Brunei: A Tax Haven Or Just A Myth?

Brunei Darussalam, or the Abode of Peace, is a tiny, oil-rich country that has been reborn as a tax haven. In 2002, the country's monarch, Sultan Hassanal Bolkiah, set out to transform Brunei into an offshore financial centre similar to Bermuda or the Cayman Islands. This move was in response to the country's declining economy, largely due to falling oil prices and Asia's economic collapse in 1997.

The Sultan's plan was to reduce Brunei's dependence on oil and gas, which accounted for 94% of its exports at the time. With no domestic stock exchange or bond market, and no publicly traded companies, Brunei was starting from scratch. However, with billions of dollars to spend, the Sultan hired lawyers with experience in Bermuda to lay the legal groundwork for the Brunei International Finance Centre.

While the term tax haven is often used pejoratively, it generally refers to a place with very low tax rates for non-domiciled investors. Traditional tax havens, like the Cayman Islands, are open about their zero tax rates and, as a result, have few bilateral tax treaties. In contrast, modern corporate tax havens have non-zero headline tax rates and high levels of compliance with international organisations like the OECD.

It is worth noting that developments over the past decade have made it more difficult for individuals and corporations to use tax havens for tax evasion. However, complex structures and secrecy laws still enable very large and multinational corporations to shift profits and take advantage of low effective tax rates.

Brunei's transformation into a tax haven

Brunei's transition into a tax haven began in 2000 when the Sultan hired Robert Miller, a lawyer with experience in Bermuda, to lay the legal groundwork for his Brunei International Finance Centre. As the head of supervision, Miller drafted laws to ensure Brunei complied with international laws against money laundering and tax evasion. The Sultan, who rules without a legislature, imposed those laws by royal fiat.

The Sultan's plan was to transform Brunei, a country roughly the size of the Australian Capital Territory, into an offshore financial centre similar to Bermuda or the Cayman Islands. In the finance industry, offshore refers to legal jurisdiction rather than geography. People typically invest through such centres, otherwise known as tax havens, to avoid taxes in their home countries or to ensure banking secrecy.

At the time, Brunei had neither a domestic stock exchange nor a bond market. Not one of its companies was publicly traded anywhere in the world, including its largest: Brunei Shell Petroleum, a 50-50 joint venture between the government and Royal Dutch/Shell Group. The sultanate also had no central bank; its currency, the Brunei dollar, was pegged 1:1 to the Singapore dollar.

The Sultan's motivation for this transformation was to reduce Brunei's dependence on oil and gas, which accounted for 94% of exports. The trouble started in 1997 when falling oil prices and Asia's economic collapse battered Brunei's economy, which depended almost entirely on the exportation of oil and natural gas. That same year, a company run by one of the Sultan's brothers, Prince Jefri, collapsed under $US3.5 billion of debt.

By 2001, Brunei's per capita gross domestic product had fallen to $US12,600, down 44% from $22,600 in 1981. The Sultan, who is not only Brunei's monarch but also its prime minister, finance minister and defence minister, realised that his sultanate's natural wealth would not be enough to ensure prosperity forever. While the monarch's 345,000 subjects still paid no taxes and still enjoyed free medical care and education, he wanted to diversify the economy.

The first step in this diversification was to award the country's first offshore banking licence to the Royal Bank of Canada. The so-called restricted licence allowed the bank to accept deposits only from people living outside the country and to provide those people with investment services such as money management. The Brunei branch opened on 2 August 2000.

The next step was the establishment of the International Brunei Exchange, which was scheduled to go into operation in October 2002. The initial plan was for people to trade futures contracts on individual US and Asian stocks, such as shares of Microsoft Corp and Taiwan Semiconductor Manufacturing Co. By 2004, investors would be able to trade through the IBX the shares of companies listed on various Asian exchanges.

As a Muslim country, Brunei was also able to lure business with investment products that adhered to Islam's ban on paying and receiving interest. To comply with this view of Islam, banks typically incorporate fees into transactions to replace interest costs. One such technique is murabaha, where a bank buys goods and sells them to a customer at a mark-up, with the customer's payment deferred until a future date, thereby avoiding interest payment.

Brunei's economic problems

Brunei, a small, oil-rich country, has been referred to as a tax haven. However, the country has faced economic problems, which threaten its prosperity and social stability. Here is an overview of Brunei's economic issues:

• In 1997, Brunei's economy was hit hard by falling oil prices and the Asian economic collapse, as the country's economy relies heavily on the export of oil and natural gas.
• A company run by one of the Sultan's brothers, Prince Jefri, collapsed under a debt of $US3.5 billion in 1997.
• By 2001, Brunei's per capita gross domestic product had dropped to $US12,600, a decline of 44% from $22,600 in 1981.
• The Sultan sued his brother, Prince Jefri, in 2001, alleging that he had misappropriated $US15 billion intended for overseas investment. The case was eventually settled out of court, with Prince Jefri agreeing to return the funds.
• Brunei's economy is highly dependent on oil and gas, which account for 94% of its exports. Recognising this overreliance, the Sultan aims to reduce this dependence and diversify the country's economy.
• Brunei lacks a domestic stock exchange and a bond market. None of its companies, including Brunei Shell Petroleum, are publicly traded.
• The country has no central bank and pegs its currency, the Brunei dollar, to the Singapore dollar at a 1:1 ratio.
• The combined assets of the three domestic and seven foreign banks operating in Brunei total just $US6.6 billion, a relatively small amount.
• Compared to other tax havens, Brunei has fewer banks registered and fewer investment funds, which may make it less attractive to investors.
• The nearby offshore centre of Labuan, Malaysia, just 45 kilometres away, could be seen as competition for Brunei as a financial centre.

The Sultan's lavish lifestyle

Brunei's Sultan, Hassanal Bolkiah, is one of the world's wealthiest individuals, with a net worth of $30 billion. He is known for his lavish lifestyle, which includes a fleet of luxury cars and private jets, a grand palace, and extravagant expenditures on personal care. Here are four to six paragraphs detailing the extravagant lifestyle of the Sultan of Brunei:

The Sultan's Car Collection:

Hassanal Bolkiah is known for his love of luxury cars, with a collection of over 6,000 vehicles worth an estimated $5 billion. His collection includes rare and exotic models from brands like Rolls-Royce, Ferrari, Mercedes-Benz, and Bugatti. He is said to own 500 Rolls-Royce and 300 Ferraris, among other prestigious brands. This collection showcases his passion for automobiles and is one of the largest in the world.

The Sultan's Palace:

The Istana Nurul Iman Palace, the official residence of the Sultan, is worth over Rs 2550 crores. It boasts an impressive 1,788 rooms, 257 bathrooms, and five swimming pools. The palace also has 110 garages and air-conditioned stables that can accommodate 200 horses. This grand residence is not only a symbol of the Sultan's wealth but also showcases his extravagant taste.

Extravagant Expenditures:

Hassanal Bolkiah is known for his extravagant expenditures, such as spending over $20,000 on a single haircut. He flies his favourite barber from London, where they work at the prestigious Dorchester Hotel in Mayfair. The Sultan's choice of transportation is equally lavish, as he owns several private jets, including a Boeing 747-400 plated with gold and equipped with luxurious amenities such as a living room and bedroom.

The Sultan's Jets:

As mentioned earlier, the Sultan owns several private jets, including a Boeing 747-400, a Boeing 767-200, and an Airbus A340-200. These jets are equipped with luxurious amenities and are often used for long-distance travel. The Boeing 747-400, in particular, stands out for its gold plating and luxurious interior.

The Sultan's Family and Marriages:

Hassanal Bolkiah has had multiple marriages, and his personal life has been the subject of media scrutiny. He has three wives and, as of 2012, five sons and seven daughters. His second wife, Mariam Abdul Aziz, was stripped of her royal titles following their divorce in 2003. His third marriage to Azrinaz Mazhar Hakim also ended in divorce in 2010, resulting in a similar loss of titles and honours for his wife. Despite these personal controversies, the Sultan continues to lead a lavish lifestyle.

The Sultan's Influence and Power:

Hassanal Bolkiah is not only the Sultan of Brunei but also holds multiple governmental roles, including Prime Minister, Minister of Defence, and Minister of Finance. He is one of the few remaining absolute monarchs in the world and has considerable influence on a global scale. He has received honorary doctorates from prestigious universities and holds honorary titles in the British, Indonesian, and Royal Navies, as well as the British and Indonesian armed forces.

The impact of falling oil prices

Brunei is a small but rich country, with its economy highly dependent on oil and gas exports. The country's heavy reliance on the oil and gas sector has afforded it economic prosperity and political stability since its independence in 1984. However, the fall in oil prices since 2013 has forced the government to take preventive measures and be more concerned about its fiscal capacities.

Impact on the Economy

The fall in oil prices has had a significant impact on Brunei's economy, which is heavily reliant on the oil and gas sector. The decline in oil prices has resulted in a decrease in government revenue from oil and gas exports, affecting the country's overall economic growth. The slowdown in the oil and gas sector has also led to a reduction in private sector activities, as many companies in this sector are dependent on government contracts.

Impact on Employment

The fall in oil prices has also impacted employment in Brunei. The oil and gas sector is a major employer in the country, and the slowdown in this sector has resulted in job losses. Additionally, the decline in economic activity has led to a reduction in the number of foreign workers in the country, as companies cut costs.

Impact on Government Finances

The Bruneian government's finances have been significantly affected by the fall in oil prices. Oil and gas revenues account for a large portion of the government's income, and the decline in prices has resulted in a decrease in revenue. This has forced the government to take measures to contain current expenditures and reduce capital expenditures. The government has also had to rely on transfers from the Brunei Investment Agency (BIA) to finance budgetary shortfalls.

Impact on Trade and Current Account

The fall in oil prices has also impacted Brunei's trade and current account balances. The country's exports consist mostly of oil and gas, and the decline in prices has resulted in a decrease in the value of these exports. This has led to a deterioration of the trade balance and the current account surplus.

Impact on Monetary Sector

The monetary sector in Brunei has also been affected by the fall in oil prices. Commercial banks in the country have experienced a decline in net foreign assets, as they have had to provide financing for companies facing economic difficulties. There has also been a shift in customer preferences towards higher-yielding foreign currency deposits, impacting the banks' liabilities.

Policy Responses

In response to the falling oil prices, the Bruneian government has taken several measures to mitigate the impact:

• The government has attempted to contain current expenditures and reduce capital expenditures.
• Transfers from the BIA have been used to finance budgetary shortfalls.
• There has been a focus on economic diversification, with an emphasis on promoting downstream oil and gas activities, developing agriculture and fisheries, and positioning Brunei as a service hub.
• The government has also targeted the development of the financial sector, including the provision of clearing and settlement services and the establishment of a domestic securities market.

The role of the International Brunei Exchange

The International Brunei Exchange (IBE) is a stock exchange that is currently being established in Brunei. The exchange is part of the country's efforts to diversify its economy away from oil and gas and develop a fund management industry.

The IBE aims to meet the needs of investors in Islamic and ethical securities. It will provide a platform for the global buying and selling of Shariah-compliant investment products, fund management operational support services, and the valuation and rating of Islamic investment vehicles.

The development of the IBE is supported by the Brunei Ministry of Education's Strategic Plan 2018-2022, which focuses on teacher leadership, career management, the deployment of technology to promote financial literacy, and the use of ICT in classrooms.

The UK, through its trade advisers in Brunei, has identified opportunities for UK businesses in the IBE, particularly those with relevant experience in the success of such ventures. The UK has close links with Brunei as a Commonwealth country, and many Bruneians have studied in the UK and have a taste for British goods.

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