In the past I have posted numerous articles on freeport art storage and the tax incentives in using them. Artsy recently posted a very interesting article on Freeports and discusses the economic benefits and some of the various privacy benefits, but which can also cause a lack of transparency.

Artsy reports (follow the source link below for the full article)
Freeports as “Special Economic Zones”

It is difficult to imagine a reason to keep art works in a freeport unless there is speculation going on. If you are collector of fine art, you want to be able to see and to appreciate what you own. But if you are a speculator, all you need is private and secure storage, since you are betting that the work is going to increase in value. So the freeport is the perfect place to park your speculative art purchases, because they cannot be traced to you and no government can tax you on these assets.

Of course if you want to corner the market on the work of a certain artist and wait for it to escalate in value, the freeport is your best bet. Everyone in the art world has heard stories of exhibitions of young contemporary artists being bought out by enterprising collectors; Charles Saatchi’s early purchases of works by Damien Hirst and his clique of YBAs is one of the most famous examples. Such works had to be stored somewhere, and the freeport is the most secretive place to do so, with the advantage that if the work changes hands there, no sales tax needs to be paid either. It could be argued that this is all anecdotal, but opportunities are being seized and growth is expected: “28% of both the art collectors and art professionals surveyed said they had already used or had a relationship with a freeport provider, and 43% of the art professionals said that their clients were likely to use a freeport facility in the future, versus 42% of the art collectors who said they were likely to use such a facility,” according to Deloitte and ArtTactic.

As an off shore mechanism, the freeport is an expansion of the concept of free trade that, despite its name, actually tends to benefit the most privileged investors at the expense of others. This is especially visible in the development of the global economic system in the second half of the twentieth century. At this moment in history, as countries were throwing off their colonial shackles and attempting to compete in the increasingly globalized world of trade, one of the main limitations was that colonial economies were largely dependent on raw materials and cash crops and therefore, after independence came, many countries struggled with the challenge of economic independence. The biggest success stories of these years were a group of mostly small Asian countries known as the Asian Tigers, which transformed their economies through export orientation, in effect, creating, packing, and shipping what consumers in wealthier nations wanted. Singapore, Taiwan, Korea, and Hong Kong created strong economies partially through opening tax-free zones, called export processing zones, special economic zones (SEZs), or other euphemisms for providing services tax-free in certain areas in order to lure foreign direct investment from multinational corporations.

This trend has accelerated globally in the twenty-first century and has created political backlashes around the world. The burgeoning string of freeports around the world is an echo of the SEZs, demonstrating that many countries are expanding their tax-free services not just to manufacturers but to investors in luxury goods. These duty-free zones are often placed at airports to facilitate the acquisition and storage of vast quantities of luxury goods that wealthy investors do not have to pay tax on. These spaces, outside of the jurisdiction of any national regulatory body, allow art to be securitized and moved off shore, and their operations parallel in many ways the offshore financial transactions that have grown so numerous in the past decades.

Freeports as secrecy jurisdictions
The first characteristic freeports share is the concept of “secrecy jurisdictions”. In his expansive account of the development of the offshore financial world, journalist Nicholas Shaxson underlines how certain countries, beginning with Switzerland, have regulated financial secrecy as a means to ensure the discretion of the banking industry and protect assets held in these countries from external regulatory mechanisms. This does not mean, of course, that all money in Swiss (or Cayman) banks amounts to ill-gotten gains, but it does mean that no one can ever find out whether it does or not.

The Panama Papers leak of 2016 led to many revelations about the use of secrecy jurisdictions by prominent businessmen, politicians, athletes, and art world insiders. A number of articles spelled out how dealers like the Nahmad family and collectors such as Joseph Lewis and Diana Ruiz-Picasso used offshore companies to secret away art and money that could not be traced to them due to the structure of these off shore mechanisms. What is noteworthy in retrospect is that these revelations have not shown that laws were broken, nor have they exposed a complete picture of how offshore mechanisms have altered the art market.

The same is true of what is known about freeports. No one can tell if the art held in them was stolen, bought with drug money, or simply a prudent investment expected to yield great returns in time. The secrecy of freeports, combined with offshore corporate entities and the unregulated nature of the art market, means that it is very difficult to connect owners with works of art that are stored in a freeport. No government can regulate, tax, or investigate property stored inside a secrecy jurisdiction, and so, for all intents and purposes, the art in freeports becomes invisible.

This secrecy and lack of regulation are a kind of loophole in the regulation of the global economic system and international law. If you are a national government, you can charge excise tax on works of art leaving the country and traveling to another, and based on the rate you set, it is possible either to incentivize the export of works of art or to provide barriers to their export.

But to put a work of art into a freeport is not exporting it, in legal terms, because it is not entering another country. So no duties need to be paid and no laws are actually broken. Such a loophole is an inducement to arbitrage; it actually suggests to an individual how he or she can skirt the law and get away with it. Tax avoidance is the reason offshore financial centers exist, and this also true of freeports. By generating the means to avoid duties in a quasi-legal framework, it becomes very difficult indeed to enforce national laws. Individuals and corporations can game the system to ensure that their interests are served best.
Source: Artsy 

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