OPINION OF THE WEEK: Guernsey's Defence Of Its IFC Deserves Applause

Tom Burroughes Group Editor 8 February 2024

OPINION OF THE WEEK: Guernsey's Defence Of Its IFC Deserves Applause

The production of a report about Guernsey and its contribution to the UK economy might be self-serving in a way, but it makes an important point about IFCs and jurisdictional variety and competition.

It appears that offshore financial centres are doing more these days to remind observers what they bring to the “onshore” world. In fact, it’s reaching the point where the terms need to be junked.

In late January, Guernsey Finance – using the research of Frontier Economics – issued data showing that Guernsey-based funds hold UK assets worth £57 billion ($71.7 billion). These funds’ capital investment into UK assets has increased by 14 per cent per annum since 2020. Considering that total foreign direct investment (FDI) into the UK has been falling, this is significant. UK fund managers also, so the data shows, generate about £2 billion of fees from funds registered in Guernsey. That’s a decent chunk of tax revenue. Additionally, UK FTSE 100 companies may collectively save almost £100 million per annum by using Guernsey captive insurance structures, the report said. 

On the captives side, this leads to insurance business flowing through London’s wholesale insurance markets which might have gone elsewhere in Europe, or to places such as Bermuda, the Cayman Islands and the US had it not been for Guernsey.

Guernsey’s move in proving its added value for the UK comes after Jersey Finance issued a report in 2022 about the island’s contributions to global value chains. Jersey Finance worked with the Centre for Economics and Business Research. It said Jersey supported £170.3 billion ($222.9 billion) of global gross domestic product each year during a four-year period between 2017 and 2020. To convey a sense of how large this is, New Zealand’s direct contribution to global GDP was £172 billion. 

In fact, after a period when these international financial centres were pressured to weed out bad actors and become more transparent, it might have been all too easy for these centres to relax. But there appears to be a realisation that unless they prove a genuine “value-add,” it will be too easy for governments of large countries, and various "tax justice" campaigners, to assert that they only drain revenues away. 

What that sort of assertion ignores is the benefits of clusters. While they may not have started out that way, many offshore centres, such as the Channel Islands, Caymans, BVI, Isle of Man, Monaco, Gibraltar and others have created ecosystems of expertise. These places exist inside countries too – think of the states of New Hampshire, Delaware, South Dakota and Alaska in the US. Clusters, such as Silicon Valley, to take a tech example, build a momentum all of their own. They become greater than a sum of the parts. So much so that it makes sense for “onshore” countries to tap into the expertise and dynamism of these places, rather than try to shut them down and reinvent them.  

These IFCs grease the wheels of finance when capital is mobile, double-taxation is a potential problem and the internationally-mobile population need to have a coherent single point of financial life. And while it isn’t popular to state this, such places put onshore jurisdictions under healthy competitive pressure. A government of whatever political hue that is thinking of levying yet higher taxes and greater spending might think twice if it knows that this will trigger capital flight. Competition is a positive thing in general. Monopolies invite complacency and shoddy standards. That surely applies to jurisdictions, even democratic ones.

I can see some objections to this. Some claim that the existence of offshore centres might encourage firms to park profits offshore for a period rather than pay more dividends to their beneficial owners. Here again, it is worth asking whether the countries in which the owners live might want to streamline and cut taxes to encourage firms to repatriate those profits.

That’s one of the measures that the Trump administration undertook in 2017 when it slashed US corporate taxes – among the world’s highest at the time – to encourage corporates to return money home. When UK taxes on income were slashed in the 1980s, it helped stem the “brain drain” that had become a staple subject of commentary in the 1970s. Ireland’s low rates during the 1980s and 90s helped change impressions of that country – entirely for the better. Examples multiply.

So I applaud these efforts, by Guernsey, Jersey and others, to prove their value. They are not, I expect, likely to convince hardened anti-capitalists. But these moves can persuade those willing to be persuaded. And considering how many significant acts of financial wrongdoing (such as money laundering) have taken place in the supposedly regular, onshore world, it is timely that places such as the Channel Islands are standing up for themselves and making a case.

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes