STIKEMAN ELLIOTT (LONDON) LLP The Future for International Financial Centres Gresham Symposium London 27 March 2014 Richard Hay Stikeman Elliott (London) LLP

Presentation Overview  why IFCs exist  tax and morality  regulation  globalisation  the future for IFCs SLIDE 1 STIKEMAN ELLIOTT (LONDON) LLP

Civil Society and International Business: Common Ground?  prosperous economies support healthy public finances, private investment, development and poverty alleviation  do we value the business contribution to trade, economic growth and jobs?  business needs infrastructure- not just roads, schools and hospitals, but also a sound legal system, trained professionals, and finance SLIDE 2 STIKEMAN ELLIOTT (LONDON) LLP

Why IFCs Get Bad Press  IFCs conduct financial services  IFCs facilitate business, and globalisation  offshore finance is, by definition, foreign to the country where the criticism arises  IFCs seldom explain why their activity is socially or economically constructive SLIDE 3 STIKEMAN ELLIOTT (LONDON) LLP

The Role of Financial Services  financial services conduct capital formation and transmission to support trade and economic growth  financial services are strategically important and generate good jobs in the information economy  countries compete to host this important activity SLIDE 4 STIKEMAN ELLIOTT (LONDON) LLP

International Financial Centres: Why?  the world is politically segmented, but economically integrated  tax systems are national fiefdoms, ill suited to cross- border business  are international financial services a giant criminal enterprise?  regulation: do we need cost / benefit analysis? SLIDE 5 STIKEMAN ELLIOTT LONDON

Who Uses IFCs?  MNCs  hedge funds  private equity  venture capital and infrastructure funds  insurance, including catastrophe bonds  ordinary people? SLIDE 6 STIKEMAN ELLIOTT (LONDON) LLP

SLIDE 7 STIKEMAN ELLIOTT (LONDON) LLP Pension Fund Private Investors How a Cayman Fund Works Other Institutional Investors Taxable in country of residence Governed under British-based Cayman law Tax neutral so no third layer of tax Investment Fund in Cayman Taxable in source country China AfricaG8 Country

SLIDE 8 STIKEMAN ELLIOTT (LONDON) LLP Why International Investors Use Offshore Companies Infrastructure Projects in China Cayman Company Bank Loan * Investors benefit from: British-based -law -courts -professionals Chinese Company

Tax and Morality  morality is important in making the policy choices in tax system design  when it comes to tax compliance and enforcement, it must be done according to law- there is no other way (Michael Devereux, Oxford Centre for Business Taxation)  countries create incentives to attract international capital  politicians often condemn the use of incentives which their governments created SLIDE 9 STIKEMAN ELLIOTT (LONDON) LLP

Tax Competition  tax and regulatory competition – US and EU differ on its benefits  is tax competition ruining EU government finances?  European states tax and spend nearly 50% of GDP  (Singapore and Hong Kong spend 22% of GDP) SLIDE 10 STIKEMAN ELLIOTT (LONDON) LLP

SLIDE 11 STIKEMAN ELLIOTT (LONDON) LLP Vera Troeger Tax Competition and the Myth of the ‘Race to the Bottom’ The CAGE-Chatham House Series, No. 4, February 2013

Angela Merkel  Europe has – 7% of the world’s population – 25% of its total GDP – 50% of its social welfare spending  enhanced tax collection and reform alone are not enough to achieve sustainable finances in Europe  Europe also needs structural changes in government expenditure to achieve sustainable public finances SLIDE 12 STIKEMAN ELLIOTT (LONDON) LLP

Regulatory Standards  regulation may be used as a tool to secure a competitive edge or challenge competitors  IFCs and financial data collection and exchange: do the small centres lag or lead international regulatory standards?  British offshore centres, Benelux and Switzerland have collected beneficial ownership data on companies and trusts for a decade. Do G8 countries match this standard?  A level playing field? Bring it on… SLIDE 13 STIKEMAN ELLIOTT (LONDON) LLP

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Cayman Islands Jersey Isle of Man BVI Bermuda UK US SLIDE 16 STIKEMAN ELLIOTT (LONDON) LLP

Financial Services and Globalisation: Impact on Developing Countries  China’s increasing prosperity has been symbiotic with the rapid growth of the financial centres in Hong Kong and Singapore  international finance is required for investment and development  does offshore finance curtail crony allocation of capital?  does Africa suffer from a dearth of proximate financial centres? SLIDE 17 STIKEMAN ELLIOTT (LONDON) LLP

The Future for IFCs  upgraded regulation should take cost / benefit analysis into account (FATF, FATCA)  IFCs support the international investment and trade which supports globalisation  countries don’t have friends, they have interests  G20 countries will protect facilities for cross-border finance, in their own interests SLIDE 18 STIKEMAN ELLIOTT (LONDON) LLP

Globalisation: Good or Bad?  is it economically or morally desirable for unskilled western workers to earn fifty times the wages of their developing country competitors?  IMF: “Globalisation has delivered extraordinary progress for people living in developing nations.”  World Bank: “Globalisation has reduced poverty and global income equality. Income per person grew 3½ times faster in globalising developing countries than in those which have not globalised.” SLIDE 19 STIKEMAN ELLIOTT (LONDON) LLP

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SLIDE 21 STIKEMAN ELLIOTT (LONDON) LLP UK Income Distribution, After Tax and Benefits

Regional disparities in poverty reduction1970–2000 SLIDE 22 STIKEMAN ELLIOTT (LONDON) LLP Sala-i-Martin, X. "Falling Poverty and Income Inequality: A global phenomenon" Quarterly Journal of Economics, MIT Press: Cambridge, MA. 2006, 121: 2.

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