Small IFCs provide tax-neutral platforms for global business and investment. How does this contribute to capital market liquidity and job creation in the global economy?
Financial intermediation through international financial centres has made a significant contribution to the substantial increase in world prosperity over the last 30 years. IFCs are essential lubricants in global investment, making them important drivers of growth in both developed and developing countries.
Pooling investments – The use of IFCs as platforms for collective investment funds, such as unit trusts and mutual funds, solves the problems of cross-border investment. Onshore tax systems are complex and often inhibit investment. IFCs’ tax neutrality allows efficient financial flows in situations where unnecessary or uncertain tax rules would make the transaction unattractive. Returns from investment funds are potentially subject to tax at three levels:
Where all of these elements are in a single jurisdiction, domestic tax policies normally prevent multiple taxation. However, where investments are cross-border, multiple taxation is far more likely, as onshore tax systems are seldom fully integrated with each other. Tax-neutrality reduce the risks of multiple taxation, while still leaving funds available to be taxed under the laws of the jurisdictions where the profit is earned and where the investor is resident.
Most of the benefit goes to insurance or pension funds, benefiting the wider population, who may have no idea that their institutionally-managed retirement funds rely on the use of IFCs. If tax-neutral platforms were damaged, savings for retirement would be reduced.
Creating jobs – IFCs contribute significantly to job creation onshore by increasing returns and thus increasing investment. Capital Economics has estimated that Jersey supports 250,000 jobs in the UK and BVI supports 150,000, while Transnational Analytics found that Bermuda supports 69,000. For example, jobs in aircraft manufacturing in Seattle, Toulouse, or Bristol are stimulated by the use of special purpose vehicles for aircraft financing. Jurisdictions like Bermuda provide essential reinsurance cover, which is often not available onshore, for activities perceived as risky, such as nuclear and medical facilities. Without this reinsurance, jobs in those sectors would be jeopardised.
Promoting exports – Cross-border capital flows increase exports. Access to capital markets reduces exchange rate volatility and the use of IFCs helps facilitate corporate expansion overseas: opening up new markets. Access to international financial services strongly increases exports, with a doubling of lending correlating with a five-fold increase in exports.
Increasing access to finance – Nearby countries have been shown to benefit significantly from greater investment and employment, as well as improved tax and regulatory policies by the proximity of IFCs. A leading economist notes that “by every measure, credit is more freely available in countries proximate to IFCs, reflecting the degree of banking competition and the resulting stability of IFC financial architectures”. [James R. Hines Jnr.; “International Financial Centres and the World Economy”; September 2009, page 4]]