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Bermuda in 2017 Convergence of the Offshore World: An Emerging Common Economic Model


The End of History? The world is at a critical inflection point. Unattended or unresolved economic pressures are causing seismic shifts in political power globally. Perhaps not surprisingly, the epicenter of this global change is at the core of the world’s dominant political power – the Anglo-American world. Policymakers in the Anglo-American core have been caught largely unaware and are struggling to contend with the forces of change in a fast moving world. The Global Financial Crisis of 2008 was felt most acutely in parts of the offshore world, so perhaps it’s also unsurprising that offshore policymakers have been far more active in implementing reform. In contrast, our previous successes have rendered Bermudians largely complacent. Bermuda has yet to understand and respond to the seismic forces realigning the world’s economic and political order.


Offshore Real GDP Comparative Performance 2008-2015 Isle of Man 140 140.0 130.0 Guernsey 109

120.0 110.0

Cayman 99

100.0 Jersey 92

90.0

Andorra 88

80.0

2008

2009

2010

Bermuda 82

2011

2012

2013

2014

2015


Changes in Government Revenues As a Share of GDP 35% 30% 25%

2007 2014

20% 15% 10% 5% 0%

Bermuda

Andorra

Cayman

BVI


Government Revenues Versus Severity of Crises 30%

27%

2007 Gov't Revenues % GDP Peak to Trough Decline in GDP

20% 16%

16%

18%

22%

20%

24%

10%

0%

No Recession Isle of Man

-10%

-9% 3 Years Cayman

-20%

-30%

-22% 5 Years Andorra

-18% 6 Years Bermuda

-16% 5 Years Jersey

-3% 1 Year Guernsey -13% 2 Years BVI


BVI Annual Incorporations $180 mln.

200,000

$ 184 mln.

$ 192 mln.

$ 197 mln.

$ 200 mln.

175,000 150,000 125,000 100,000 75,000 50,000 25,000 0

47,000

2009

60,000

2010

2011

Number of Incorporations Incorporation Fees (in US$ 000's)

65,000

2012

64,000

54,000

2013


BVI Incorporation Fees As a Share of Total Government Revenues 70%

62%

60% 50% 40%

60%

44% 36%

30% 20% 10% 0% 1994

2000

2007

2014


BVI Government Revenue As a Share of GDP 35% 32%

30% 25%

26%

29%

20%

20% 15% 10%

13%

5% 0% 1994

2000

Other Government Revenues Incorporation Fees

2007

2014


Britain never granted Cayman the same degree of self-governance as Bermuda. By Caymanian law, Cayman must adhere to the following Principles of Responsible Financial Management: Operating Surplus Should Be Positive

Net Worth Should Be Positive

Debt Servicing < 10% Core Gov’t Revenues

Net Debt < 80% Core Gov’t Revenues

Cash Reserves > 90 days Expenses

Prudent Financial Risk Management

These principles are closely monitored and their values reported annually in Cayman’s Budget. Prior to 2008, Cayman’s government debt had been creeping higher, but the Global Financial Crisis triggered multiple financial alarms in Cayman…....


Cayman’s Compliance with the Principles of Responsible Financial Management 2009/10

2015/16

Operating Surplus Should Be Positive

Does Not Comply Deficit = C$ 30 mln.

Complies Surplus = C$ 128 mln.

Net Worth Should Be Positive

Complies C$ 512 mln.

Complies C$ 1.1 bln.

Debt Servicing < 10% Core Gov’t Revenues

Does Not Comply Debt Servicing = 12.9%

Complies Debt Servicing = 9.7%

Net Debt < 80% Core Gov’t Revenues

Does Not Comply Net Debt = 126.8%

Complies Net Debt = 33.3%

Cash Reserves > 90 days Expenses

Does Not Comply Cash Reserves = 48 days

Complies Cash Reserves = 113 days

Prudent Financial Risk Management

Complies

Complies


In 2009, Britain responded to Cayman’s deteriorating finances by exercising greater control over Caymanian financial affairs.

Since 2009, Cayman must receive Britain’s approval of their annual government revenue and expenditure plans prior to the passage of Cayman’s Budget in their Legislative Assembly.


Amongst other reforms, Britain pressured Cayman to adopt the Framework for Fiscal Responsibility. Passed into Caymanian law in 2012, the Framework commits the Cayman Government to adhere to the following four policy principles: • Improving Medium Term Planning • Delivering Value for Money in Government Services • Effective Management of Risks such as Government Debt and Pension & Health Liabilities • Delivering Improved Accountability at All Levels of Government


Cayman Government Debt

C$ Millions

900 800 700 600 500 400 300 200 100 0

2009

2010

2011

2012

2013

2014

2015

2016


Current Tax Structure in Cayman Cayman derives its government revenues almost entirely from corporate fees, corporate licenses, custom duties and stamp duties. Corporate Fees – Annual fees are paid by all companies based on share capital. Corporate Licenses – Banks, insurers, fund managers and fund administrators also pay annual licensing fees ranging from C$5,000 to C$1,000,000 depending on size of business. All local businesses also pay annual licensing fees. Custom Duties – Duty on imported goods averages 22%. Stamp Duties – Taxes are paid on issuing various legal documents including: Real estate sales – 7.5%. Leases – Between 5% to 20% depending on term of lease. Conveyances – From 4% to 6%. Mortgages – From 1% to 1.5%.


Cayman Government Revenues by Type 2013/14 Stamp Duties & Other 13%

Customs Duties 25%

Corporate Licenses & Fees§ 62%

§Surreptitiously referred to as “Domestic Levies on Goods & Services” in Cayman’s Financial Statements


Corporate Revenue Categories in Cayman’s 2016/17 Budget > C$10 Mln. C$ Mln. Annual Permanent Resident Work Permit Fee…........................................ 20.4 Banks & Trust Licenses…............................................................................... 31.2 Cruise Ship Departure Charges…................................................................ 13.9 Information & Communications Authority Licenses…............................ 11.4 Insurance Licenses…...................................................................................... 10.1 Mutual Fund Administrators….................................................................... 47.6 Other Company Fees – Exempt…................................................................ 110.9 Other Company Fees – Resident, Non-Resident & Foreign..................... 14.4 Partnership Fees….......................................................................................... 52.4 Security Investment Business Licenses….................................................... 17.6 Tax & Trust Undertakings….......................................................................... 15.6 Tourist Accommodation Charges…............................................................. 24.8 Work Permit Fees…........................................................................................ 99.8

Total: C$ 470.1

These accounts comprise 51.7% of the C$908.5 mln. in Total Revenue budgeted for 2016/17.


Cayman Chose to Tap the Corporate Sector to Balance its Books While these major categories of corporate revenue for the Cayman Government comprise 51.7% of Total Revenue today, in 2006 these same accounts contributed only 27.5% of Caymanâ&#x20AC;&#x2122;s revenue.


Percentage Change

Andorra Real GDP

3 1 -1 -3 -5 -7 -9

2008

2009

2010

2011

2012

2013

2014

2015


Percent

Andorra Government Surplus/Deficit % of GDP

2 1 0 -1 -2 -3 -4

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


Percent

Andorra Government Debt % of GDP

45 40 35 30 25 20 15 10 5 0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


Percentage Change

World's Fastest Declining Populations 2008-2014

0.0 -2.0 -4.0 -6.0 -8.0

Serbia Romania

Bulgaria

Croatia Puerto Rico Sint Maarten Lithuania

-10.0

Latvia

-12.0 -14.0 -16.0 -18.0

Andorra Bermuda Source: World Bank Bermuda Data: 1.5 X Total 2008-14 Job Losses / Bermuda 2010 Census Population (1.5 X 6,738) / 64,319 = 15.7%


2008-2013 Change in Andorran Population by Nationality Total

-9.9%

Andorran

+11.6%

Foreign

-22.6%

Source: Commune Parish Census/Department of Statistics, Government of Andorra


Annual Change in Andorran Population by Nationality 4% 2% 0% -2%

2009

2010

2011

2012

2013

-4% -6% -8% -10% -12% -14% -16%

Andorrans Foreigners Total

2014

2015


2015

2008 Foreigners 63%

Andorrans 37%

Foreigners 54%

Andorrans 46%


Current Tax Structure in Andorra Personal Income Tax – Since 2015, residents of Andorra pay a tax of 10% on their world-wide income and capital gains. A personal allowance of EUR 24,000 is exempt. Corporate Profit Tax – Profits are taxed at 10% although international service providers can apply for a reduction of 80% of the tax base. VAT Tax – A tax on the sale of all goods and services is paid at a standard rate of 4.5%. Banking and other financial services are taxed at 9.5%. Social Security Tax – Employers pay 14.5% of gross salaries to social security of which 5.5% is deducted from employees.


In some ways Jersey’s problems are similar to Bermuda’s – collapsing tourism and a failure to diversify their finance industry (overreliance on offshore banking.) 1979 Tourist Arrivals – 1.5 million 2015 Arrivals < 400,000 That’s where our similarities end…..


Jersey’s Shameful Banking Past Their Customers Have Included Some of the World’s Most Corrupt Politicians & Businessmen • South Africa’s Apartheid Regime • The Soviet Communist Party • Nigeria’s dictator General Sani Abacha • Enron • HBOS • Northern Rock Source: The Guardian


In the 1990’s, governments and supranational or multilateral organisations such as the EU and OECD began pressuring Jersey and other “tax havens” to adopt significant reforms in two areas: • Bank Secrecy (exchange of information agreements) • Harmful Tax Competition (changing their tax structures)


Jersey’s economy in particular has been adversely affected. Number of Jersey Banks in 2000 - 73 Banks in 2015 - 33 With the contraction of Jersey’s banking industry since the turn of the millennium, they lost a number of high paying jobs and the island’s income suffered commensurately. Jersey is working to diversify their economy, however, and in many ways they are adapting to a fast changing world much more successfully than Bermuda. Jersey’s job creation over this difficult period stands in stark contrast to our own.


Offshore Employment 120 115

Jersey 115

110 105 100 95 90 85 2001

2003

2005

2007

Bermuda 89 2009

2011

2013

2015


Jersey Economic Growth by Sector 120 110 100

Non-Finance 108

90

Total GDP 97

80 70 1998 2000

2002

Finance 78

2004

2006

2008

2010

2012

2014

As in Bermuda, Jerseyâ&#x20AC;&#x2122;s economy experienced a significant divergence between the financial and non-financial sectorsâ&#x20AC;Ś....


Bermuda Economic Growth by Sector 250.0 230.0 210.0 190.0

Finance 211

170.0 150.0 130.0 110.0

Total GDP 119

90.0 1998

2000

2002

2004

2006

2008

â&#x20AC;Ś..in Bermuda, however, the roles were reversed.

2010

Non-Finance 93

2012

2014


Jersey 1998 Non-Financial 43%

2015 Finance 57%

Non-Financial 51%

Finance 49%


Bermuda 1998 Non-Financial 76%

2015 Finance 24%

Non-Financial 59%

Finance 41%


Bermudaâ&#x20AC;&#x2122;s Economy by Sector in 2015 Eduction, Health & Social (10%) Public Administration (6%)

Financial

Business (9%)

(41%)

Real Estate & Renting (17%) Agriculture & Fishing

Transportation & Communications Hotels/Restaurants

Manufacturing

Wholesale & Retail Trade

Electricity, Gas & Water Construction


In 1997, the EU adopted a new Code of Conduct requiring all member states to subject local and foreign companies to the same taxation. Countries who wanted access to the EU market were expected to comply with these “harmful tax competition” measures. Guernsey, Jersey & Isle of Man had a problem. Domestic company profits were taxed at 20% while international companies paid no tax on profits. In response to the EU’s pressure, Britain’s Crown Dependencies developed a new “Zero-ten” corporate tax structure.


Jersey Income Taxes Paid in 2007 Pre ‘Zero-Ten’ Total = GBP 430 Mln.

Companies 196 Mln.

Salary & Wage Earners 196 Mln.

Self Employed 38 Mln.


Guernsey's Taxes as a Percentage of Government Revenues

Percent

70 60 50

Pre 'Zero-Ten'

Post 'Zero-Ten'

Personal Taxes Corporate Taxes

40 30 20 10 0

2006

2007

2008

2009

2010


Sterling Millions

50

Guernsey's Budget Surplus/Deficit ‘Zero-Ten’ Corporate Tax

40 30 20 10 0 -10 -20 -30 -40 -50

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Current Tax Structure in Jersey Personal Income Tax – Residents pay tax on their world-wide income at a rate of 20%. Individuals deemed “high net worth” pay only 1% on amounts in excess of GBP 625,000 excluding Jersey property income. Corporate Profit Tax – As in Guernsey, a 10% tax on profits is paid by companies meeting the definition of “financial services.” Utilities pay tax on profits at a rate of 20%. Other companies are “charged” a tax of 0%. G&S Tax – A sales tax on most goods and services is applied at a standard rate of 5%. Social Security – Employees pay 6% of gross earnings towards social security contributions while employers pay 2%.


Current Tax Structure in Guernsey Personal Income Tax – Residents pay tax on their world-wide income at a rate of 20%, although total payment in any one year is capped at GBP 220,000. Corporate Profit Tax – A 10% tax on profits is payable by banking, domestic insurance and custody businesses and retail businesses when profits exceed GBP 500,000 annually. Utilities pay tax on profits at a rate of 20%. Rental income from land and property is taxed at 20%. VAT Tax – Guernsey has no VAT or sales tax. Social Security – Employees pay 6% of gross earnings towards social security.


Current Tax Structure in Isle of Man Personal Income Tax – Residents pay tax on their world-wide income at a rate of 20%, although total payment in any one year is capped at GBP 125,000. Corporate Profit Tax – A 10% tax on profits is payable by banking and retail businesses when profits exceed GBP 500,000 annually. Rental income from land and property is taxed at 20%. VAT Tax – VAT is applied on the same basis as in the UK. Sales of most goods and services are taxed at the standard rate of 20%. National Insurance – National Insurance contributions are payable by employers at rates comparable to those in the UK.


Change in Jersey Government Revenues by Category 2007-2015 Total Increase = GBP 132.7 Mln. Other Revenues 44.5 Mln.

Income Taxes 27.6 Mln.

Customs Duties .1 Mln. Goods & Services Tax 85.0 Mln.


Change in Guernsey's Government Revenues By Category 2007-2015

GBP Mln.

Total Increase = GBP 27.4 Mln.

20 15 10 5 0 -5 -10 -15

Income Taxes

Other Revenues

Stamp Duties Customs Duties

Property Taxes

Company Fees

Department Operating Incomes


30% 25%

Changes in Government Revenues As a Share of GDP 2007 2014

20% 15% 10% 5% 0%

Jersey

Isle of Man

Guernsey


Change in Government Revenues 2007-14 70% 60% 50% 40% 30% 20% 10% 0% -10%

Bermuda Cayman

BVI

Andorra Guernsey

Jersey

Isle of Man


35%

30%

25%

Changes in Government Revenues As a Share of GDP

2007 2014

20%

15%

10%

Bermuda Andorra

Jersey

Cayman

Isle of Man

Guernsey

BVI


Government Revenues As a Share of GDP in 2014 35%

The New Normal? 30%

25%

20%

15%

10%

Bermuda Andorra

Jersey

Cayman

Isle of Guernsey Man

BVI


Trading Places Offshore Employment 2001-2015 41,000 Cayman 39,138

39,000 37,000 35,000 33,000

Bermuda 33,319 Guernsey 31,230

31,000 29,000 27,000 25,000 2001 2002

2003 2004

2005 2006

2007 2008 2009 2010 2011 2012 2013 2014 2015

The Cayman Islands is now the largest British Overseas Territory.



Bermuda in 2017: Converging Offshore Model - Robert J. Stubbs