Offshore Review: How to avoid the pitfalls

Andrew Walters, finance director of Policy Selection Ltd (PSL), which runs The Assured fund, discusses the best route to investing money offshore.

International investment centres such as the Cayman Islands' - which boasts a financial services industry reckoned to be home to the largest offshore hedge fund administrator in the world - have been in the news a good deal of late, as investment companies seek more and more ways to deliver best value to investors utilising increasingly complex vehicles.

Investing offshore was previously seen as bucking the system, but today following calls for greater control, offshore jurisdictions in my view facilitate enterprise, growth and investment.

Investors and product developers have always explored the merits of offshore jurisdictions as a means of circumventing what some may regard as ‘punitive taxation' or ‘business stifling regulation'.

With governments now trying to reign in escalating budget deficits and uniting in their condemnation of tax havens, it is becoming more difficult for those wishing to carve out greater control for themselves.

Moreover, post Bernie Madoff debacle, one may argue that the appeal of such jurisdictions has waned, with investors now wanting greater regulatory control.

Offshore jurisdictions typically have a much lighter approach when it comes to where the balance should be struck between principles and rule based regulation.

They typically offer a significantly lower tax regime or enable an investor to enjoy the returns of an investment tax free until the funds are repatriated back on shore. Furthermore, as established financial centres, they have the same professional, financial and telecommunications infrastructure, which facilitates the efficient incorporation and running of businesses at a cheaper cost.

When push comes to shove, it comes down to what level of control the investor or product provider wishes to exert.

If anonymity is a key criterion - as it is for many well heeled investors - then jurisdictions such as Andorra, Liechtenstein and Monaco are least likely to disclose information about clients.

Of course, there is no protection against whistleblowers - as in early 2008 when an employee of LGT bank in Liechtenstein sold a compact disc containing the names of foreign customers of the bank to the German, British and US authorities, exposing the investors' ‘secret' accounts.

Then there are other countries which are less secretive, i.e. according to the Organisation for Economic Cooperation and Development (OECD) they are committed to improving transparency but still have a way to go. These ‘tax havens' would include Bahamas, Belize, Gibraltar, US Virgin Islands and Panama.

In these countries you can avoid paying tax, but you cannot keep your identity secret. In early 2009 the Swiss Bank UBS agreed to disclose the names of American clients who were suspected of tax evasion by the US Internal Revenue Service.

On 2nd April 2009, the G20 world leaders announced their aim to strengthen financial supervision and regulation and apply sanctions against non-cooperative jurisdictions, including tax havens. The OECD published a list of those countries that were against the international standard for exchange of tax information. The list was divided into 3 categories:

• The ‘white list' - jurisdictions that have substantially implemented the internationally agreed tax standard
• The ‘grey list' - jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented
• The ‘black list' - jurisdictions that have not committed to the internationally agreed tax standard
• There are a select number of offshore jurisdictions such as the Isle of Man, and now Cayman included on the White List alongside the likes of the UK, France and Germany.

The members of the White list have signed Tax Information Exchange Agreements (TIEAs) with other states, which represent a commitment to good business practice and co-operation. However, the TIEA only comes into effect when there is a specific request for information about an individual case. The requesting jurisdiction must have pursued all possible means available within its own jurisdiction and must reasonably suspect an individual of tax evasion before making the disclosure request of the other state and the information provided may not be shared with third parties.

Equally, if not more, importantly is how the home jurisdiction will view the foreign company. It is all well and good that the offshore country levies no direct tax, but if the UK authorities believe that control of the vehicle lies in the UK then it will pursue the company for UK corporation tax.

It is difficult to make unique commercial arguments to satisfy the UK revenue for locating the business overseas. European passporting and a less stringent regulatory framework are insufficient reasons, particularly if the principle director or driving force is located in the UK, where it will be viewed all the key decisions are made.

The aim of the product developer is to balance the characteristics of the product so as to maximise commercial success. Investors want the best of all possible worlds, no taxation but regulation with compensation and accessibility to SIPPs and ISAs.

If the product provider is dealing with an overseas asset or security, such as US Life Settlements, then he has to think about taxation in that territory. A Life Settlement is a life insurance policy that is sold by the insured on the second hand market to a buyer, who will maintain the policy by way of paying premiums, in return for receiving the full face value on the demise of the insured.

Investors are going to be reluctant to invest in an asset that leeks tax or where the local taxation may consume the returns. In order to structure around US withholding tax, it may be an option to form a company within a jurisdiction, such as Ireland, that has a double tax treaty with America , under which the US authorities will not tax it at source on the understanding that he is being taxed in the home state.

Pursuing this avenue further, the creation of an Irish QIF would require suitable Irish service providers to act in various roles, such as Corporate Administrators and Fiduciary Custodians. Then you are faced with Irish Corporation tax and Irish Withholding tax, should the funds need to be remitted outside Ireland.

Aiming products at the mass pension markets, e.g. ISAs, will entail registering the investments on a recognised exchange.

Infamously, Keydata failed to secure a Luxembourg Exchange listing which forced the company into negotiations with HMRC to make good the tax due on investments through ISAs which, in turn, precipitated the FSA decision to shut down its operation - and leaving a trail of stunned investors.