There"s offshore finance, and there"s onshore, but just what is the beast in the middle known as "midshore"? Orlando Crowcroft wonders whether it"s nothing more than a clever marketing ploy…
Branding has always been a major problem for offshore finance centres, not least in the years following the financial crisis, as Western nations scramble to ensure that their citizens and companies are paying their dues.
Jersey and Guernsey may have found their way onto every white list possible over the past two decades, but so have dozens of others offshore jurisdictions, with the result that it has done little to improve their reputation in the UK among a sceptical public and critical media.
It was exactly this reputational damage that was behind a vast number of rebranding measures in recent years - "tax avoidance" became "tax minimisation", "offshore finance centre" became "international finance centre" or IFC - but it seemed that for every semantic tweak made, there erupted a celebrity tax scandal; for every rebrand, a critical speech from a UK politician.
In light of this, discussion of the term "midshore" as an alternative to "offshore" may come as little surprise. To a sceptic, however, it appears to be just another way of differentiating one kind of IFC from another, destined to be used by industry practitioners for a few years but with little public take-up. But is that really the case, and is the term actually misunderstood?
By definition
There is a misconception among some that midshore centres are IFCs that have close links to onshore centres and adhere to all international standards - but this is not the case. Midshore refers to the very few IFCs that contain elements of both onshore and offshore. In Asia, these are Hong Kong and Singapore, in Europe, Luxembourg - which is part of the EU but has low tax rates and other offshore perks. Ireland and New Zealand have also claimed a place in the midshore space.
As business hubs, tax minimisation is simply one of a number of ways to attract foreign companies and individuals to these jurisdictions. The argument is that efficiency, regulation and an established services industry are just as important.
“The midshores have a different business model, seeking to be a hub for business rather than IFCs, which seek to be a conduit for the flow of business,” explains Marcus Hinkley, Group Partner and Head of the Singapore office at law firm Collas Crill.
It"s well known that Asia is driving growth in the offshore world, which is why the Channel Islands are so vociferously pushing themselves in China, India and Russia. A recent survey by Offshore Incorporations Limited attributed this to increased capital raising and rising individual wealth - all of which is benefiting midshore as opposed to offshore jurisdictions.
“An interesting trend is that, because of increased regulatory scrutiny worldwide, midshore centres such as Hong Kong and Singapore are seeing more business,” says Martin Crawford, CEO of Offshore Incorporations Limited.
Indeed, Crawford argues that in an industry built on reputation - in efficiency, regulatory flexibility, low cost and high levels of service - all IFCs are under serious pressure to remain competitive.
The crackdown by Western nations on offshore centres in Europe and the Caribbean has allowed midshore centres in Asia to press ahead. “The industry is changing so that the word "offshore" is in some cases no longer a fair reflection of the pre-eminent structures or jurisdictions" marketing strategies, and investors are more open to incorporating an onshore element into their business plans,” Crawford says. “Not only do Hong Kong and Singapore have business-friendly tax policies, but they also boast robust onshore financial services industries. They represent a bridge between onshore and offshore.”
Meet the competition
Nick Kershaw, Managing Partner at Ogier in Jersey, believes that while Singapore and Hong Kong are the Channel Islands" rivals for Asian business, Luxembourg poses a bigger threat in Jersey and Guernsey"s traditional markets. In the West, midshore Luxembourg is a good proposition for firms worried about the negative connotations of offshore.
“There are clients who may adopt a policy of preferring to use certain jurisdictions that they consider would be viewed by their home country as more acceptable in terms of planning their affairs,” Kershaw says. “However, it"s by no means everyone.”
Collas Crill"s Hinkley feels that OECD initiatives and bad publicity for IFCs have forced many firms to look for a move to compliance, and towards a midshore jurisdiction not overtly subject to the same pressure. Whichever way you look at it, he says, the move is bad for pure offshore centres like Jersey and Guernsey.
“I think the new move towards global tax transparency through intergovernmental agreements will only serve to benefit midshores,” says Hinkley. “There"s no positive for IFCs - these midshore jurisdictions will compete with them. At best, one could say it"s neutral to IFCs, as midshores have a slightly different business model.”
Not everyone is of the same opinion, however. Others feel that far from being only neutral, there is a way for midshore and offshore to work together that could benefit both.
OIL Group recently commissioned a survey of industry participants around the world to get a sense of how investor preferences are changing in Asia. When asked to score jurisdictions in terms of importance, respondents came back with a fairly predictable set of rankings, with the British Virgin Islands (BVI) and the Cayman Islands sitting atop the list, followed by Hong Kong and Singapore.
“The rise of these two [midshore] jurisdictions will not come at the expense of long-standing tax-neutral offshore locations,” explains Martin Crawford. “As investment structures become increasingly multi-layered, jurisdictions are performing different roles along the chain based on their competitive advantages - be they tax neutrality, tax treaty access, administrative simplicity or basic geographical convenience.”
For example, he says, a private equity fund may be registered in Cayman and set up a structure in Hong Kong that in turn holds assets in China. A Netherlands trading company may channel its business via Seychelles, with the ultimate owners managing their business through a Singapore entity.
Indeed, the two major Asian deals of 2013 were structured through Hong Kong, but with an offshore element: these were China National Offshore Oil Corporation"s (CNOOC) buyout of Canadian energy company Nexen, and Shuanghui International"s purchase of America"s Smithfield Foods. Shuanghui International is the Cayman registered offshore arm of the Chinese food producer Shuanghui.
Shifting sands
For his part, Marcus Hinkley can see the obvious appeal to Asia of its two midshores, existing as they do in close proximity to closed and complex financial systems that are nonetheless very wealthy and wanting to spread their wings.
“The reason why midshores such as Hong Kong and Singapore do so well is because these jurisdictions have such great reputations among the lack of clarity, corruption and chaos of the region that they are situated in - China, Indonesia and emerging Asian countries,” he says.
While Jersey and Guernsey, with new regulations such as the Foreign Account Tax Compliance Act (FATCA) and an increasing number of tax exchange agreements with the onshore world, are moving towards the midshore rather than to traditional offshore jurisdictions, Ogier"s Kershaw does not believe the islands could ever join them fully.
“Jersey doesn"t have the network of tax treaties, and that"s one of the key reasons why people will go to midshores instead of here - I"d say it"s the biggest driver as opposed to perception,” he says. “But Jersey and Guernsey are moving themselves more into that space by adopting tax transparency more vigilantly and working with the UK on that. They will never be EU, or have the network of tax treaties, but they are moving towards that space, and that"s a good thing.”
Lastly, Kershaw believes the crackdown on the islands following the recession is starting to ease, and Jersey and Guernsey are beginning to be seen more favourably - in the UK, at least.
“When the recession begins to recede - which we are seeing - the spotlight becomes much less strong. The fact that we have David Cameron saying Jersey and Guernsey are not considered to be tax havens - that"s a stamp of approval.”
What is "midshore"?
No classification in the finance industry is set in stone, but Hong Kong, Luxembourg, Singapore, Ireland and New Zealand have laid a claim to a place in the midshore space.
Marcus Hinkley, Group Partner and Head of the Singapore office at Collas Crill, says what sets these jurisdictions apart is they are basically onshore jurisdictions that have legislated certain tax and other offshore-modelled incentives for financial services.
So although a midshore attracts flows of international capital in much the same way as a traditional offshore centre, while offshore jurisdictions are principally propelled by their financial services, midshore jurisdictions tend to possess a broader economic base.
“The leading midshore and offshore jurisdictions have much in common, including transparency, tax neutrality, low-tax frameworks, sophisticated infrastructure, an educated talent pool, and strong legal and regulatory systems,” Hinkley explains. “But while there"s a perception that the law of the midshore jurisdictions is perhaps more conservative than their offshore rivals, it"s interesting to note that neither Hong Kong nor New Zealand require a trustee to be licensed.”
Indeed, Hinkley argues, well-established offshore jurisdictions such as Guernsey and Jersey could perhaps teach their midshore counterparts the importance of having strong compliance and regulatory regimes while still remaining strong and relevant in the global economy.