Will Offshore Tax Havens Face More Scrutiny in 2014?
The Isle of Man is kind of like the United Kingdom’s version of the Caymen Islands. Technically it’s a crown dependency, and the British government is responsible for its defense and foreign relations. But it’s also completely self-governing with one of the oldest Parliaments in the world.
The “island administration,” which sits in the middle of the Irish sea, is a popular tax haven for British bankers. It’s no coincidence that the island’s financial sector accounts for more than a third of the gross domestic product. So why did the ratings agency Standard and Poors recently downgraded The Isle of Man’s credit rating from a AA+ to a AA?
As a major tax haven, it has no wealth, capital gains, corporate, or inheretence taxes – and as a result it has benefitted handsomely from a thriving offshore banking industry. However, Standard and Poors thinks that’s about to change, as governments reform and try to clamp down on companies and individuals that stash money overseas.
While economists and analysts differ in their understandings of what exactly constitutes a tax-haven, the countries that are most consistently labeled as such are Bermuda, the Netherlands, the Caymen Islands, and Ireland. As a result of their low taxes, many of these countries house headquarters for companies that do most of their business elsewhere — like Accenture plc (ACN).
If Standard and Poor’s is right, and these regions of the world are facing tighter regulation in the coming years, then some of the companies which save money by moving offices there could see their costs go up. Many companies from Facebook (FB) to Herbalife (HLF) participate in corporate inversion to save money on taxes.
We decided to build a list of companies that have headquarters in tax haven countries, and look for signs that might corroborate S&Ps thinking. We started with a list of stocks based in one of the four countries previously mentioned. Starting with a list of about 100, we screened for signs of institutional selling. This means that hedge funds and and institutional investors have been selling the stock.