.

However, in the opinion of the Buckingham Palace, the proposed change to the non-domicile tax rules is “something that many overseas companies raise with His Royal Highness as an issue that may impact on their future plans to invest in this country,” and it is his duty to inform the Government about these concerns.

Many of the largest publicly traded corporations in the U.S., including major banks that now receive federal bailout money from the Government, are using subsidiaries in offshore tax havens, which let them avoid paying U.S. taxes. This information can be found in the new report by the Government Accountability Office (GAO) published last week.

GAO searched publicly available data on the companies filed with SEC, and found that 83 of the 100 largest publicly traded corporations and 63 of the 100 largest federal contractors maintain subsidiaries in countries considered to be tax havens. Citigroup has set up 427 tax haven subsidiaries in offshore tax havens including 35 in the British Virgin Islands and 90 in the Cayman Islands. In this list there are also Bank of America which has 115 subsidiaries in offshore countries, Morgan Stanley with 273 subsidiaries, the American International Group, etc. There are other well-known companies in the list  including Pepsi, Coca Cola and Ceterpillar. Other offshore tax havens mentioned in the report are Switzerland, Luxembourg, Hong Kong, Panama and Mauritius.

Meanwhile, Citigroup is expected to receive $50 billion from Government. Bank of America has already received additional $20 billion of Government aid, on top of previous $25 billion.

This report was severely criticized by the Treasury Department. In a letter included in the report it was noticed by the deputy assistant secretary for international tax affairs that there was no universal definition for an offshore tax haven. Thus, any list  of tax havens may be considered a blacklist and used for applying sanctions or other negative measures that would “inappropriately negatively affect our economic and other relations with listed countries.”

It should be said that GAO auditors did not verify the companies’ transactions in the named offshore jurisdictions including BVI, that the subsidiaries really helped the companies reduce their tax burden. The results of the report were based just on the fact that subsidiaries are located in the jurisdictions considered tax havens, and on the traditional purpose of those subsidiaries to cut tax costs.

According to a Senate Report issued to pierce the secrecy surrounding offshore bank accounts, the big Swiss bank UBS and Liechtenstein Global Trust (LGT), which is run by the royal family of Liechtenstein, might help wealthy individuals avoid paying taxes in the United States.

The report consists of 115 pages and describes the way 8 persons used offshore accounts in order to evade taxes. These individuals include Harvey Greenfield, the owner of the Commonwealth Toy and Novelty Company, which sells Beverly Hills Pups; Frank Lowy, the Australian billionaire who runs the Westfield Group; and the world’s largest owner of shopping centers; Richard M. Chong, a venture capitalist.

The report says that that Prince Phillipp of Liechtenstein courted clients for LGT. In March 2001, he met with members of the Greenfield family in Vaduz, the capital of Liechtenstein, in order to persuade them to move a USD 30 million offshore trust held at another bank to LGT. By 2001 LGT had established a Liechtenstein foundation for the Greenfields that used two companies incorporated in the British Virgin Islands corporations with a view to transfer at least USD 2.2 million.

Also, the report issued by the Senate details the marketing efforts made by UBS in order to win new clients in the US. It is worth noting that UBS is cooperating with authorities in the investigation and does not comment the situation.

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 proceeding on the bankruptcy of late stockbroker Rene Rivkin, related to his affairs in the UK and BVI,  was started more than a year ago and is not over yet. Rivkin’s bankruptcy trustee, Anthony Warner of Sydney-based CRS Warner Kugel, planned to recover millions of dollars from Jersey bank account of the company called Thameslink, wholly owned by Rivkin and having BVI company called Derata as its sole director. In case of success, the funds were to be distributed to the creditors, including the Australian Taxation Office.

Now, the Royal Court of Jersey approved a claim of the trustee on the Thameslink, which has $2.7 million in its bank account in Jersey. Mr Warner confirmed that Jersey authorities would be releasing the $2.7 million Thameslink funds to the estate after declaring that Rivkin was the beneficial owner of the company – the fact Rivkin had previously denied. Also, Mr Warner said he would be given success to financial records of Thameslink, to examine them carefully and probably uncover new details of his Swiss bank accounts.

Rivkin’s estate was placed into bankruptcy last year, and his family co-operates with Mr Warner to recover funds believed to be held in offshore jurisdictions including BVI, by companies ultimately owned by Rivkin.

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.

In the beginning of September, the financial services group FirstRand was charged of being involved in an illegal scheme that enabled rich South Africans to transfer money into an offshore company to bypass the taxman. FirstRand’s chairman Dippenaar, defending its company, admitted however that First National Bank had used its former private bank, Ansbacher, to create an offshore investment company whose sole purpose would be to warehouse investments of his clients. This setup, actually being quite legal, is commonly known as a loop structure – an investment by South African citizens and residents in offshore trusts that, in turn, reinvest the funds in South African businesses in which the original investors have a stake.

The Jersey-registered Ansbacher Group was acquired by FirstRand in 1992. Now the bank is known as multi-jurisdictional wealth management group, delivering tailored financial solutions internationally. In 1998, the government of South Africa announced the partial lifting of foreign exchange restrictions, which would allow citizens and residents to invest up to R500 000 in offshore structures.

According to Newsweek’s information, in June 1999 Ansbacher incorporated Duisberg Holdings in the British Virgin Islands, with its registered address at the offices of Ansbacher. An Ansbacher client in South Africa who wanted to make use of the new exchange regime, would set up an onshore trust, and Ansbacher would then establish a corresponding offshore trust for the client. Then the client would probably invest R500 000 in the BVI company, which would in turn make an interest-free loan to the offshore trust. This offshore trust would then invest the funds in the South African business in which the original investor had a stake.

It should be said that in July 2004 FirstRand had agreed to dispose of its interest in Ansbacher to Qatar National Bank, listed on the Qatari Stock Exchange, for a sum of £135 million (R2 billion). It said the reason for the sale was that over time Ansbacher had become non-core to the strategic focus of FirstRand.