Offshore Advantages

By Diana Ramroop (Courtesy Caribbean Money Market Brokers CMMB)

It’s that time of the year again, when the Christmas tree is up, our homes are decorated, the malls are filled with lavish

Christmas decorations, radio stations fill the air with happy and joyous Christmas songs and we are probably all bus y making

preparations for the holidays. It is at this time of the year, we tend to appreciate our families more than usual and we take

stock of how our year was spent and we think about the resolutions that we would like to make for the upcoming year. For

some of us, this year may have brought us happiness, sorrow, disappointment, maybe some transition in our lives or it may

have been uneventful, just another year gone by.

The year 2009, started off in turmoil as the manufacturing sector globally had declined. According to JP Morgan’s global

manufacturing index, there was a ‘severe’ 17% annualized contraction in global activity. Manufacturers around the world had

already begun to cut job in an effort to conserve cash. Steel companies like ArcelorMittal, US Steel Corp and AK Steel were

working at 43% capacity. The S&P 500 Index was down about 34.5% for 2008. The Volatility Index (VIX) had increased from

26.2 at the start of January 2008 to 40 as at the end of 2008. Globally, central banks were desperately slashing interest rates

and using stimulus packages to prevent their economies from sliding into further recession. Policy interest rates in the US

were slashed from 3% at the start of the 2008 to a mere 0.25% by the end of 2008 while in Europe rates were cut from 4.5%

to 1% by the start of 2009. The outlook for 2009 looked grim. Let us recollect some of the major events that affected the

international market for 2009 thus far:

Stimulus packages and government bailouts

TARP

The TARP (Troubled Asset Relief Programme) was initiated by the US government in October 2008 in order to loan

emergency funds to banks with ‘troubled assets’, such as, loans on real estate and other mortgage-related assets and

securities based on these assets, saw financial institutions receiving about $700 billion in such funds. For 2009, we would

have seen companies such as Citibank and Bank of America each receiving an additional $20 billion in TARP funding

bringing their total receipt to $45 billion each. Due to restrictions placed on executives’ compensation, equity purchase

option and compliance policies, companies such as Bank of America, JP Morgan Chase, and American Express quickly

sought to repay their TARP funds.

Cash for Clunkers

This was ran by the US government between July 01 2009 to 26 August 2009 at a cost of $3 billion dollars. The aim of this

programme was to get US consumers to purchase more fuel efficient cars while trading in less fuel efficient ones, thereby

promoting auto sales and ultimately stimulating the economy. This programmed led to a 19.4% increase in sales for Toyota,

17.6% for General Motors, 14.4% for Ford, 13% for Honda and 8.7% for Honda. This initiative was not very successful as its

costs vastly outweighed the benefits by $1.4billion and it was the Japanese and Korean manufacturers that increased their

market share at the expense of US manufacturers.

Fall of the US Dollar?

To fund these stimulus packages, the US government, through the Federal Reserve, has been increasing its money supply.

It is estimated that the money supply (notes, coins and central bank reserves less dollars held abroad) grew by 14.3% from

Sept. 08 to Sept. 09. At the same time, the debt-to-GDP level has risen from 51% in 1988 to currently about 73.6% of GDP.

It is projected that the debt level will continue to increase to about $13 trillion by 2013.As result of this; there have been

concerns about the ability of the US to fulfill its interest payment obligations. This has been causing pressure on the US dollar

as investors are seeking alternative investments like gold, copper or a basket of currencies as opposed to just one main

currency. This year we would have seen that US dollar’s value which can be measured by Bloomberg’s Dollar Bullish

Sentiment Index had fallen to 30.8 as at 18 September 2009 from a high of 68.86 a year ago. The lowest level this index

reached was in March 2008 when it fell to 30.3. In stark contrast to the dollar, gold reached a record high of $1133/oz on 16

Nov. 2009 as investors sought a hedge against the dollar.

Healthcare Reform

In some quarters, the present healthcare system in the US was deemed inadequate, in that it failed to address the needs of

everyone and it was too costly to the average citizen, thereby excluding citizens from accessing this vital service. It was

estimated that healthcare spending accounts for about 17% of GDP and any reform of this sector would have a major impact

on the economy. To transform the health sector it would cost an already debt -laden US government about $1 trillion over a

decade. Proposals made thus far, places insurance mandates on employers and employers, sets prices and coverage,

establishes an option to be run or subsidized by the state, and to pay for all of this taxes would have to be increased. The

increase in taxes, which should take effect in 2011 and may range from 1% - 5.4%, depends on the income level of the

insured. These are substantial changes that would affect the type of insurance products purchased, kind of service provided

and the cost to companies and individuals. Subsequently, all of this would affect the earnings of companies in this sector.

This is why Fitch rating agency has a negative outlook for this sector in 2010.

As the year draws to a close, the US economy has shown small signs of recovery. Credit Suisse raised their GDP forecast

for this quarter to an annualized rate of 4.5% up from 3.5%. In addition to that, unemployment fell slightly by 0.2%, the trade

gap closed by 7.6% in October, export levels were up 2.6% and sales of US retailers climbed by 1.3% in November. We

would have also seen that the S&P 500 index is up about 33%, the VIX is down to 22.32. If these trends continue, it is our

expectation that 2010 would be a better year for investors.

TAX ALERT

On Wednesday, December 9, the UK government announced a one-off, 50 percent tax on discretionary bonuses awarded or paid by the financial services industry during the period December 9, 2009, to April 5, 2010. The draft legislative language is potentially subject to change and is unlikely to be voted on by Parliament before the first quarter of 2010. In all events, the UK government intends to have the legislation in place by the due date for the tax’s collection (August 31, 2010).

This tax is on the financial services entity and is not deductible for purposes of UK corporation tax (it would not appear to be an income tax for purposes of the US foreign tax credit); it is not an additional income tax on the recipient. Performance-based remuneration, whether paid in cash, benefits, or most equity-based compensation, in excess of 25,000 sterling generally is subject to the tax. The tax applies to performance-based remuneration awarded or paid to UK-resident employees, independent contractors, and non-UK residents who performs relevant financial service duties in the UK during the period April 6, 2009, to April 5, 2010. The tax does not reach non-variable pay that is not subject to performance conditions.

The tax will apply to UK-resident entities which are licensed by the Financial Services Authority (the FSA) and conduct “relevant regulated activities” including: (a) deposit-taking; (b) dealing in securities as principal or agent; (c) arranging deals in securities; (d) acting as custodian; and (e) retail mortgage lending. It will also reach UK-resident investment companies or financial trading companies which are affiliated with an FSA-regulated entity.

For non-UK resident businesses, the tax will apply to the UK branch of a non-UK bank, provided that the bank is authorized by the FSA and accepts deposits or “wholly or mainly” conducts relevant regulated activities through a UK permanent establishment. Also, the UK branch of a non-UK “relevant foreign financial trading company,” which includes a securities dealer, is subject to the tax. Non-UK entities engaged in insurance, sponsoring venture capital trusts or OEICs and friendly or building society services are exempt.

Complicated rules govern the treatment of a UK permanent establishment which is itself not FSA-licensed, but affiliated with an FSA-licensed person. While the language is not completely clear, it appears that sponsors of private equity and other alternative investment funds operating in the UK are exempt from this tax unless they are affiliated with a bank or other financial institution that is FSA-licensed.

For a non-UK resident financial services business, the questions to ask are:

1. Is your UK permanent establishment, parent entity, or other affiliate licensed by the FSA?

2. If so, do your activities wholly or mainly consist of “relevant regulated activities”?

The draft legislation anticipates many standard approaches to sidestepping its coverage. For example, neither delaying the payment of an award that has arisen contractually during the period, nor shifting the obligation to pay from a UK permanent establishment to the non-UK parent entity, will avoid this tax.