Dr Trevor Thomas, Guest Writer 
Dr Trevor Thomas
That Jamaica will host an offshore financial centre (OFC) within the next two years now looks increasingly likely.
The special advisory committee set up by Senator Don Wehby, and headed by Eric Crawford of PricewaterhouseCoopers, will soon present its recommendations to Cabinet. In doing so, the committee will rely on a report by KPMG, who have been commissioned to assess the market conditions and propose the necessary legislative and regulatory adjustments.
KPMG was due to report to the committee last week. The committee will report to Cabinet two weeks later. The scheduling is tight, but this is not to be regretted. Nothing concentrates the mind so much as a deadline.
And concentrated minds are required.
Market crowded
The Caribbean offshore financial services market is becoming crowded and increasingly competitive.
The latest entrant, Trinidad and Tobago, plans to open an international financial centre in September 2008 to cover capital markets, banking, insurance and asset management, as well as possibly hosting an energy-commodities exchange.
Jamaica, by contrast, is still at the discussion stage.
To be fair, some decisions, through robust debate, are becoming crystallised.
The location of the offshore financial centre, originally mooted for downtown Kingston, now seems to be destined for Montego Bay. Port Royal was raised persuasively, but appears to have been all but rejected.
Similarly, the low-tax OFC advocates would appear to have the edge over those arguing for a nil-tax jurisdiction.
Finally, there is much support for Jamaica operating as a back-room OFC - a development with which this article takes issue.
A back-room OFC exists to provide regional processing and administration for multinational companies.
Such OFCs need to provide a favourable tax system, excellent telecommunications, a skilled (but relatively low-paid) workforce and minimal operating costs. There is a major demand for back-room services as multinational companies increasingly recognise that modern technology enables them to minimise their expenditure by placing each component part of their services in those jurisdictions with the lowest attendant costs.
Product differentiation
There are, however, several problems in a new offshore financial centre marketing itself primarily as a host for back-room services.
The most obvious is product (or service) differentiation.
Back-room services essentially compete on cost. As new centres open with lower costs, the work secured would migrate - the very nature of back-room work is that it is a movable feast.
Perhaps a less obvious dis-advantage to back-room services is that they have a limited multiplier effect for the economy as a whole. For example, there is no natural cross-over with tourism.
Indeed, it could be argued that back-room services could be hosted by a free zone alone, without the need for the full legislative edifice of offshore companies, trusts and limited partnerships that form the very foundation of a modern offshore financial centre.
Attract good business
Jamaica needs to attract 'front-of-house' business. The principal issue that must be addressed, therefore, is the nature of the business it wishes to attract.
There is, for example, a huge market in offshore mutual funds and offshore hedge funds, largely dominated by The Cayman Islands. Similarly, there is a substantial offshore insurance industry, mostly dominated by Bermuda.
It will be difficult for Jamaica to effect a fundamental change in the preferred choices of mutual-fund managers, captive-insurance lawyers and advisers to the international hedge-fund industry.
However, there is a market sector that is very substantial in size and not dominated by any existing OFC, which, in many respects, is an ideal fit for Jamaica. This is the sport and entertainment market sector.
Professional sport and entertain-ment is today very big business, and global in nature.
The earning potential of inter-national performers serves to make them substantial business entities in their own right.
The more traditional international businesses have used offshore financial centres in their tax-planning structures.
Unsurprisingly, international performers, arguably the most mobile business people in the world, have followed a similar route, though no OFC has specifically created a niche to serve their interests.
Offshore Jamaica can actively market itself as an OFC friendly to and supportive of the sports person and entertainer seeking to protect his/her assets or to minimise the overall burden of taxation on their worldwide income.
The Jamaican-registered Inter-national Business Company, for example, could be tailored to meet the demands of a performer's services or licensing company.
Cultural mecca
Brand Jamaica already has a rich and deserved reputation in entertainment and sport. It is, as dubbed by Jamaica Trade and Invest, "the cultural Mecca of the Caribbean".
It should be relatively easy for this image to be segued into the offshore Jamaica brand.
Unlike back-room services, this type of front-of-house activity generates a huge multiplier effect for the economy as a whole. It goes hand in hand with tourism. Moreover, it is easy to envisage special additional tax breaks within the OFC for performances and sporting events. Revenue lost from the direct taxation of performers will be more than compensated for by the indirect taxation on flights, hotel rooms, luxury-imported goods, general sales taxes, licensing fees, registrations fees, and so on.
Tax-break concept
The concept of tax breaks for those engaged in the entertainment industry is not new to Jamaica. For example, to encourage the making of motion pictures in the island, the Government offers investors tax-free profits on overseas releases, duty-free concessions on plant and machinery, and GCT rebates on locally purchased goods and services.
Offshore Jamaica's front of house is a similar picture, painted on a much larger canvas.
Finally, celebrity has long coat-tails. Many people follow the lead of the stars, whether in fashion, lifestyle, or choices. This is the reason sports people and enter-tainers earn so much money in endorsements (often more than they earn from their principal activity).
Once offshore Jamaica is perceived as the principal offshore financial centre for the stars, it will lead to a wave of similar activity from the less well known. As a Sinatra fan once remarked many years ago, "What's good enough for Ol' Blue Eyes is good enough for me."
Nationalistic undertaking
That said, let us remember that the creation of an offshore financial centre is a commercial undertaking, not a nationalistic one.
As such, we should accept all legitimate offshore business that promotes urban development, generates national income and creates productive jobs, and this includes back-room services.
We are, however, a justly proud people of a vibrant and staggeringly beautiful island. When we promote our offshore financial centre, we should focus on our front of house, not our back door.
Dr Trevor Thomas is an international tax consultant and the author of "Offshore Jamaica: The Path Ahead".
Email: tax@drtrevorthomas.com
