The BVI was knocked down in 2017 by dreadful natural disasters and at the time financial services was and still is the main source of revenue. Now against a backdrop of a May 2018 UK parliamentary decision that spells catastrophic effects, the BVI Legislators this week mounted a valiant fight against the most recent and so far most dangerous financial services attack: the EU’s call for Economic Substance by December 31.
Considering that it would be impossible for thousands of BVI registered international companies to set up headquarters and commence operations here in the Territory by month end, legislators anticipate a massive blow to the Territory’s financial services sector.
Putting away differences all legislators gathered in the House of Assembly on 18 December mournfully likening the Bill titled Economic Substance Company and Limited Partnership Act, 2018 to a near impossible fight to safeguard the crucial financial services sector that is already fending off other darts.
The predicament of the Bill was lamented by legislators on both sides of the aisle as they debated the legislation which is supposed to address the European Union (EU) concerns about the possible case of BVI companies relocating profits from high tax jurisdictions to benefit from the BVI’s zero rate of income tax. It was noted that the Bill is a means of allaying the issues posed by the EU’s calls.
In presenting the legislation to the House Premier and Minister for Finance Dr. the Hon. D. Orlando Smith explained that the EU raised concerns against the backdrop that under the fair taxation heading a jurisdiction should not facilitate the offshore structures and arrangements aimed at attracting profits which do not reflect true economic activity in the jurisdiction.
Hon. Smith said that Government promised the EU a response to its concern by the end of 2018. He noted that the BVI was not alone in making such a commitment and is not alone in legislating to meet such requirement. He said Cayman, Turks and Caicos and the Crown Dependencies are all legislating to address EU concerns about economic substance.
Meanwhile, it was explained that the EU has acknowledged the BVI pledge to address the situation and is expected to do an assessment by 2019 of the steps taken by BVI and other jurisdictions. At this juncture the Premier said that if the Territory does not take any steps it will be placed on a list of non-cooperative jurisdictions. “Being so listed will bring with it great consequences,” the Premier noted.
The effect of the Bill is that economic substance requirements are to be imposed on all BVI companies, and on all limited partnerships. In fact, the Bill establishes a requirement for economic substance in the BVI for all relevant activities such as banking, insurance etc. It is expected to come into effect by 1 January 2019 and the economic substance would apply to the period ending after 31 December 2019 and then annually thereafter.
Third District Representative, and Opposition Member Hon. Julian Fraser was the first to contribute to the debate and likened to the situation to the game of Russian Roulette where one is meant to point a gun to one’s head containing a bullet in chamber and pull the trigger.
In his contribute Hon. Fraser described the Bill and its ensuing results as a grim situation as he explained that the Bill’s reference to the term economic substance means the setting up of headquarters here in the Territory for the more than 400,000 BVI registered companies. “Those headquarters are not just an individual sitting behind a desk they are actually supposed to perform would that ever happen. Can you see that happening? The task that we are pursuing is so mammoth and unrealistic, but we will have to come to grips with the reality that we are in trouble.”
The Opposition member noted the Beneficial Ownership public register situation that is looming for 2020 and stressed that this is an unfortunate compounder to that situation: “We’ve been trying for a long time to kick this can down the road. Right now we have hanging over our head the beneficial ownership register which is required to be made public by the end of December, 2019 and we are kicking that particular can down the road. Now here comes another one. The question I have: which is worst?”
In further likening the situation to Russian Roulette where both options dangles death, Hon. Fraser explained that passing the Bill will damage the financial services sector and not passing the legislation will cripple the sector.
Hower, responding “No!” may bring the EU to the reality that seeing the unreasonable pressure “No!” is an answer: come what may – after all David defeated Goliath.
Mr. Fraser stated that “Our problem is if we don’t meet these requirements the EU is asking for we will become blacklisted and here are the options of becoming blacklisted…We are being told yes if you don’t pass this legislation you’re going to get blacklisted. If you pass the legislation I am not guaranteeing you that you will not be blacklisted…We are between a rock and a hard place.”
At Large Representative and Opposition Member, Hon. Archibald Christian said that legislators have been back and forth in the House of Assembly in recent days trying to sort out the Bill to meet EU requirements. Hon. Christian said that the attempt to get a satisfactory Bill was delayed as the EU has made changes or called for other requirement and thus delaying the readings in the House. “The European Union keeps on shifting the goal post.”
In noting how unfair the process is Hon Christian said: “The over 400,000 companies that are registered in the BVI…we don’t know what percentage of those companies, whether its ten percent, fifteen percent or all of them should have some presence in the Virgin Islands: physical presence operating in the Virgin Islands. I don’t want people to think that the BVI is doing anything wrong or illegal, this business that we are in has been going on for over 35 years…we have to scramble here today and try and pass this as quickly as we can to save our souls and to save our people and our economy, try to save,” he added.
But will it save anything in the end?
Hon. Christian also noted that there is no guarantee that by passing the Bill the Territory will not be blacklisted and he said that this factor makes the situation troubling.
In zeroing in on the difficulties the EU imposition will cause for the industry, Hon. Christian explained that big requirements will be made of both new and existing registered companies.
Minister for Communications and Works Hon. Mark Vanterpool said that all legislators are very concerned and cautious about the Bill and are hoping for the best. In explaining how worried the Bill made the members of the House, Hon. Vanterpool said: “First time I have seen the Premier so worried in his attempt to address this matter. Met several times, he’s been back and forth even at the last minute address issues that keeps changing.”
So the EU can change the rules of the game at their pleasure, but the BVI cannot. So who is ruling BVI? The EU? Or the UK?
The most worrisome part seems to be the threat of blacklisting. According to Hon. Vanterpool: “You hear words like blacklisting, what does it mean – that the European Union which is an economic block within Europe would say to us if you don’t do certain things about our financial services businesses we would be blacklisted, meaning in my thinking that they would do everything possible to prevent us, and prevent especially the companies that were registered in the Territory from doing business with them…Which means that the companies that are registered with us will not feel that it is attractive to do business in the BVI if they are going to be blacklisted or they are going to be prevented from using their companies to do business internationally.”
Minister for Education and Culture, Hon. Myron Walwyn regarded the request by the EU and the stipulations of the economic substance as an impossible task. He stressed that essentially the EU would like the companies that are registered in the Territory for cross border transaction and other business purposes to open offices in the BVI.
As he explained how unsurmountable the task to comply with the EU request is the Education Minister said: “We all know that between now and the 31 December that is near to impossible. We also know that it is going to take a decade or more for us to be able to do that as well and then there are a number of other issues that will prevent us from that – cultural issues, issues of space. The difficulty of companies moving from where they are located now to come to the Virgin Islands here. So it’s going to create some issues for us certainly in the short term that we are going to have to grapple with, but as we say the effect of not doing it would be. It will create issues for banking and other services in terms of our commerce activities here in the Territory.” Furthermore, Hon. Walwyn said that the effects of this legislation will be felt in the Territory by 2020.
Leader of the Opposition, Hon. Andrew Fahie referred to the situation as economic bullying as he mentioned that the situation is financially motivated. “Those big countries looking for money so they trying to see whoever, whatever companies they have abroad whatever money that is supposed to be as they say hiding that they want to get it back home because everybody is strapped for cash …So we reach here with the economic substance Bill and this has been rumored for quite a while and it is here today; and like we were told before that they want the companies not just registered here but physically have an office and operating here and this has to be passed by 31 December.”
In echoing the unfair nature of the matter the Leader of the Opposition said “Damn if you do, damn if you don’t you will be blacklisted. Damn if you do because if it is passed…It will cripple that section of our economy.”
Similar to other legislators Hon. Fahie noted that what is being required of the Territory is almost impossible. “This legislation if we don’t pass it we will be blacklisted. If we do pass it none of us can say that the EU will accept it to be able to adhere to whatever they have been asking because since we started last week the goal post has shifted couple times.”
Diversify Now:Too Little Too Late
It has always been said that 60 cents of every dollar the Territory has comes from financial services and on Tuesday against the lamenting of the constant attack on the Territory’s financial services sector was the repeated call by most of the Legislators for the BVI to diversify its economy in order to lessen the blow that a fallout from financial services will have on the economy.
A few of the legislators shared ideas of industries that can be looked at as viable revenue earners. However, in this trail of discussion Minister for Health and Social Development, Hon. Marlon Penn was most vocal.
To illustrate that the BVI can successful diversifying its economy from being financial services dependent, Hon. Penn used St Kitts and Panama as examples of countries that shifted from one economy to another in relatively short periods of time. Noting that the shift will not be as daunting or scary as may be envisioned Hon. Penn mentioned the companies Uber and Ford. He said that Uber is a young company while Ford has been around for decades, but he said that now Uber value is almost double in value.
“We have to modernize our industries and the process of modernization has to be inclusive of our people. The economic shift started from a logistical point of view, from a service base aspect. The BVI has the foundation to be able to capitalize on the new knowledge based economy that is coming down the stream.” He said the knowledge based economy will provide strength and structure beyond now.