An economic impact report commissioned by BVI Finance has concluded that the British Virgin Islands brings a substantial net benefit to governments worldwide.
The report “Creating value: The BVI’s global contribution” by consulting firm Capital Economics found that the 417,000 companies registered in the islands hold about $1.5 trillion in assets globally.
Many of the companies are registered in the BVI to facilitate cross-border trade and investment. For instance, more than 140 corporations listed on the stock markets in London, New York and Hong Kong maintain a subsidiary in the BVI. About a quarter of the companies’ assets represent investment vehicles, whereas family wealth and property holdings make up about 5 percent each.
The investment flows mediated by the BVI support around 2.2 million jobs worldwide, the report noted, especially in Asia, where about 40 percent of the assets held by BVI companies are located. European clients represent about 20 percent of BVI companies. The U.K. alone constitutes 12 percent of the value of BVI companies, both in terms of the location of the ultimate beneficial owner and the location of the assets.
“The scale of the BVI’s global contribution to investment and jobs sheds a new light on the debate around its impact on the tax receipts of other nations,” Capital Economics stated, and concluded, “The BVI is a substantial net benefit to governments worldwide.”
Commenting on the findings, Interim Executive Director of BVI Finance Lorna Smith said the results of the study clearly demonstrate the significant contribution the BVI makes to the global economy.
“Not only does the BVI enable cross-border trade and investment; it also supports millions of jobs, and generates substantial tax receipts for governments globally. This brings tangible benefits to the lives of employees, voters, families and businesspeople around the world,” she said.
Ms. Smith added the report was equally clear in stating that the BVI is not a center for corporate profit shifting. “This helps clarify once and for all some of the inaccuracies and misunderstanding about what the BVI is, and the valuable role it plays in the global economy.”
Like the Cayman Islands, the BVI stresses that it is not a tax haven but rather a tax-neutral jurisdiction, which does not reduce or eliminate any tax liability in other jurisdictions.
The report argued that the BVI is not a material center for corporate profit shifting. Multinational companies that seek to optimize their tax position would look to conduct any ‘profit shifting’ through jurisdictions that gave them protection from double taxation, and where they would be exempt from withholding charges, Capital Economics said. But, “The BVI offers little protection to businesses from so-called ‘double taxation’ in another jurisdiction or from ‘withholding taxes’ elsewhere. Multinational companies that use their transfer pricing arrangements to shift profits into the jurisdiction will not be sheltered from taxes due elsewhere.”
This is in stark contrast to European jurisdictions like the Netherlands, which maintains a large number of double taxation treaties that reduce withholding taxes for income from dividends, interests and royalties, or low tax jurisdictions like Luxembourg and Ireland, which offer low tax rates on intra-group interest payments or royalties from intellectual property. These mechanisms are much more suitable for the shifting of profits to low tax locations to avoid taxation.
Mark Pragnell, the author of the report, said in an interview with the Financial Times that globalization had increased the use of cross-border structures by multinationals, whereas the use of BVI companies for private wealth management was diminishing.
Mr. Pragnell conceded that it was not clear how much of the capital flows through BVI companies represented round-tripping, a process whereby capital is sent to offshore vehicles and then brought back to its country of origin under the guise of a foreign investment to take advantage of government benefits and lower taxes or to circumvent regulations. But he maintained that the main motivation for channeling money through the BVI was to take advantage of its secure legal framework.
Capital Economics believes that BVI companies could be used to avoid up to $750 million of tax each year.
“To put this in context, the United Kingdom tax authorities estimate their annual ‘tax gap’ at US$59 billion alone – so any leakage through the BVI is immaterial against other sources of tax loss,” the report said. “Moreover, our estimate of the theoretical maximum amount of tax avoided assumes that the only and every use of a BVI Business Company is tax avoidance. In reality, we believe the actual number will be a small fraction of this.”
At the same time, investment flows channeled through BVI vehicles would bring substantial net benefits to governments onshore. For instance, the report estimates that the tax supported by employment related to investments mediated by BVI companies is $15.7 billion, far outweighing the potential tax loss onshore from deferred tax payments or the avoidance of property transaction taxes.
Locally in the BVI, tourism accounts for one in four jobs. However, the business and finance industry generates 60 percent of all government revenues. It employs 2,200 people directly, supports another 3,000 jobs and produces $330 million of gross value added, the report found.
Two-thirds of the business and finance jobs are held by BV Islanders, or belongers.