AuthorWorthy, Ruya

In 2016, before he became Chancellor of the Exchequeur, the then-Conservative MP, Rishi Sunak, in a paper produced by the Centre for Policy Studies, argued that:

Brexit will provide the UK with new economic freedom, and the Government should take the opportunity to create Free Ports across the nation. Free Ports will simultaneously: increase manufacturing output, create employment regionally where it is most needed, and promote trade. Using Free Ports to drive economic growth will also re-connect Britain with its proud maritime history as a trading nation and act as a beacon of British values, signalling the country's openness to the world. (1) However, opponents of such ports contend that:

Instead of 'levelling up' the economy, they would entrench the power of corporations and deepen market competition. (2) The imminent departure of the United Kingdom from the European Union has meant that, in some economic circles, thoughts are turning towards the establishment of free ports. These are extremely secure storage facilities, often situated next to airports and docks, which allow 'temporary' tax exemption for an unlimited period of time. (3) These facilities exist outside the formal territorial jurisdiction of any country and are usually privately owned, though in some instances States have taken control of the warehouses. (4)

Soon after becoming Prime Minister, Boris Johnson, as part of the push towards a Brexit deal, proposed the establishment of ten free ports in areas of the United Kingdom most in need of economic growth (5) and a consultation paper was launched in February 2020. (6) "We have just turned the page on a great new chapter for this country. Freeports will let us sail onto our next, great, prosperous destination." The core benefits which the Government proposes to offer to businesses bringing goods into in a free port site are:

* Duty suspension--No tariffs, import VAT or excise to be paid on goods brought into a Freeport from overseas until they leave the Freeport and enter the UK's domestic market.

* Duty inversion--If the duty on a finished product is lower than that on the component parts, a company could benefit by importing components duty free, manufacture the final product in the Freeport, and then pay the duty at the rate of the finished product when it enters the UK's domestic market.

* Duty exemption for re-exports--A company could import components duty free, manufacture the final product in the Freeport, and then pay no tariffs on the components when the final product is re-exported.

* Simplified customs procedures--the Government intends to introduce streamlined procedures to enable businesses to access Freeports.

Whilst free ports are permitted within the European Union, most of the existing free ports were established before the host State joined the EU (7) and it is argued that their potential is limited by virtue of the Union Customs Code and EU State aid rules. Leaving the European Union would, it is argued, allow the UK to take advantage of the new economic freedom it will enjoy. The Conservative Party confirms that the UK is legally equipped to implement free ports into the economy under Section 100 A of the Customs and Excise Management Act 1979 (CEMA). (8) The rationale for introducing free ports is to provide new opportunities and jobs to the coastal parts of the country by boosting trade and cutting through customs red tape. (9) As the model to be adopted appears similar to that of the free trade zones (FTZs) in the United States (as to which, see below), critics have expressed concern that money laundering and tax fraud may increase in the UK as a result of such a move.

Although these proposed warehouses will not be specialised in art storage, it is likely that they would be used by collectors. The British Art Market Federation (BAMF) published a report in 2017 highlighting that in order to maintain its position within the global art market, it must attract the highest value of artworks at any one time. (10) This would in turn attract international buyers and stimulate trade. HMRC records indicate that over the past three years the value of art imports has varied from 2.8 billion[pounds sterling] to 4.1 billion[pounds sterling], whereas exports have ranged from 4.7 billion[pounds sterling] to just over 6 billion[pounds sterling]. (11) Despite the UK market having attracted the highest number of visitors to some of the world's major art fairs, auctions and exhibitions, the majority of the works sold are being exported to other jurisdictions. Such figures highlight that if the UK were to introduce free ports similar in structure to those of the US, the UK art market may see greater changes. Such developments would boost UK art services as part of the tax-free ecosystems that intrinsically develop within free ports.

Progress in the UK art economy through the introduction of free ports, however, would depend on the exact nature of the regulations which are implemented. For the Government to endorse free ports in the UK, strict anti-money laundering regulations would need to be put in place, which would bring the UK free ports in line with the regulated Geneva Free Port and Le Freeport Luxembourg. In this case, the advantages offered by the UK free ports would lie primarily in their location for UK-based collectors and dealers and the availability of numerous transport options compared to Geneva and Luxembourg.

Revelations about the use of free ports were made in 2016 with the leak of the 'Panama Papers' from the law firm Mossack Fonseca when it was revealed that politicians, prominent businessmen and notably art world professionals had been using such ports as well as offshore trusts to conceal ownership of assets. (12) The leaks did not reveal whether or not laws had been broken, nor did they demonstrate the way in which these mechanisms have essentially impacted the art market. (13) The Panama Papers did, however, reveal the location of certain artworks and their shell owners, and demonstrated the effectiveness of offshore mechanisms in masking the ultimate beneficial owners (UBOs) of goods stored in the warehouses. (14)

With free ports such as Singapore, Beijing and--until January 2020--Geneva, not requiring the disclosure of the ultimate beneficial owners (UBOs) of goods held within their warehouses, shell companies registered offshore are able to mask such ownership.

The secrecy of free ports coupled with the use of shell companies to disguise the UBOs, also mean that it is difficult to determine whether the artworks are stolen, bought with illicit gains or are simply there as an investment. (15) Thus, had it not been for the Panama Papers leak, it might not have been possible to bring proceedings in the Maestracci case. (16) It is likely that a number of looted artworks are stored within free ports under shell company names, and out of the eyes of the public, in order to avoid restitution claims and may continue to be so for many lifetimes to come.

The global nature of the art market, the increasing interest in art as a commodity for investment and the large sums of money changing hands as a result have necessitated regulation vis-a-vis tax evasion and money laundering. The increasingly high valuation of artworks and the resulting onerous transaction costs come with heavy tax liabilities. When the purpose of the art purchase/transaction is investment rather than enjoying the piece on a wall, its destination will in many cases be a storage unit. Such an investor will naturally wish to seek the best ways to reduce the cost of owning and keeping the artwork. The precise scope of the tax exemptions offered by free ports will vary depending on the jurisdiction, but these will generally apply to indirect taxes such as import duties and (for EU States) VAT (Value Added Tax) (and its equivalents elsewhere). This paper examines the implications of storing art at free ports in different parts of the world and the legal constraints applicable thereto.


The Art Market in Context

In recent years, the art market has witnessed a string of record-breaking prices for works of art at auction. In May 2019, Jeff Koons' stainless steel Rabbit sculpture reached USD 92,210,000 (buyer's premium included) making it the highest achieved price for a living artist to date. (17) At Christie's Post-War and Contemporary Art Evening sale in November 2017, what was believed to be the last circulating Leonardo Da Vinci in private hands--Salvator Mundi--sold for an astronomical USD 450,312,500 (buyer's premium included) making it the most expensive painting ever sold. (18) As the net worth of certain individuals increases exponentially, and the effects of anti-money laundering regulations result in tightening of the compliance rules for various financial investment avenues, auction houses and dealers are facing a new era of clientele.

Art, which was at one time purchased for aesthetic and social status, is now deemed in some quarters to be an alternative investment asset. (19) Artworks possess certain inherent qualities which may attract investors. The opaque nature of the art world allows for private sales to take place without the sale price being published. This information asymmetry provides opportunities, if the parties so desire, to sell at a higher margin, declare a lower value for tax purposes and to shield identities. As with stocks, the art market follows various trends; if an investor is fast and knowledgeable on the market, he or she has ample profit opportunity. There are of course various risks that come with investing in artwork as opposed to stocks, such as its physical vulnerability. Damage to a work may lead to devaluation and therefore purchasers must take considerable care when selecting a storage location.

The globalisation of the art trade, coupled with the commercialisation of art from Asia, Africa and the Middle East has led to commercial...

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