The offshore financial industry shows resilience as demand stays robust
The offshore industry is poised for growth, as the industry insiders see the demand for offshore financial and corporate services likely to increase in the coming years, according to an industry survey conducted by OIL, a corporate service provider specializing in international incorporations.
The industry has been battling negative perceptions in the eyes of the public. It is commonly accused of facilitating avoidance of taxation and banking regulations. The high level of secrecy it provides is sometimes seen as helping to hide wealth from spouses or business partners and to launder illicit money.
While acknowledging the image problem, providers of offshore services stress the essential role they play in facilitating the smooth flow of capital in today’s global economy. “Offshore jurisdictions play a vital role in enabling global economic development by reducing cross-border friction costs and facilitating the global flow of capital,” says Jonathon Clifton, group managing director at OIL.
Neutral venues that can be trusted by all parties to a transaction, modern, cutting-edge legislation, and a tax-neutral environment make these jurisdictions attractive for incorporation of businesses, according to Clifton. “In a nutshell, the offshore industry serves as the plumbing of our integrated modern global economies,” he adds.
Thirty-six percent of the 320 industry experts around the globe who participated in the survey still expect an adverse impact of the negative publicity and new regulations on the overall demand for offshore services (down from 41% the year before). The rest of respondents are evenly split between expecting outright growth and expecting no net growth, but demand switching among jurisdictions. The new incorporations have been on a down-trend since 2013, with the expected 2015 total of 296,300 being 5% lower than 2013.
The British Virgin Islands (BVI) heads the importance ranking of offshore jurisdictions, with Hong Kong and Cayman Islands tied for the second position and Singapore rounding up the top four. There’s a considerable gap between the top four and Luxembourg in the fifth position. When asked to estimate the importance of each jurisdiction in 2020, the respondents placed Hong Kong and Singapore at the top, followed by the BVI, Cayman Islands and USA.
The expected rise of the “mid-shore” jurisdictions of Hong Kong and Singapore will stem from the rising wealth of the region. The growth of the market is estimated at 72% for Greater China and 50% for Southeast Asia in the next five years.
Hong Kong and Singapore offer sound business infrastructure, expertise and resources for clients. As new regulations are implemented worldwide, they will find themselves in a favourable competitive position with respect to traditional offshore jurisdictions like BVI or Cayman Islands.
Entrepreneurs and high-net-worth individuals will remain the principal drivers of the offshore business, especially in the Asian market (48.6% of Asian respondents say this, compared to 43.9% of non-Asian respondents). In Asia, the secondary driving force comes from hedge funds and private equity (22.9%), while in non-Asian markets it comes from family offices (22.0%).
The top two needs driving the demand, as published for the SEA and India, are asset protection and wealth management, with tax planning further down the list.
New regulations remain a key concern for the industry. Among them full implementation of Common Reporting Standard tops the list with 72% of respondents saying it will cause most impact. Other regulatory initiatives expected to cause impact are: non-public registry of beneficial ownership, uniform global regulation and global standardization of tax accounting.
While the global enforcement of new regulations is widely expected to be “political and inconsistent” or involve exceptions for individual jurisdictions, the respondents say that their main impact will be that of raising the cost of doing business and necessitating investment in human capital and IT.
“Regulation that balance greater transparency with the need to support companies wanting to expand globally will make our industry stronger and ultimately bring it into mainstream,” says Clifton. “However, regulation should enforce best practice within our industry, not seek to stamp it out,” he adds.
While the offshore business shows resilience, adaptability and compliance with regulations, and the demand for the services is robust, the public relations battle remains to be won.