Opportunities and Challenges Facing the Offshore Industry

Opportunities and Challenges Facing
the Offshore Industry
Contents
5
Foreword
6
Introduction to the market
12
Key trends
Regulation:
{ The rules are changing, but underlying drivers are not
{ Global convergence is here to stay
Jurisdictions:
{ Traditional European centers struggle in a fragmented market
{ The “entrenchment” of the BVI and Cayman Islands
Clients:
{ Asia still dominates, while traditional markets stabilise
{ China – continues to shape the offshore industry
27
Summary
28
Methodology
30
Acknowledgements
3
Foreword
When OIL launched the Offshore 2020 research project in 2010, the world was beginning
to emerge from the depths of the financial crisis and the offshore industry was in a
state of flux. The Organisation for Economic Cooperation and Development and various
Western Governments were applying a ‘blowtorch’ to the industry for both political and
revenue raising purposes.
In times of crisis, it is useful to remember the term ‘weiji’; a rough translation of
‘crisis’ into Chinese. Weiji comprises two characters; one meaning danger and the
other opportunity. Three years on from those uncertain times, we thought it useful to
hold a mirror up to the industry and assess whether it has managed to capitalise on
opportunities arising from the crisis.
This year, we’ve expanded our research in terms of geographical reach and industry
participants, with more than 150 people sharing their thoughts and experiences. The
regular requests for copies from clients and regulators confirms that the result of this
research is contributing to the broad debate among industry stakeholders.
This year’s report continues some ‘trend lines’ established in earlier editions as well as
touching on new themes. One issue is absolutely clear: the industry is better managed
and better regulated than it was three years ago, with greater convergence between
national and international agencies and global standardisation of many practices. We can
expect this to continue.
In terms of the offshore client base, we look at the changing role of China and its
widening influence on the industry as well as the semblance of stability returning to
traditional Western markets after years of turmoil. Our much-anticipated jurisdictional
update hones in on increasing fragmentation within the industry: some financial centers
maintain their stranglehold while others need to be mindful of the need to adapt to
changing circumstances.
We trust you find this report informative and insightful. Any feedback is of course welcome
and we would be delighted to receive suggestions for potential topics for the 2013 edition.
Martin Crawford
Chief Executive Officer
5
Introduction to the market
The global picture
Previous editions of this survey have, rightfully, been dominated by the impact of wholesale international
regulations on the offshore industry. The Organisation for Economic Cooperation and Development (OECD) has
been the principal actor since 2009, winning G20 support for its drive for greater tax transparency, but other
international bodies also weighed in. It created a climate of uncertainty.
Now the industry appears to have come to terms with change. Questions are still raised concerning the efficacy
of the OECD peer review process, jurisdictions’ ability to comply with new rules and the threat of ‘overregulation’, whether it comes in the form of automatic information exchange or something else. And, make no
mistake, industry participants expect more developments in this area, notably the incremental convergence of
regulatory standards globally and licensing for service providers.
But there is an acceptance that double tax agreements (DTAs) and tax information exchange agreements (TIEAs)
are here to stay. Jurisdictions have responded by signing more of them and service providers increasingly see
them as an opportunity rather than a threat. The trend that has slowly been encroaching upon the industry for
the past couple of years – more complex, multi-layered structures designed to incorporate the benefits offered
via DTAs – is fully fledged.
In last year’s survey, over half of respondents said the advent of DTAs and TIEAs had impacted their business.
This year, when asked whether the increasing number of these agreements has prompted a slowdown in
business, four in five people responded in the negative (see Figure 1).
Figure 1 Have you seen a slowdown in your offshore business due to an increased number of DTAs/TIEAs?
Yes, 20%
No, 80%
Source: OIL
6
Interestingly, the perceived importance of tax treaties in the medium to long term has actually gone down (see Figure
2). Two years ago, interviewees were asked whether zero-tax or the existence of a broad range of DTAs would become
more important in the medium to long term; DTAs collected 53% of the vote compared to 32% for zero-tax. In 2011,
the gap widened, with DTAs taking 77% and zero-tax just 15%. There has since been a shift back to 2010 levels.
Figure 2 Zero-tax or DTAs will become more important in the medium to long term
100%
8%
15%
13%
15%
33%
32%
77%
54%
53%
2010
2011
DTA
Zero-tax
2012
Don’t know
Source: OIL
This confirms the trend towards greater acceptance and understanding. Back in 2011, when fewer treaties
had been signed and there was uncertainty about how the regulators would treat the beneficiaries of these
agreements, there was a genuine fear that the industry would be overwhelmed by this development. However,
DTAs are in fact just one of many wealth planning tools available to service providers; in the right structures
they can be used to complement zero-tax strategies, not replace them.
Jurisdictions are required to sign a minimum of 12 TIEAs or DTAs (the latter are more wide ranging but include
similar information exchange mechanisms) to qualify for the OECD ‘white list’ of those that meet global
transparency requirements. As of May 2012, 89 countries and regions had been white-listed, up from 40 in April
2009 (see Figure 3). Most of the heavy lifting required to get there took place in 2009 and 2010 when nearly
400 agreements were signed. A further 67 came in 2012 and then seven during the first five months of 2012.
7
Figure 3 Number of countries in the OECD white, grey and black list*
100
89
40
38
3
Grey List
4
0
Black List
April 2009
White List
May 2012
* White list: Jurisdictions that have substantially implemented the internationally agreed tax standard;
Black list: Jurisdictions that have not committed to the internationally agreed tax standard;
Grey list: Jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented
Source: OECD
Though the pace has slowed, particularly for TIEAs, the thought processes have not. A number of jurisdictions
are pursuing DTAs with financial centers that can be strategic partners – the idea is that each will form a part of
the complex chains that make up modern offshore structures.
As such, for jurisdictions it is not a zero-sum game. Those that have traditionally acted as parent entities,
Cayman Islands and British Virgin Islands (BVI) are still the preferred jurisdictions. Mid-shore locations,
whether it is Hong Kong and Singapore in Asia or Luxembourg, Malta or Cyprus in Europe, have come to the
fore, offering onshore-style regulatory certainty, sophisticated services and comprehensive DTA networks.
Other jurisdictions fit into the puzzle wherever it makes commercial sense, for example a New Zealand trust
or a Samoan special purpose vehicle.
The changing regulatory environment has made a number of approaches redundant, but at the same time it has
opened up a range of new opportunities.
8
The regional picture
The outlook for Asia can be split into two parts: its aggressive wealth creation, which remains unchanged; and its
role in the global market, which is changing considerably.
Geographical shifts in the offshore industry mirror broader economic transitions, so rapid GDP growth across
the region has inevitably attracted more interest from service providers. Asia Pacific continues to be the fastest
growing in terms of wealthy individuals.
Last year’s Capgemini and Merrill Lynch Global Wealth Management World Wealth Report, revealed that the
wealth controlled by the region’s population of high net worth individuals (HNWIs) had exceeded Europe in
2010 to become the second-largest in the world behind North America. It has since maintained the lead, despite
difficult public markets eroding the fortunes of many.
HNWIs are defined as people with investable assets in excess of US$1 million. Total assets controlled by these
individuals retracted 1.7% year-on-year in 2011 to $42 trillion. Asia Pacific saw a 1.1% decline to $10.7 trillion,
equal with Europe and better than Latin America, Africa and North America. Only the Middle East posted an
increase in wealth among its HNWIs (see Figure 4).
Figure 4 HNWI wealth distribution, 2007 -2011 (by region)
Global HNWI Wealth (US$ Trillion)
50
40.7
1.0
1.7
6.2
10.7
32.8
0.1
1.4
5.8
39.0
1.0
1.5
6.2
9.5
8.3
9.5
7.4
42.7
42.0
1.2
1.7
7.3
1.1
1.7
7.1
10.2
10.1
9.7
10.8
10.7
11.7
9.1
10.7
11.6
11.4
2007
2008
2009
2010
2011
Total
% Change Total
HNWI Wealth
2010-2011
Global
-1.7%
Africa
Middle East
Latin America
Europe
Asia-Pacific
North America
-2.0%
0.7%
-2.9%
-1.1%
-1.1%
-2.3%
Note: Chart numbers and quoted precentages may not add up due to rounding
Source: Annual World wealth report 2012 - Capgemini and RBC wealth management
Latin America, widely regarded as one of the fastest-growing markets for the offshore industry, saw the biggest
retraction in 2011 in value terms, with wealth falling 2.9% to $7.1 trillion. Overall, the Middle East, where wealth
is closely tied to oil prices, which were buoyant in 2011, were up 0.7%.
9
As for Asia’s role in the global market, the region is now not only attractive in terms of client origination, but
also as a destination for capital from other parts of the world. More than 80% of survey respondents say that
Asia is used by US and European clients predominantly as a nexus for business opportunities rather than a safe
haven for capital (see Figure 5). Yet a similar proportion agree that Hong Kong and Singapore are becoming
global centers for capital markets and private banking, respectively (see Figure 6).
Figure 5 Is Asia a nexus for business opportunities
Figure 6 Are Hong Kong and Singapore becoming global
rather than a ‘safe haven’?
(and not just regional) centres for capital
markets and private banking?
No, 15%
No, 18%
Yes, 85%
Yes, 82%
Source: OIL
Source: OIL
The trend is nascent rather than established, but other factors suggest that it will gather momentum. In 2011, Asia
was the leading market for IPOs by number of listings and capital raised, and although activity has slowed in 2012, the
pipeline of companies waiting to go public remains strong (see Figure 7 & 8). M&A activity in the region is also robust.
Finally, seven new private banks have opened in Hong Kong since June 2010, taking the territory’s total to 39.
There have been six additions in Singapore over the same period for a total of 48. Asian wealth may be the
primary focus but anecdotal evidence suggests there is also plenty of business coming from the likes of Europe.
‘Despite DTAs and AML at its heart this industry is still driven by
tax planning, globalisation and growing wealth.’
Service provider in Europe
10
Figure 7 IPO activity by region (number of deals), 2008-2011
No. of deals
1000
879
734
414407
292292
252
Asia-Pacific
192 172
83
92 76
EMEA
North America
2008
2009
2010
11 11 30 27
Central and
South America
2011
Source: E&Y Global IPO update
Figure 8 IPO activity by region (capital raised), 2008-2011
$Billion
200
191
88
71
32
41 35
30
10
Asia-Pacific
EMEA
2008
27
44 38
19
North America
2009
2010
7 13 9 9
Central and
South America
2011
Source: E&Y Global IPO update
11
Key trends
Regulation: The rules are changing, but underlying drivers are not
Three years on from the OECD-led drive for closer regulation of offshore financial centers, the industry appears
to be better managed and participants appear to be coming to terms with the implications. As one survey
respondent puts it, DTAs and TIEAs have become ‘part of the DNA’ of the industry. Substance, a term that once
provoked uncertainty, is increasingly seen as an opportunity to
market more sophisticated, value-added structures.
‘Substance, a term that once provoked
uncertainty, is increasingly seen
as an opportunity to market more
sophisticated, value-added structures.’
Last year’s survey suggested an appreciation of growing
regulatory influence. An overwhelming number of respondents
agreed that the role of regulators in the market today is important
or very important. Furthermore, over half said the advent of DTAs
and TIEAs had impacted their business.
With the trend clearly entrenched, the questions asked this year were designed to take the debate a step further.
First, what material impact is regulation having on business practices and how is this affecting strategy? Second,
where will the OECD and other agencies seek to take their agenda next?
As national revenue authorities intensify their tax collection efforts, DTAs have confirmed their place as the
preeminent tool in cross-border tax planning. In addition to the basic information exchange facilities offered
by TIEAs, DTAs solidify trading relationships. Companies can avoid being taxed on the same income in two
different places while the treatment of passive income – capital gains, interest, dividends, royalties, and so on –
is attractive.
Qualification for treaty benefits requires, among other aspects establishing a sufficient level of substance
in the jurisdiction so that regulators have no reason to suspect a company exists solely to leverage these
benefits. As such, offshore structures increasingly feature a combination of jurisdictions. For example, a
Cayman Islands-incorporated private equity fund that invests in China may establish a presence in Hong
Kong with a view to leveraging the Hong Kong-China DTA. But it must have staff on the ground operating
the business and making real business decisions in order to prove substance.
Nine in 10 survey respondents agreed that the advent of hybrid onshore-offshore structures and the increased
use of DTAs have turned substance into a key requirement (see Figure 9). Interestingly, nearly two-thirds
observed that clients understand this situation, although many responses were heavily qualified.
It is therefore no surprise that DTAs and information exchange plus anti money-laundering (AML) and know-yourcustomer (KYC) requirements rank highly among the key business constraints and drivers (see Figure 10). AML and
KYC processes remain the most important consideration with DTAs and information exchange in fourth place.
‘DTA’s are part of the industry DNA now ……
and it has creating new opportunities in structuring for us.’
Asian service providers
12
Figure 9 With the advent of the mid-shore and increased use of DTAs, is establishing ‘substance’ a key requirement?
No, 11%
Yes, 89%
Source: OIL
Figure 10 Constraints & drivers on the usage of offshore vehicles
AML/KYC processes
Asset protection
Increasing wealth
Double tax agreements and information exchange
Traditional tax planning
Emerging market wealth
Lack of qualified staff
Merger and acquisitions
Global trade
Euro crisis and sovereign debt issues
Capital market movements
GDP growth
Higher taxes
Flight to hard currency
Growth on the funds industry
Constraint
Driver
4.1
4.1
3.9
3.8
3.8
3.8
3.6
3.5
3.5
3.5
3.4
3.4
3.3
3.3
3.3
Constraint and driver
Source: OIL
However, when questioned further, only 35% of respondents were willing to say that AML and KYC processes
are the single largest constraint on business (see Figure 11). Numerous concerns were also raised about onshore
jurisdictions not taking processes as seriously as their offshore counterparts, AML and KYC becoming so ingrained
within the industry that they are reduced to box-checking exercises, and difficulties in opening bank accounts.
The last of these is worth further consideration. In mid-2012, international banks’ oversight procedures came under
the spotlight after the US authorities accused two European-based lenders of exposing the financial system to money
laundering, drug trafficking and terrorist financing. As a result, opening a bank account is unlikely to get any easier.
While these could be considered freak incidents, the fact they are on the agenda is indicative of a broader push
towards globalised regulation. This is in line with the expectations of offshore industry participants.
13
Figure 11 Are AML/KYC processes the key constraints on your business?
Yes, 35%
No, 65%
Source: OIL
AML processes are likely to become more standardised, with mid-shore providers such as Hong Kong and
Singapore tightening their approach, creating more pressure for traditional jurisdictions to improve compliance.
Regarding tax information exchange, the OECD looks set to continue its move towards automatic mechanisms,
while certain jurisdictions reach bilateral agreements similar to the UK-Switzerland accord, which mandate oneoff payments on undisclosed accounts held by UK taxpayers.
Further regulations on tax avoidance and aggressive tax planning will further emphasis the importance of DTAs.
Respondents also identified closer inter-territory cooperation (yet increased cross-border competition among
tax authorities), fee disclosure and trust oversight as areas worth watching.
In this context, licensing for offshore service providers such as OIL inevitably rears its head. A clear majority of
respondents think that service providers should be licensed and more than two thirds anticipate this happening within
five years. The issue has been covered in previous surveys and the prevailing view is that it is a case of when, not if. But
the potential acceleration of this transition would have clear implications for industry participants.
Service providers must respond to the needs of an increasingly sophisticated client base, which places a greater burden
on resources. Throw licensing into the mix, and the human capital investments this would likely involve, and it gives
further credence to a notion expressed in last year’s survey: an incremental shift towards consolidation as economies of
scale deliver efficiency and better pricing while a broad geographic footprint facilitates the delivery of bespoke products.
For all these changes – real or anticipated – the survey rankings of the key drivers and constraints within the offshore
industry indicate that clients’ priorities remain largely consistent. AML and KYC processes and DTAs and information
exchange may feature in the top six, but the remaining four places are occupied by asset protection, increasing
wealth, traditional tax planning and emerging markets wealth. The rules governing offshore financial services are
evolving and industry participants are learning how to adapt – but the underlying demands remain the same.
‘I think the Asian [mid-shore] jurisdictions are likely to target for US and
Europe tax authorities ….. it is not just Switzerland.’
Tax lawyer in Europe
14
Jurisdictions: Traditional European centers struggle in a fragmented market
For traditional jurisdictions, the principal challenge of the changing regulatory and competitive environment is
consolidating existing advantages or repackaging themselves in order to stay relevant. The survey results clearly
show that some are doing this more effectively than others.
Last year opinion was divided over the prospects for Caribbean offshore financial centers like BVI, Cayman
Islands, Bermuda and Bahamas versus European strongholds including Jersey, Guernsey and the Isle of Man.
There was a general perception that these jurisdictions would become comparatively less important over the
next five years, but how quickly would specific centers atrophy?
And what could they do to stem the tide?
‘Cayman Islands and BVI are so
entrenched, their structures and services
so well known and well used, that it
would take a massive shift in client
sentiment to displace them.’
For three consecutive years now, respondents have been asked to
rank jurisdictions by importance at the time and five years hence.
It is worth noting that the first survey largely focused on Asia,
with Europe more strongly represented from 2011 onwards. The
2012 edition addressed 26 jurisdictions and what is particularly
striking about the results is the relative stability compared with
previous years (see Figure 12 & 13).
Figure 12 ‘Top 10’ jurisdictions by importance
5
4.0
4.2
3.8 3.8
3.4
3.7
4.0
4.1 4.1
3.8
3.7
3.2
3.5
3.8 3.7
2.9
2.9
3.2
2.7 2.6
3.03.0
2.9
2.8
2.7 2.7
2.2
1.7
I
BV
ym
Ca
s
nd
sla
I
an
g
on
gK
n
Ho
ore
ap
g
Sin
2010
sey
Jer
L
2011
2.42.4
2.2
1.6
urg
re)
wa
bo
em
ux
2.8
2.7 2.6 2.6
2.42.4
la
De
A(
US
2012
ey
rns
e
Gu
d
lan
Ire
a
ud
rm
Be
In 5 Years
Source: OIL
15
Figure 13 Other major jurisdictions by importance
3.0
2.3
2.1 2.1
2.5
2.4
2.1
2.5
2.2 2.2
2.2
2.3
2.2
1.8
1.9
1.8 1.8
2.3
2.2
2.1 2.1
2.0
1.9
1.7
1.8
1.9
1.8 1.8
2.0
1.9 1.9
1.5
2011
lize
Isla
1.6
1.4
1.6
rsh
all
a
am
Be
s
Pa
n
do
a
rba
an
mo
Ba
Sa
bu
s
La
nd
sla
kI
Co
o
ha
ma
s
lta
Ma
1.5
2012
In 5 Years
Ma
2010
1.6
1.3
Ba
es
ell
n
rus
yc
h
Se
Cy
p
Ma
of
Isle
rla
nd
s
nd
Ne
the
ala
Ze
w
Ne
Ma
uri
tiu
s
1.3
1.5
illa
2.2 2.2
2.3
s
2.1
2.6
2.4
gu
2.3
2.6 2.6
2.4
An
2.5
nd
2.7
Source: OIL
Only five locations are expected to be relatively less important in five years time than they are today: BVI,
Cayman Islands, Jersey, Mauritius and Bahamas. This speaks volumes for how the industry is becoming more
fragmented with different jurisdictions playing roles in multi-layered structures depending on the specific needs
of the client, such as exposure to a particular geography or a preference for the privacy afforded by a certain
type of product.
Nevertheless, an interesting highlight is the fact that BVI and Cayman Islands both recorded their highest
scores since OIL launched this market research 3 years ago; while rest of the 3 locations – Jersey, Mauritius and
Bahamas – should be concerned
Mauritius is to some extent an anomaly. It was the source of 45% of India’s $24.5 billion foreign direct
investment (FDI) in the 2007-2008 fiscal year, but this fell to 35% in 2010-2011, a result of uncertainty about
the DTA that exempts Mauritius resident companies from paying tax on capital gains arising from investments
in India. The government decided to delay the introduction of anti-avoidance provisions under the new direct
tax code – which would require proof of substance in Mauritius to qualify for treaty benefits – but many industry
participants accept it a case of when rather than if.
16
What Mauritius shares with Jersey and Bahamas is expectations of decreasing importance expressed over
several years, even though the numerical changes are often minimal. (With this in mind, Guernsey is tipped to
see no change in its standing in 2012 and 2017, but there is a general downward trend.)
First, consider the Channel Islands jurisdictions. Their strategy has been to turn robust regulation to their advantage
as a ‘reputational reinforcement,’ the end goal being to target higher value not higher volume business.
This has been supplemented by signing DTAs with credible counterparties. Since November 2009, Guernsey
has agreed or implemented 11 DTAs and 29 TIEAs. In the last six months, the jurisdiction has reached a treaty
agreement with Malta and concluded negotiations with Hong Kong, as well as announcing plans for talks with
Liechtenstein and Luxembourg. Jersey, for its part has signed a DTA with Malta in recent years and is awaiting
ratification of a Luxembourg accord.
The strategy suggests awareness that tax neutral financial centers must align themselves with ‘mid-shore’
jurisdictions that are seen as a bridge between the onshore and offshore worlds. An agreement with Luxembourg
promises access to the euro zone and an easier time navigating the EU Alternative Investment Fund Manager
Directive; a pact with Hong Kong means a direct route to the rapidly growing Asian markets.
So why is it not working? The answer lies in the Channel Islands’ reputational reinforcement agenda. More than
two thirds of survey respondents agree with the premise that traditionally favored financial centers in the West,
particularly Europe, are losing their competitive advantage due to stringent regulations (see Figure 14). Pressed for
a reason why, the length of time it takes to establish a company, requirements affecting privacy and confidentiality,
the advent of DTAs, increased choice and fragmentation are all cited. However, the overriding factor is cost.
Figure 14 Traditionally favoured offshore financial centres in the West (particularly Europe) are losing their
competitive advantage because of stringent regulations. Do you agree?
No, 31%
Yes, 69%
Source: OIL
17
The irony is that Cayman Islands remains one of the more expensive jurisdictions globally, in respect of
incorporation and annual maintenance, but it is not suffering. Although Cayman Islands and BVI are expected
to be less relevant in five years than now, they will be the second and third most important financial centers
globally, with Hong Kong in first place and Singapore a close fourth.
Both have taken steps to reassure the global investment community of their ability to meet transparency
requirements, looking to hang on to their market leader positions for fund registrations and company
incorporations, respectively. (It could be argued that the efforts made by Bahamas, admittedly a much smaller
player, have been less convincing, hence its decline in the polls.) But the key issue is habit. Cayman Islands and
BVI are so entrenched, their structures and services so well known and well used, that it would take a massive
shift in client sentiment to displace them.
In last year’s survey, respondents were asked to name their preferred jurisdictions for specific business purposes.
BVI ranked first for asset protection and estate planning, individual tax planning and special purpose vehicles,
while Cayman Islands shared top spot with Luxembourg for fund management. This time around, BVI has
added investment holding for corporations to its titles. Cayman Islands has wrested sole occupancy of the fund
management category and also leads in listing vehicles for IPOs in Hong Kong (see Figure 15).
Figure 15 Jurisdictions as listing vehicles for Hong Kong IPOs
All listings on HKSE*
Latest 100 listings on the HKSE
2%
7%
9%
38%
34%
10%
4%
70%
11%
15%
Cayman Islands
Hong Kong
China
Bermuda
Others
Source: HKSE
* As of September 2012
‘I am doing less business in the Channel Islands because
my Asian clients are very price sensitive.’
Singapore accountant
18
Complacency would be misguided, though. Respondents also selected emerging jurisdictions – important now
and expected to become fully fledged by 2020 – with Singapore particularly well placed. It ranked first in asset
protection and estate planning, individual tax planning and trading for corporations (where top spot is currently
held by Hong Kong) (see Figure 16). Meanwhile, Ireland and Samoa are seen as fast risers in fund management
and investment holding for corporations, respectively.
Figure 16 Single most important location for specific usage
Purpose
Leading jurisdictions today
Growing in ‘Influence’ by 2020
Asset protection and estate planning
BVI
Singapore
Funds management
Cayman Islands
Ireland
Individual tax planning
BVI
Singapore
Listing vehicles for IPOs
Cayman Islands
BVI
Investment holding for corporations
BVI
Samoa
Special purpose vehicles
BVI
BVI
Trading for corporations
Hong Kong
Singapore
Source: OIL
Singapore’s growing status in the industry is confirmation of the mid-shore theory. Separately, respondents
were asked to name one jurisdiction that is ‘up and coming,’ and give reasons for their choice. No single location
dominated the standings – remember that the industry is becoming more fragmented – but Singapore and Hong
Kong were comfortable leaders (see Figure 17). Location, regulation, strength and flexibility of the financial
services sector, and good DTA networks were among the reasons cited.
Interestingly, China and the US placed fifth and eighth, on the grounds that increased regulation is pushing
business onshore. International finance is indeed becoming more complex and multi-layered.
‘One of the by-products of the extra-jurisdictional actions by the US
is that some business is moving back on-shore.’
Regulator in the Caribbean
19
Figure 17 Top 8 ‘Influential’ jurisdiction in 2020
‘Influential’ jurisdiction
Key reasons listed by respondents
Singapore
Based on its regulation, good banking sector, and being part of the Asian
world, DTA network
Hong Kong
Location, pace of internationalisation of the RMB, high financial flexibility,
simple and low cost corporate management, DTA network
Malta
Business, tax and legal infrastructure
Samoa
Political stability, with geopolitical advantages, easy management,
administrative efficiency
China
Government policies and move onshore
Ireland
Globalised jurisdiction, (DTA Network) hub for investments into the EU
Luxembourg
Tax treaties and infrastructure
US
Shift of business onshore
Source: OIL
‘Asia remains our most important growth market with Hong Kong and
Singapore at the heart of our expansion plans.’
Private banker in Hong Kong with a global bank
20
Clients: Asia still dominates while traditional markets stabilise
Asia is by some distance the most important growth region for offshore financial services. This comes as no
surprise. OIL’s first survey, conducted two years ago, targeted industry participants who conduct business in
Asia, so the region inevitably ranked highest in terms of business
origination. In 2011, the sample size broadened yet Asia held
‘There is a blurring of the lines of
onto top place and respondents have since become even more
distinction between individuals and
bullish in their outlook. Latin America and Africa understandably
follow a similar trajectory.
corporations – to the extent that the
individual is increasingly treated as
What is surprising, however, are assessments of more developed
a corporation for financial planning
markets. In previous years, mainland Europe, the UK, North
purposes.’
America and Australia-New Zealand appear to have been on a
slow downward spiral. Indeed, the 2012 results show that these
locations are less important now than they were 12 months ago or seeing no change (see Figure 18).
Figure 18 Client origination by location
5
4.3
4.6
4.0
4.2
3.8
3.0
3.2
3.0 3.1
Scale of 5
3.2 3.1 3.2
2.9
2.5
2.6 2.7
2.5
2.8
2.7
2.3
2.3
2.5
2.3
2.5
2.6
2.5
1.5
Asia
Europe
UK
2010
North
America
Middle
East
2011
2012
Australia/
New Zealand
2.4
2.0
Latin
America
1.4
1.7 1.7
Africa
In 5 Years
Source: OIL
21
In terms of the five-year outlook, though, each one is expected to see growth. This could be tied to greater
stability in the regulatory environment and confidence in the improvement of the economy, suggesting that
industry participants are becoming accustomed to recent changes and plotting new commercial strategies.
Similar patterns emerged when respondents were asked to name the most important growth market in Asia and
Europe (see Figure 19). China was the runaway leader, with India in second, Singapore in fourth and Indonesia
sixth. European jurisdictions that boast particular client seams also featured strongly. The UK placed third,
largely thanks to the City of London; other high finishers include Germany (fifth), Switzerland (seventh), France
(eighth) and Luxembourg (12th) – and in each market residents face tax issues of one form or another.
Figure 19 Important ‘growing’ markets in Asia and Europe
China
India
UK
Singapore
Germany
Indonesia
Switzerland
France
Hong Kong
South Korea
Russia
Luxembourg
Netherlands
Ireland
Poland
Taiwan
Ukraine
Sweden
Vietnam
Responses
Source: OIL
There are a few anomalies as well. Hong Kong, a jurisdiction that seeks to match Singapore as a combination of
the offshore and onshore worlds, trails its neighbour by a distance, in ninth place. This can be explained by Hong
Kong’s status as a portal for China, with a lot of activity in the territory actually originating in the mainland.
Russia, widely recognised as Europe’s most important emerging market, also ranked unusually low, perhaps a
reflection of the challenges of conducting business locally.
22
The quirk about doing business in emerging markets – and Asia is a classic example – is that it’s much harder to
separate the individual from their business interests. This affects how clients use offshore structures.
In many cases, privately-owned enterprises across the region are still controlled by the families that set them
up in the first place. This is clearly true in China, where economic reforms that encouraged private sector
development only date back about 30 years and it took a decade before real progress was made. Even in more
mature markets such as Japan and South Korea companies that were established after World War II, founders
are only now considering succession planning issues. It is also worth noting that when these companies go
public, the family owners often retain significant if not controlling stakes.
As a result, there is a blurring of the lines of distinction between individuals and corporations – to the extent
that the individual is increasingly treated as a corporation for financial planning purposes.
Asked whether the market is likely to become more dependent on business from corporations than individuals,
59% agreed, up from 51% in 2010 and 57% in 2011 (see Figure 20). The corporation share is expected to be
even higher in five years time. Overall, corporations currently account for just over half of business covering a
wide variety of purposes. While the individual share is concentrated in asset protection and estate planning and
individual tax planning, corporations are used for funds management, listing vehicles, corporate investment
holdings, special purpose vehicles and trading (see figure 21).
Figure 20 The market is likely to become more dependent on business from corporations rather than individuals
Disagree, 41%
Agree, 59%
Year
% of business from insitutions
2010
51%
2011
57%
2012
58%
In 5 years
59%
Source: OIL
23
Figure 21 Percentage (%) of respondents’ business done today for the following purposes
30%
23.9%
14.0%
16.7%
15.9%
13.4%
10.2%
6.5%
Corporate
60.2%
Individual
39.8%
r
s
s
x
e
les
fo
ta
os
ng
nd
n&
al ing
rp les
hic PO
ldi ate
Fu ent
tio ing
ing rate
u
u
e
o
c
d
I
v
c
d
p
r
n
l
r
m
te
g
hi
th o
ivi ann
Tra rpo
ro lan
ge
cia ve
tin fo men corp
Ind pl
co
na
t p te p
pe
Lis
t or
a
e
S
s
s
a
f
e
m
As est
Inv
Source: OIL
Trusts, structures that can be used to hold a variety of different assets, are natural beneficiaries of this trend. A
company owner can bundle his share of the business, an assortment of properties and his portfolio of investments
into a trust, cede effective control to the trustee in order to achieve tax efficiency, and name family members as
beneficiaries. This is a neat solution to succession planning issues as well as personal wealth management.
The relationship between corporate and individual wealth is particularly pertinent when preparing for an IPO on
a foreign stock exchange. BVI- or Hong Kong-incorporated entities held in trusts are routinely used to hold Asian
entrepreneurs’ shares in Chinese companies that are restructured in the Cayman Islands, with a Cayman Islands’
vehicle being interposed in order to list in Hong Kong or other jurisdictions. Nearly 80% of respondents are of
the view that acceptance of such structures in emerging markets is increasing.
Similarly, nearly 60% of respondents find that family offices are beginning to use fund structures due to their
flexibility (see Figure 22). Setting up professional fund structures in the form of umbrellas with multiple sub-funds –
for example, the Cayman Islands private placement fund – means portfolio companies can be segregated, enabling
better risk control and back office support. The solid governance framework within these structures also permits the
family office to focus on its role as strategic advisor on manager selection and monitoring asset allocations.
24
Figure 22 Family offices are beginning to use fund structures because of their flexibility (easier vehicles for
investment and redemption)
Don’t
know, 14%
No, 28%
Yes, 58%
Source: OIL
These strategies have much in common with the needs of the current generation of Chinese entrepreneurs:
Increasing wealth inevitably means a higher value is placed on wealth protection; company founders are making
investments offshore and sending their children to Europe and North America for secondary and tertiary
education; and the companies themselves are looking at overseas acquisitions and other expansion opportunities.
Nearly two thirds of survey respondents currently do business in China, 55% of it related to inbound investment
and 45% to outbound (see Figure 23). Seven in 10 expect this balance to swing more in favor of outbound over
the next five years.
Figure 23 China inbound (%) vs outbound (%)
Do you conduct
business in China?
No, 36%
Percentage of investment inbound into
China versus outbound from China
No, 30%
Outbound
45%
Yes, 64%
Will this change
in the next five years?
Inbound
55%
Yes, 70%
Source: OIL
25
It remains to be seen how quickly this transition really comes about. The gap between China inbound and
outbound investments is closing in value terms. In the first half of 2012 $59.1 billion entered the country, down
3% year-on-year, while outflows jumped 48% to $35.4 billion. However, this is partly cyclical – a function
of Chinese firms having abundant cash reserves and foreign asset prices being depressed. From a long-term
perspective, there will still be a sizeable portion of capital inflows as investors pursue business opportunities
afforded by a fast-growing economy. Indeed, a lot of this capital might ultimately emanate from Asia itself as
investors in the region use offshore structures for tax efficiency purposes.
Between 1979 and 2011, $1.2 trillion entered China as FDI. Of this, $533 billion came via Hong Kong –
understandable given the interconnectivity of the two economies – and $112 billion was channeled through BVI,
the second highest share. Cayman Islands has also featured strongly among the sources of Chinese FDI. There is a
clear capital markets link here given the prominence of BVI and Cayman Islands in IPO structures (see Figure 24).
Figure 24 Major sources of estimated cumulative utilised FDI in China: 1979-2011
Country
$Billions
% of Total
1,224.0
100.0
Hong Kong
533.2
43.5
British Virgin Islands*
111.8
9.1
Japan
79.9
6.5
United States
68.1
5.6
Taiwan
58.7
4.8
Singapore
53.4
4.5
South Korea
49.9
4.1
Total
Source: News articles
*Note: BVI data till 2010 only
‘China is changing …… we are seeing larger firms looking to
acquire assets outside China.’
Hong Kong lawyer
26
Summary
Asia remains the most important growth region for offshore financial services, but the outlook for more
developed markets have stabilised due to greater clarity in the regulatory environment and confidence in
the improvement of economy. The challenge of doing business in emerging markets – and Asia is a classic
example – is that it’s much harder to separate the individual from their business interests. This blurring of the
lines of distinction means that the individual is increasingly treated as a corporation for financial planning
purposes. Trusts, structures that can be used to hold a variety of different assets, are natural beneficiaries of
this trend. So too are funds, which are increasingly popular among family offices.
For traditional jurisdictions, the principal challenge of the changing regulatory and competitive environment is
consolidating existing advantages or repackaging themselves in order to stay relevant. Three financial centers
should be particularly worried: Mauritius, which is heavily reliant on India-related business and is now being
targeted by the Indian tax authorities; Bahamas, which arguably hasn’t done as much as its Caribbean peers
to meet transparency requirements, along with some ‘unfriendly’ commercial requirements; and Jersey, which
– like other Channel Islands jurisdictions – has yet to prove that its higher quality rather than higher volume
business is a winner with cost-conscious customers. The BVI and Cayman Islands remain well positioned, as are
fast-rising mid-shore location such as Hong Kong and Singapore.
Three years on from awareness of international regulatory crackdown, the offshore industry is better managed
and participants appear to be coming to terms with the implications. The advantages of DTAs and TIEAs, as well
as the substance requirements that have to be met to qualify for treaty benefits, are now better understood
by a wider group of stakeholders. They are increasingly seen as an opportunity to market more sophisticated,
value-added structures. However, AML and KYC requirements still rank highly among the key business drivers
and constraints. Regulation is likely to become more global and more standardised, with tighter AML processes,
automatic information exchange mechanisms and licensing for offshore service providers.
OIL will continue to track these trends over the coming year as a means of opening up the debate on where the
industry could – and should – be headed.
27
Methodology
OIL’s first White Paper, Offshore 2020: An Asian Perspective, which was published in December 2010, was based
on interviews with 47 offshore industry participants who conduct business in Asia. Interviewees were based in
locations including Hong Kong, Singapore, Taiwan, China, Cayman Islands, BVI, Anguilla and Labuan.
The following year’s offering had a wider geographical remit and larger sample size (92). More interviews
were conducted and the likes of Switzerland, Jersey, Cyprus and Ireland added to the existing complement of
jurisdictions covered. One reason for this was OIL’s expansion into Europe, a London office opened earlier last
year. The 2012 survey saw similar levels of geographical participation but there was a significant rise in the
sample size, with 155 interviews conducted (see Figure 25).
Figure 25 Sample size
200
No. of respondents
155
92
47
2010
Source: OIL
28
2011
2012
However, it is important to note that Asia, as the key driver of industry growth, remains the dominant focus in
this report (see Figure 26). Interviewees represented the following industry segments (see Figure 27):
Figure 26 Survey participants by region
9%
6%
Asia
Europe
Caribbean
Rest of the world
22%
Figure 27 Survey participants by company type
2% 9%
4%
6%
11%
63%
17%
Source: OIL
28%
22%
Law
Corporate services/
Consulting firms
Bank/Private banking/
Financial advisory
CPA/Accounting/
Taxation
Regulatory agencies
Investment management
Industry associations
Others
Source: OIL
The aim was to assess how the offshore financial services industry is likely to develop over the coming five years.
With this in mind, the survey was conducted based on six hypotheses:
{{ Asia is the most important region for growth
{{ DTAs will continue to grow in importance
{{ Traditional jurisdictions are losing their competitive advantages
{{ Demand for offshore companies are changing with corporate needs increasingly driving business
{{ Regulation remains the most important factor operating in the offshore market
{{ Asia is seen as the leading business origination location but is also likely to be an important destination for
business and capital
29
Acknowledgements
OIL wishes to express our appreciation to our clients and partners for their input and support in our 3rd
annual market research study. The following firms have agreed to be listed in the report:
AllBright Law Office, ANZ, Baker & Mckenzie, Bird & Bird, Boardroom Corporate Services, Bonnard Lawson,
Boughton Peterson Yang Anderson (in association with Zhong Lun Law Firm), Campbell Corporate Services
Limited, Campbells Attorneys , Certa Legal Tax Dutch Caribbean, Charles Monat Associates, Chief
Consultant Co, CKLB, Clifford Chance, Clifford Law, Collas Crill, CWL Partners, Dacheng Law Offices,
Daiwa Capital Markets, DBS Bank, Deloitte, Deutsche Bank, Entourage (HK), Ernst & Young, Family Capital
Conservation, Fiduciary Asia Company Secretaries, Financial Partners, Guernsey Finance, Hamber Consulting,
Harneys, Headland Capital Partners, Hilda Loe Associates, International Business Registry (Government of Ras Al
Khaimah), Jersey Finance , Jin Mao Lawyers, Karfigest S.A., LawAlliance, Lawrence Quahe & Woo LLC, Liberation
Management, Louvre Fiduciary, Mainland-Taiwan International Company, Maples and Calder, Matheson Ormsby
Prentice, Mayer Brown JSM, Mondial (Dubai) LLC, Northern Light Venture Capital, OCBC Trustee, OCRA, Office
of the Attorney General, Samoa, Ogier, PKWA Law Practice, Primasia Corporate Services, PwC, Siam City Law
Offices, Samoa International Finance Authority, Stafford Corporate Services, Stephenson Harwood, Corpag,
Thomas Eggar , Thorp Alberga, TMF BVI, Trend Law Firm, Vistra Group, Wetrust Co., Winners Law Firms, Withers,
Wizdii Holdings, Yida Law Firm, Zhong Lun Law Firm, ZhongLun W&D Law Firm, 浦海投資管理有限公司
To have a further conversation about the key findings and how OIL may further enhance its services and add
value to your business, please contact any of the following business unit heads in our local office:
Hong Kong / United Kingdom
Jonathon Clifton, Managing Director
[email protected]
T: +852 2886 7645
China
Ernest Zheng, Managing Director
[email protected]
T: +86 21 6287 7706
Singapore
Helen Soh, Executive Director
[email protected]
T: +65 6438 0838
Taiwan
Nadine Feng, Executive Director
[email protected]
T: +886 2 2718 2222
If you wish to participate in the next survey, please register your interest with [email protected].
30
31
Offshore Incorporations Group is Asia’s company formation specialist
with 25 years of expertise serving professional intermediary clients
through offices in Hong Kong, Beijing, Shanghai, Shenzhen, Guangzhou,
Singapore, Taiwan and the United Kingdom. The Group has over 250
highly experienced professionals and strong alliances with trusted
professional partners to enable coverage of jurisdictions worldwide and
facilitate local support.
The information and opinion expressed in this publication are not to be
relied upon as professional advice or a comprehensive report. Readers
are responsible to seek proper professional advice for specific situations.
© 2012 OIL
32
All Rights Reserved.
www.offshore-inc.com