In Brussels, Belgium, European Union flags fly in front of the Berlaymont building, which houses the European Commission, the EU’s executive arm. (File photo: WIKIMEDIA COMMONS)

The global Covid-19 crisis is slowing the ongoing implementation of “economic substance” rules that affect international financial centres, but this delay may result in a more considered strategy and rollout, according to two experts who spoke to a Virgin Islands audience last week.

The pandemic, they added, has also underscored a rift between Asia and the West that has affected the VI and other IFCs.

“The coronavirus has certainly exacerbated this [financial] crisis and the influence on the global architecture, and it’s somewhat slowed down the
transformation … we’ve seen over the last decade,” Oliver Cooper, policy lead at Canadian law firm Stikeman Elliott and an IFC Forum adviser, said at last week’s virtual BVI Finance Breakfast Forum.

The event, which drew more than 100 attendees, largely centred around the European Union’s policy toward IFCs.

According to Mr. Cooper, the condition of the global economy prior to Covid “is very much an Asian story, and China’s rise to prominence, and how that has been challenged by Western democracies.”

He added, “Certainly international finance centres are the ones that have been the global partners with economies in China and Hong Kong, where more than 40 percent of our market comes from. And we don’t see that train changing anytime soon.”

Economic substance

Mr. Cooper and his colleague Richard Hay, counsel at the IFC Forum and partner at Stikeman Elliott’s London office, went on to explain that the EU blacklist and its demand for economic substance — which pushed the VI to rush through the Economic Substance Act at the end of 2018 — was not necessarily meant to specifically target IFCs.

“With six percent of the global population, and 21 percent of the world economy, the costs associated with the EU’s social programmes are possibly
a significant policy influence bearing on the EU’s expanding role in global tax and regulatory policy,” Mr. Hay said.

He also noted that the need for social spending is likely to expand even further in the light of the pandemic.

Mr. Cooper explained that the EU regulations are often seen as “being done in some way to attack BVI, to attack other centres, but that’s far from the case. And it’s controversial because in fact it’s been adopted to achieve domestic objectives within the European Union: … the idea that how to increase spending or maintain spending without increasing taxes can be achieved by simply clamping down on this island offshore that has lots of money.”

They added that the EU blacklist, which the VI has successfully avoided, has resulted in a “tilt” by alienated IFCs away from the EU and towards the United States or Asia.

“As the world’s foremost intermediate jurisdiction, the BVI may benefit from fragmentation as neutrality becomes more important,” Mr. Hay explained.

He described the intermediation of trade and investment though IFCs like the VI as a “poverty reduction machine,” especially in China, which has seen some of the largest benefits.

Global minimum taxes

The panelists also discussed the possibility of global minimum tax rates, proposed last year by the Organisation for Economic Cooperation and Development to help ensure that governments don’t miss out on needed revenue.

However, the panellists argued that “tax-neutral” jurisdictions such as the VI promote more efficient collective investment, which they said increases returns on workplace pensions and other funds and can actually increase the amount of tax collected by governments.

Public registers

Meanwhile, UK Parliament has ordered overseas territories to adopt public registers of beneficial ownership by 2023, a stance that has drawn widespread opposition in the VI.

Last year, the Crown dependencies and the Cayman Islands committed to adopt public registers at the same time as the EU.

However, the speakers noted that 16 EU member states have not yet implemented public registers in accordance with the requirements of the EU’s Fifth Anti-Money Laundering Directive, despite being required to do so by January of this year. The VI continues to maintain that it will not adopt public registers until they become a global standard.

Mr. Hay discussed the possibility of Parliament voting to modify the legislation it passed in 2019, either by changing the threat of a government-issued Order in Council or by requiring all the territories to “adopt the same sort of BOSSs-style system that you’ve got now.”

However, he added, “It’s probably important not to count your chickens on the change in the parliamentary arithmetic.”

BVI Finance CEO Elise Donovan, who facilitated the forum, called the discussion “encouraging to IFCs to stay in the game and to keep
abreast of the trends.”