Say the words "inward investment," on the other hand, and the image is quite the reverse: it is a vote of confidence in the attractive business climate, the skilled workforce and the generally efficient economy. Thus, British ministers are proud of the fact that the UK is not only the largest recipient of inward investment in the European Union but the second largest, after the United States, in the world. "Tax haven" is grubby, "inward investment" is squeaky-clean.
Now suppose, like me, you are in Barbados - not a particularly disagreeable thought at this time of year. It's a tiny island - 22 miles by 14 miles - but has been extremely successful in transforming its economy from reliance on sugar and other basic commodities into a tourist haven. As a result, its 260,000 people have one of the highest standards of living in the Caribbean.
But there are limits to tourism, even if you do it well. Leaving aside the danger of being dependent on, so to speak, one crop - tourism is one- third of Barbados's GDP - wage rates are always going to be under pressure. However hard you try to push yourself to the top of the market, there will always be other newer, and maybe cheaper, destinations snapping at your heels. Ideally, you should buttress tourism with another "crop," preferably one that delivers high wage rates and employs a fair number of people. Step forward financial services.
How do you create a financial services industry that isn't just a tax haven? Answer: encourage "inward investment" in financial services.
The tax haven model has, on the face of it, been pretty successful. Places as diverse as Monaco, the Channel Islands, the Netherland Antilles and Luxembourg have created a tax and/or regulatory advantage and have grown rich on the back of it. But pure tax havens, the ones that exist only because of low taxation and essentially just provide name-plates for businesses that are run from thousands of miles away, are under threat. The European Union does not like them; the US authorities are worried that so many of the much-criticised hedge funds are legally located offshore; and the OECD is making a study to try and see how tax haven abuse should be curbed.
You can't stop rich retirees moving to escape high personal taxation, the original impetus for the Channel Islands' financial services boom. You can't stop sports personalities like Ian Woosnam or Nigel Mansell going to live on Jersey any more than you can stop the string of anonymous British millionaires with beach houses here on Barbados's "Platinum Coast". Nor, in a world without exchange controls, can you stop people moving their money offshore, even if they keep their persons in Kensington or Chelsea. But you can try and stop the name-plate end of the business by closing the tax loophole that makes shifting money offshore so attractive. If, for some reason, the EU and UK authorities decided to cut up rough, they could do enormous damage to a place like Jersey.
So, to some extent, offshore financial service industries have to live with the consent of national authorities. The issue for a place like Barbados is how to build an industry on the lines of Ireland, which has developed an offshore financial service industry by offering tax breaks, but one which is carried out by people physically located in Dublin.
In the Irish case, a model which is being studied here in Barbados, the argument is that a financial services "factory" is no different from, say, a personal computer factory. If it's perfectly proper to use tax breaks, grants and so on to attract industries that produce tangible objects, it is also perfectly proper to use the same incentive to attract industries which produce intangible services.
Thus, Barbados is seeking to build an offshore financial services business where the work is actually done here on the island. There is what Winston Cox, Governor of the Central Bank, calls "a light tax jurisdiction" (nice phrase that), but the Barbadian authorities see little point in attracting business just because of tax. They need the jobs to be here, too.
Can it be done? I don't know. There is a conference taking place here at the moment for foreign financial service companies, where the speakers have identified various areas where Barbados might seek to specialise: things like electronic commerce and fund management.
The island has a well-educated population, but the authorities here acknowledge it will need to import specialist skills. I can think of worse ways for a downsized London fund manager to spend the winter, but it defeats the object if Barbados were to rely largely on expats. Whether it can develop and sustain the necessary skill base is not clear.
The country seems to be approaching the problems in a thoughtful and intelligent way, with emphasis on sound, but friendly, regulation training of staff, freedom of capital movements and predictable legislation. But it is a tremendously competitive market and to be successful in financial services, as Barbados has been in tourism, is a tough task.
In any case, there is a bigger issue here. Are we going to continue in a world where global capital moves freely and where countries are free to craft tax regimes designed to attract foreign investors? Or will there be a backlash? Some sort of backlash is taking place at the moment. Just last week, for example, the French and German finance ministers were talking about the need for "tax harmonisation" in the EU.
You don't need to be particularly bright to realise that this means that they don't like the fact that the UK has lower taxes than France and Germany and that this is one of the reasons why it has been more successful at attracting inward investment. So it is not just a Barbados, a Jersey, or even an Ireland that is under threat from tax harmonisation. It is the UK, too.
Whether this backlash becomes sufficiently powerful to undermine the world's progress over the last 45 years towards both freer trade and freer capital flows is another matter. The big developed countries have such a powerful self-interest in maintaining free flows of foreign direct investment that I can't see them doing anything which seriously disrupts that. They are constrained, too, by technology - the fact that global telecommunications are becoming so constant and so cheap that anyone can locate a service industry that relies on telecommunications more or less anywhere in the world. For example, you can put a call centre anywhere where people speak half-decent English.
But we can expect governments to try to curb the more extreme examples of tax haven abuse. If they were wise, they might ponder why their tax and regulatory systems were such that their citizens sought to escape them. But I don't expect such wisdom of government.
The message, therefore, for a country like Barbados is very clear. Do try and attract new inward investment. And do look to financial services as one important source of such investment. But don't ever use the expression "tax haven"; just stress your business-friendly "light tax jurisdiction" instead.Reuse content