Virgin Islanders fear their offshore lifeline will be cut

Tax havens are being pressed to reveal financial information under threat of sanctions. By Ben Fo

More than 400,000 companies share a few local addresses in the tiny Caribbean financial centre of the British Virgin Islands. The vast majority have no employees on the island. All conduct their business elsewhere and many avoid paying taxes back home. And yet the country welcomes their business, which provides more than half of the government's revenue, making it one of the Caribbean's most prosperous places.

An estimated $7.3trn (£5trn) is stashed in offshore financial centres worldwide by corporations and wealthy individuals seeking to shield their operations and lessen their tax burdens. Now these havens are under scrutiny as never before. Leaders of the G20 nations meeting in London warned last Thursday that countries refusing to share tax information would face tough sanctions. Hammered by the financial meltdown, the world's richest countries say they are serving notice they won't tolerate shady offshore operations any more.

Some of the havens capitalise on secrecy. Others, such as the British Virgin Islands, provide incorporation registries so that businesses can claim they are based in the islands and avoid taxes in countries where their work is performed. The amount of money involved in this global shell game is staggering, Between 30 and 40 per cent of global trade is billed outside the country where it actually takes place, the London-based Tax Justice Network said. In the US, $100bn in tax revenues are lost each year due to offshore tax abuse, said Senator Carl Levin, who has co-sponsored two bills that would help to crack down on havens.

In the British Virgin Islands, companies register with the Financial Services Commission, located on a side street across from an office supply store. A plaque in front of it declares: "Vigilance, Integrity and Accountability." The government insists it co-operates with money-laundering investigations, but doesn't have much to share: it does not require financial records to be kept on the island, and the incorporation paperwork need not include the identities of shareholders or directors. Such a relaxed environment has made the British Virgin Islands one of the world's largest corporate registries.

The problem, according to the Organisation for Economic Co-operation and Development, is that the territory doesn't divulge enough financial information to tax collectors from other countries. That has landed the British Virgin Islands on the group's "grey list" of tax havens that have not substantially implemented an international tax standard. Four jurisdictions were blacklisted as unco-operative: the Philippines, Uruguay, Costa Rica and the Malaysian territory of Labuan. To comply – and join the top category that includes the UK and the US – it must sign at least 12 bilateral agreements on sharing tax information.

Many countries named on these lists have said the distinction is more about politics than compliance with financial laws. Local solicitor Richard Peters, for one, says the practices of the self-governing overseas British territory are as legal as Delaware's.

Most US states also don't require businesses to name their owners when they incorporate, a violation of international money-laundering standards that has stymied US investigations of tax cheats and other criminals. Although they co-operate with tax investigations, they sometimes have little information to share. One of Mr Levin's bills would require companies to name their owners; another would add teeth by barring US financial institutions from doing business with jurisdictions or companies that don't comply with tax investigations.

In the British Virgin Islands, some of the 24,000 people now fear their economic lifeline will disappear. The revenue from registering foreign companies has paid for a community college and a hospital.

The Premier, Ralph O'Neal, 75, the former schoolteacher who leads this archipelago, says it smacks of colonialism when developed nations dictate standards for financial operations, especially when they don't comply with the rules themselves.

"Why is it that we now in the colonies, because we are still a colony, can't have a financial centre?" Mr O'Neal said. "If you are doing something and you are saying I can't do it, are you saying that I am inferior?"

Blacklisted jurisdictions face the loss of World Bank and International Monetary Fund support. Many Caribbean islands are on the "grey list", which also includes Monaco, Liechtenstein, Panama, Bermuda and a handful of Pacific islands. These places are to be monitored and could face sanctions for failing to substantially implement the tax standard.

Most tax havens will comply with demands for greater transparency, predicted Dan Alamariu, an analyst at the Eurasia Group political risk consultancy in New York. "They're small economies and I don't see what choice they'll have in the long term." (AP)