This interview originally appeared on June 26, 2018.
Taxlinked (TL): What are your thoughts on the efforts to harmonize vetting practices and information sharing among Caribbean countries that offer Citizenship by Investment (CIP) programs?
Mimoun Assraoui & David Regueiro (MA & DR): The CIP industry can be no stronger than its weakest link and nowhere is this more true than in the Caribbean with its five competing programmes. Ultimately, it is in everyone’s best interests to have these jurisdictions apply the same high level of integrity and due diligence practices because, as we all must appreciate, one mistake could have repercussions that reverberate across the industry.
Certainly, all these countries are applying good vetting practices but what makes a difference is the depth of the due diligence carried out. There is continued technological improvements and innovative methods to ensure the level of due diligence is at the highest international standard, like we see in Malta, which has been hailed the industry leader.
Whether it is introducing multi-layered due diligence processes, including some preliminary vetting by all parties involved in the process to prove they also carried out rigorous background checks, or monitoring successful applicants and reviewing their third partner providers in the due diligence process, these CIP countries must work together. We cannot have inconsistent vetting processes where applicants ‘shop around’ not only over price but also because of differing levels of due diligence!
After all, many do not realise but the five Caribbean countries, Antigua & Barbuda, Dominica, Grenada, St Kitts and Nevis and St Lucia, are members of CARICOM, which allows right of establishment in any country in the region.
This isn’t an issue of sovereignty, therefore, but of regional and international interest where harmonisation of the vetting process and sharing of information is crucial for the sustainability of these programmes.
TL: Have any Caribbean countries introduced their own tax residency plans to go alongside their other services? What do these tax residency programs consist of?
MA & DR: I don’t know if ‘introduce’ is the right word; maybe a more accurate phrase would be to ask whether these countries have formalised and improved some of their tax regimes, which were always there and available to citizens, but now have been extended to corporations and non-citizen residents of these countries. Of course, this is to make the CIPs more attractive, but if we look at passports as more than just a commodity, then second citizenship really is about prudent financial planning. So, what we know at this stage is that three out of the five Caribbean countries, St Lucia, St Kitts and Nevis and Dominica, have signaled an interest in developing tax residency programmes.
St Lucia started with tax benefits for corporations passing the International Business Companies (Amendment) Act of 2017, better known as the Headquarters Act, for example, which saw large firms like Digicel relocate its headquarters to St Lucia. Companies with their headquarters in the country thus have a favourable tax rate in addition to there being no duties on equipment, no need for work permits, and workers don’t pay income tax. For individuals, citizens or residents who buy real estate or have a rental agreement for 2 years qualify for a flat rate on worldwide income.
St Kitts and Nevis, on the other hand, has proposed a residency requirement of 2 months per year for citizens and residents. St Kitts has a zero tax policy and so they have maintained this without creating a dual tax structure. Economic citizens who followed the contribution route or invested in real estate or residents who invest in real estate can take advantage of this regime by paying a small fee and spending at least 2 months per year in St Kitts.
The only information we know about Dominica to date is that plans are afoot to encourage new citizens who do not necessarily reside in Dominica to become tax residents there by paying a minimum amount of tax. At the present time, its citizens are not liable to taxation in Dominica on any income earned outside of Dominica unless they decide to reside there.
What they are doing is no different to what other fiscally prudent yet wealthy countries have in place, including Switzerland and Monaco. With the right institutions, legal frameworks, and fiscal conditions in place, tax residency programmes can bring in a significant amount of revenue for these countries. So even if the number of visa-free countries its citizens can access changes, these tax residency programmes are likely to remain firm and an even more attractive incentive for the CIP programmes.
Like what we have seen with the CIP programmes then, the tax revenues will help these countries become less dependent on aid and help with many projects for its people in various parts of life such as education, art, tourism, agriculture, etc. There is also the improvement of infrastructure and job creation and so the local economies benefit more.
TL: Why would a potential client opt to establish their tax residency in a Caribbean jurisdiction versus doing it elsewhere?
MA & DR: This is obvious: where you are a tax resident of a country rather than just a citizen on paper, there is more affinity, alliance and allegiance as opposed to holding a travel document that can come in handy when one needs to travel. There is a vested interest then. The islands we are talking about are often referred to as the jewel or pearl of the Caribbean for a reason. With proximity to
the United States and Europe, spending a few days a year or investing in immovable property and even domicility in these countries is not an unattractive thought.
HNWIs are getting more financially astute and thinking long term, so these islands won’t necessarily be the playground of the rich and famous like Monaco but rather a complimentary lifestyle choice where affluent individuals can invest and settle down or at least have a second home.
What St Lucia has done with its Headquarters Act is quite clever and perceptive. Like Geneva, which hosts the United Nations Headquarters allowing substantial tax concessions, what St Lucia has started is no different. This would be attractive even to individuals who see this visionary forward thinking as encouraging. For individuals, what the leaders of the Caribbean states have signaled so far looks to be less onerous than other jurisdictions (60 days in a year for St Kitts and Nevis as opposed to the normal 183 days in many other countries like the UK, Australia, Spain, UAE, etc.)
TL: Anything else you’d like to share with our members?
MA & DR: Yes. With its physical stay requirements and registration of property that directly links clients to that Caribbean country, etc., indirectly, these tax residency programmes can only have a positive impact on the CIP programmes. It goes some ways in alleviating some common misconceptions that these CIP programmes help harbour unsavoury characters or are tax havens where people try to evade tax or hide their money.
What remains to be seen is how cooperative these countries will be in sharing its citizens and residents tax and residency information. In fact, when the OECD Council developed the Common Reporting Standard (CRS) in response to the G20 request in 2014, one of the first areas they turned their minds to was the CIP programmes and countries particularly in the Caribbean. CRS is about various countries agreeing to obtain information from financial institutions and automatically exchange that information on an annual basis. It sets out the information to be exchanged, what they needed to report, and the common due diligence procedures to be followed.
With some CIP countries already reporting clients who have been rejected, information sharing is unlikely to be an issue for these countries. For its CIP processing units, the CRS standards of due diligence are complimentary to their own processes and the sharing of information can only lend more credibility to both their CIP and tax residency programmes. That ought to be of some comfort to the OECD, EU and even to the Caribbean countries too.
Whilst CIPs started before these tax residency programmes, it could be that the latter could surpass the former in popularity. Tax residency programmes then would not necessarily be auxiliary benefits of CIPs but be the main reason why clients participate in CIP programmes.