Assets of $1.5tn Wash up in British Virgin Islands

[dropcap]O[/dropcap]ffshore companies in the British Virgin Islands have assets of more than $1.5tn, more than twice the sum estimated in 2010.

Two-thirds of the offshore companies registered in the BVI are used for “corporate structuring”, and more than 140 listed businesses in London, New York and Hong Kong have a unit in the BVI, according to research carried out on behalf of the BVI government.

These units can be used for tax planning, but can also be useful as a tax-neutral hub for investors from different locations. Companies are also attracted by the BVI’s legal system, which mirrors British law.

A further quarter of the companies represent funds and investment vehicles, while property holdings and family wealth each account for 5 per cent of the overall number.

The BVI, which derives more than three-fifths of government revenues from its financial sector, has been hit by the global financial crisis and the ensuing backlash against offshore finance. Nevertheless, the total assets of its companies are now twice as high as they were when estimated at $615bn in 2010 by the International Monetary Fund.

Capital Economics, the consultancy that carried out the research, acknowledged that “the scale of financial activity carried out on the islands may appear incongruous in a small jurisdiction with a population no greater than an English market town”. But it said the perception it was a tax haven was based on a misunderstanding.

Mark Pragnell, the author of the report, said globalisation had led to a greater use of cross-border structures by multinationals, while the use of BVI companies to contain private wealth was becoming less prominent.

Mr Pragnell said it was unclear how much of the flow through BVI companies represented “round-tripping” — sending money offshore that is later brought back to its country of origin.

This is often seen as a way to get around regulations and taxes but Mr Pragnell said the main rationale for routing money through the BVI was to take advantage of its secure legal framework.

Capital Economics estimates that BVI companies could be used to avoid up to $750m of tax, including stamp duty on the transfer of properties and the deferral of taxes on interest income. The purchases of large commercial properties in central London account for the majority of the top 10 property deals by value carried out through BVI companies.

The research also highlighted the popularity of BVI companies in Asia. Two-fifths of BVI-held assets are in Hong Kong and China, which also accounts for a third of the owners of BVI companies, by value.

Lorna Smith, interim executive director of BVI Finance, said: “The BVI has never been a secrecy jurisdiction. We adhere to privacy for clients.”

The BVI stressed its “substantial efforts”, which it said exceeded many large nations, to strike out criminality and ensure transparency. But Tax Justice Network, a campaign group, said although it had made significant improvements in transparency, secrecy remained a salient feature of its offshore sector.

Alex Cobham, director, said: “Time is up for the business model of selling secrecy to non-residents, for tax abuse and other corrupt purposes. If the BVI wants to stop being known as a tax haven, it should follow the emerging international standard by establishing a public register of the ultimate beneficial owners of all BVI companies and trusts.”