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 globalisation, making them important drivers of growth in both developed and developing countries.
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”.
The use of IFCs for collective investment funds, such as unit trusts and mutual funds, neatly illustrates how they provide solutions for unintended and otherwise economically-punitive outcomes. Onshore tax systems are complicated and often inhibit investment in a particular jurisdiction. IFCs provide a tax-neutral platform that 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 foreign regimes. Tax-neutral platforms 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.
These advantages accrue to 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, retirement savings would be reduced and governments’ current difficulty in providing adequate pensions would be exacerbated.
Well-understood and well-regulated tax-neutral structures also contribute significantly to job creation onshore. For example, American jobs in aircraft manufacturing in Seattle are stimulated by the use of special purpose vehicles for aircraft financing. Jurisdictions like Bermuda also 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.
Cross-border capital flows are also shown to increase exports and jobs in the capital-exporting country.