With A Little Help From My Friends . . .

Any blog centred on the wealthy and powerful is bound to spend time discussing the answer to the eternal question about money:
                       When you've finally got it, where do you put it, and who are your friends?

This year has seen probably the most vicious and sustained attack ever on the two institutions who provide the answer to that question -- Tax Havens and Offshore Banking.

I am of course referring to the long running bout of fisticuffs between the American tax authority, IRS, and the investment bank UBS -  sparked off by the rodent-like Mr Bradley Birkenfeld.

But before I embark on this sorry affair - with it's still strangely uncertain ending - I'll try to define the terms in play here. I'm going back to basics to talk about Tax Havens and Offshore Accounts.  For those of you who are not enchanted by money, this may be a bit tedious, so it might be an idea to leave now and go and do something more interesting.

Meanwhile,  off we go, beginning with -  What exactly is a Tax Haven?

The FT Lexicon defines a tax haven as:
"A country with little or no taxation that offers foreign individuals or corporations residency so that they can avoid tax at home."

Expanding somewhat on that, The Economist tends to use Geoffrey Powell's explanation. Powell is the former economic adviser to Jersey and he says:
“ What identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a world wide demand for opportunities to engage in tax avoidance.”

In a report in December 2008 the US Government Accountability Office expanded even further and said the following were indications of a tax haven:

nil or nominal taxes
*lack of effective exchange of tax information with foreign tax authorities
lack of transparency in the operation of legislative, legal or administrative provisions.
no requirement for a substantive local presence
self promotion as an offshore financial center

*note this one particularly, because it's the one that really got the goat of the IRS, and fuelled their thuggish bullying of UBS (as you can tell, I'm nothing if not impartial in this story!).

 UBS is the Union Bank of Switzerland, a premier global financial services firm offering wealth management, investment banking and asset management.  As they say on their website:

UBS is one of the world's leading financial firms. And we operate in two locations. Everywhere and right next to you.

Unfortunately, everywhere included America and right next to included Mr Igor Olenicoff, a multi-millionaire real estate mogul living in California,  who was unlucky enough to innocently seek the help of one Bradley Birkenfeld, an employee of UBS.

But I'm jumping ahead.  Before that, one more definition - offshore banking. The growth of tax havens is primarily due to the considerable growth of offshore banking, and this expansion is due to the globalization of the world's businesses.

So, what is offshore banking?
An offshore company is a business entity organized outside the primary jurisdiction of its home country. It locates all or some of its business operations in offshore havens, to take advantage of the low tax incentives they offer.
Offshore companies are regulated by their foreign tax havens, though it's fair to say that offshore companies operate in a pretty loose regulatory environment.
A company frequently incorporates in an overseas juridiction to avoid the extremely high taxation which they are paying in their home country.
An offshore company will be protected by the laws of their new domicile and obviously the laws enacted by these tax havens will be advantageous to the interests of the relocating company. For example, if you are trying to sue a company domiciled in the Cayman Islands, you would have to sue this company in the Cayman Islands where this company is chartered and incorporated. The laws in the Caymans are more considerate toward the interest of these companies than those, say,  of the United States.

Some countries, such as the United States, have increasingly sought measures to regulate offshore companies which also operate in the United States. Some new laws have barred offshore companies from retaining employees in their offshore jurisdictions. There are also new regulations on the kinds of business operations which these companies could move to the offshore locations.  Some countries have started to enact new measures aimed at making it illegal for companies to conduct business in the low-tax havens.

But there are big guns on both sides of this divide and the story aint over yet.

Next time, the battle in detail between the taxmen and the defenders of the rights of an individual to protect his own money.  At this stage in the battle, it looks as though the taxman is winning - but nothing in the world of high finance is ever quite what it seems . . .