Research reinforces the global value of IFCs

Geoff Cook of Jersey Finance discusses the role of offshore jurisdictions.

International finance centres (IFCs) have for some time known that they make a considerable, positive contribution to global economies, but until recently empirical evidence to reflect that has not been readily available.

In addition, while IFCs have been quick to point to the high quality of their regulation, their probity and the endorsements they receive on a consistent basis from global authorities such as the Organisation for Economic Development (OECD) and the International Monetary Fund, this has not necessarily filtered through to mainstream public debate and occasionally there has been some misunderstanding of the positive role they play globally.

However, that situation is now changing, with a growing body of research clarifying the important role leading IFCs play in facilitating the flow of capital into markets around the world.

The studies shed light on how IFCs can, and wish to, offer a solution to global financial flows by bringing knowledge and investment to and from developed and developing countries.

Over the past few years, Jersey Finance has taken up the initiative to build a strong library of research in order to position the jurisdiction at the forefront of thought leadership around IFCs and to set it apart as a destination of choice for managing and facilitating high-quality cross-border financial flows.

This evidence-based research is giving Jersey the ability to position itself strongly on the international stage and ensure key messages are communicated to current and potential investors, media, political groups, and those interested in Jersey and IFCs more widely.

In 2013, Jersey Finance commissioned its first research-based report (‘Jersey’s Value to Britain’), carried out by independent research firm, Capital Economics, in order to showcase the benefits Jersey provides to the UK. Among its findings were that Jersey is a net benefit to the UK and a conduit for nearly £1/2trn of foreign investment into the UK, helping support an estimated 100,000 British jobs. Further, Jersey generates around £2.3bn in annual tax revenues.

This data has enabled the island to respond with hard evidence to accusations about ‘tax leakage’ having a detrimental effect on the UK economy. The research showed, for instance, that the amount of tax evaded through Jersey is far less than is often claimed, with the study indicating that tax evasion in the year in which data was collected (2011) was estimated to be no more than £150m and was probably much less.

Further reports have since followed, including ‘Moving Money’, a paper published by two leading US academics, which provided a powerful answer to the critics of offshore financial centres and demonstrated the value of IFCs in an open global financial market, helping to boost global trade and economic growth.

This was followed by the ‘Jersey’s Value to Africa’ report last year, also carried out by Capital Economics. This report confirmed the fundamental role that Jersey can play in facilitating foreign direct investment (FDI) into the continent to help Africa fulfil its economic potential by 2040. It calculated that around $6.1trn of inward FDI through secure IFCs like Jersey is the only way Africa is likely to be able to plug its funding gap of $11.4trn.

FDI

The latest study to be completed and commissioned by Jersey Finance is a report published by global management advisory firm, Investment Consulting Associates, entitled ‘Jersey’s Contribution to Foreign Direct Investment’.

In seeking to identify the role of IFCs in supporting cross-border investment, the report highlighted how they are increasingly important in facilitating FDI and make a positive contribution to the world’s economy. The report calculated that the total global value of FDI by investors increased from $1.33trn in 2012 to $1.41trn in 2013, while such investments routed through IFCs are at historically high levels accounting for a significant share of worldwide FDI flows.

Within the report, FDI was defined as investment by corporate investors in a company or entity based in another country, investment by individuals to optimise their international investment revenues and ‘greenfield’ investment, which creates new physical operations such as factories, distribution centres, service centres and regional headquarters.

As far as Jersey specifically is concerned, the stock of outbound FDI distributed globally in 2012 was $75.8bn, with FDI originating from the jurisdiction flowing to a diverse range of countries including many emerging markets. In the top 20 countries for capital invested and jobs created through Jersey FDI were Poland, Germany and the Netherlands, while several African developing markets were also found to benefit from FDI originating from Jersey.

In addition, greenfield FDI distributed from Jersey helped 94 projects get completed between 2003 and 2014, with an aggregated value of $13.34bn, creating over 39,000 foreign jobs and raising a potential $445m in foreign tax revenues.

The report suggested that investors continue to find IFCs like Jersey attractive for FDI precisely because of the strengths of their financial markets and the quality of the services they offer, as well as the suitability of their vehicles and the stable institutional, tax and regulatory environment they provide for cross-border transactions.

With a growing amount of capital flowing across borders, the report concluded that IFCs like Jersey are key providers of investment vehicles, supporting financial services and other essential services, all of which serve to increase the scope and flexibility of capital to make it easier to invest around the world in pursuit of FDI objectives by attracting, pooling and directing economic flows between source and destination jurisdictions.

While we have known for some time that private clients and corporate investors find Jersey an attractive centre, this latest report provides concrete evidence that the island not only attracts significant financial inflows, but also enables outflows that stimulate economic growth across the globe.

By asserting its cross-border investment expertise and capabilities, as well as its position in terms of standards of regulation and commitment to international cooperation, Jersey is giving investors confidence in its ability to structure wealth and investments more safely and more efficiently around the world.

Contribution

Reports like this are serving as a good illustration of how leading IFCs are making a positive contribution to global investment, in both developed and developing markets. Annual wealth management surveys depict a world in which there are increasing numbers of high-net-worth individuals, especially in the developing markets in the far east, the Gulf and Africa.

This in turn is prompting an increase in demand for infrastructure investment and can present IFCs with further potential in facilitating cross-border aspirations where developing countries are concerned, provided the IFCs in question can demonstrate high standards of regulation, a robust legislative framework, a strong pool of professional expertise and a commitment to international co-operation.

It is clear that cross-border business is being driven by a need for a quality service, with decisions surrounding IFCs being less led by tax and more by a need for very specific expertise, knowledge, strong case law and the availability of a range of structures. As a result, there will be increasing opportunities for jurisdictions that can demonstrate substance on all of those factors to play a key role in meeting the needs of an increasingly diverse and complex cross-border investment landscape.

For Jersey’s part, it continues to drive forward its international co-operation programme and to date has signed in excess of 40 tax agreements with countries worldwide. Jersey is also a signatory to the US Foreign Account Tax Compliance Act, the OECD’s Common Reporting Standard, an inter-governmental agreement with the UK and the European Savings Taxation Directive for automatic exchange of information within the EU.

Where beneficial ownership is concerned, Jersey is more advanced than many other jurisdictions, having captured corporate beneficial ownership information on a centrally held registry since 1999, with this information being made available to law enforcement agencies under information exchange mechanisms.

Overall, as the research produced recently for Jersey shows, there is strong evidence to suggest that IFCs have a constructive role to play in putting capital to work in order to achieve a good profit return for investors while also benefiting developing nations.

Looking forward

As we look forward now, there is a real opportunity to move the dialogue about IFCs and their role in the global economy on to a more constructive footing. For its part, Jersey has been arguing for some time that its inherent strengths can be a force for economic good.

New research, such as that commissioned by Jersey, is highlighting the role IFCs play in the global economy, providing compelling evidence of their positive role internationally in both developed and developing markets, and in their ability to add considerable value for investors.

Where developing countries are concerned, quality IFCs can help bring knowledge, offer a solution and facilitate much-needed infrastructure investment. By using IFCs’ investment vehicles, investors can reduce the risks of transferring assets across borders, particularly to countries, such as some emerging markets, which are less stable and not as well-regulated.

Without IFCs and their stable fiscal and regulatory regimes, flows to developing economies might not happen, since the risks of such investments could outweigh the returns.

There’s no doubt, though, that further research is needed and will be warmly welcomed in order to strengthen ongoing conversations regarding IFCs with renewed energy. It is Jersey’s intention to continue commissioning relevant studies to add to its library of research. Gaining this invaluable knowledge is giving Jersey the power to further strengthen its core investment and private wealth management platforms while enhancing its reputation as a cutting-edge jurisdiction.