Transparency cooperation requires a level playing field

Published by Cayman Journal – July 2013

The Cayman Islands is willing to step up to the plate when it comes to requests for information, but only if the playing field is level, writes Cayman Finance. 

The Cayman Islands has come under constant pressure to agree to information sharing on its financial services clientele. First there was the United States’ FATCA legislation, then a similar agreement request with the UK, then a multi-lateral pilot with G5 countries, there are calls for us to become part of an old OECD convention, and finally British Prime Minister Cameron recently proposed the creation of a central registry of beneficial ownership.

The Cayman Islands has demonstrated a willingness to participate in information sharing on an on-demand basis that has led the way in the offshore world, yet still more is being demanded, even when those demanding the information are not providing similar information on their own clientele or collecting that information from their own citizens.

Foreign politicians have clearly been very busy in recent months, driven by the needs of cash-strapped governments and politicians who need to find a positive message for their re-election aspirations. It seems the offshore financial services industry has become a target, in the mistaken belief targeting offshore will somehow solve the financial mire their countries are in.

There is, however, no decent research to substantiate the thesis that going after offshore jurisdictions will make even a small dent in the deficit holes of foreign governments’ coffers. This is because the evasion figures are a small fraction of what is suggested and unlikely to surpass the cost of implementation of these systems. Tax avoidance, on the other hand, is legal and has been used by some companies to be able to conduct business and make investments, many of which may not be otherwise viable, so if all tax avoidance schemes were to be made unlawful (therefore converted into “evasion”) global economic activity would decrease, and governments would not realise anything near to the figures being projected by sectors of the media and some NGOs.

Lastly, the indirect effect of increasing effective tax rates should be considered. Apple is a clear example. If the company pays more taxes, its stock and dividends will suffer. Pension funds are the biggest holders of that stock, meaning the lucky pensioner’s will have less disposable income, decreasing consumption, and the unlucky ones will further depend on social security – in both, increasing public deficits. In the end, unless governments control their spending impulses, things are bound to get worse.

Cayman leads compliance culture 

The Cayman Islands has been the poster boy for compliance with onshore pressures to supply information, having committed to FATCA – a system by which information of US beneficiaries of accounts is to be submitted to the Internal Revenue Service. Cayman Finance supported this initiative and was instrumental in analysing the different avenues of implementation that ultimately took the jurisdiction to agreeing to sign IGA Model 1 – a government-to-government exchange of information.

The UK, realising its overseas territories were about to engage in the sharing of information with US authorities, then required the Cayman Islands to participate in the signing of a similar agreement, which this jurisdiction duly agreed to undertake.

Shortly after that request, the G5 and a number of other countries also requested a similar agreement to be established, and the pilot for automatic exchange of information was created. Significantly, the Cayman Islands not only supported it but was the first Overseas Territory and the first country outside the G5 and Europe to commit to it.

Despite the significant challenges and costs implementation would undoubtedly carry, the Cayman Islands made its stance clear and agreed to participate in all of the above initiatives. This is because up until this point the initiatives were aligned with the industry and the Government’s joint view the jurisdiction did not want to participate in any illegal activities – it was happy to provide genuinely interested onshore authorities with the information they might need to proceed, if they felt illegal activities were occurring.

Old convention sees new light of day 

However, we are now presented with an old initiative, a convention dreamt up by OECD bureaucrats that has been long forgotten because it had no political support. But of course, any promise of 
government revenue that will not impact the average voter is a hit at the moment. The convention adds significant scope and goes far beyond the exchange of information as has been previously accepted. In an extremely simplified manner, the convention has four main objectives:

  • the automatic exchange of information;
  • enforcement of tax rulings;
  • to fight avoidance as well as evasion; and
  • spontaneous reporting.

As previously stated, the Cayman Islands has no problem agreeing to the first objective, and while the second objective has new requirements, the issue of costs is covered within the convention, so as long as the Cayman Islands government is not required to bear these costs, Cayman Finance does not have an issue with this second objective. We are not in the business of protecting tax evaders.

The last two points are more complicated and intimately related. The convention proposes information that might be of interest to another nation can be shared, although it has not been solicited, and that not only includes the possible unlawful reduction of tax (evasion) but the lawful one (avoidance).

At this point one has to ask if the bureaucrats at the OECD are going to be reported, as they do not pay income tax being employed by the OECD. Or how about the millions of United States’ citizens who hold a mortgage on their homes and have more than enough investments to pay them off, effectively reducing their tax bill?

The problem is there is no clear definition of good and bad tax avoidance or a sensible definition of what is aggressive tax avoidance. We have all read the news on Starbucks, especially when they appeared to have voluntarily agreed to pay additional taxes after the news stories broke, but how do you quantify how much exactly is enough tax? 5 per cent? 10 per cent? 40 per cent?

The good news is the convention is a framework under which bilateral agreements will have to be negotiated, and countries can file their reservations. The Cayman Islands should ensure through those reservations the jurisdiction defends its right to maintain the revenue system it has chosen and that it, the tax authority as well as the private sector, is not forced to bear significant additional costs or become judges of what is acceptable and what is not in terms of tax avoidance.

On this basis Cayman Finance supported the signing of the convention as a new way to demonstrate our commitment to a “level playing field” and as it becomes a globally accepted standard.

Public registry too risky to contemplate 

Lastly came the centralised registry of beneficial ownership proposed by Mr. Cameron. Media reports state some sectors of the media and NGOs would like such a registry to be public. The risks of such public registry are so vast that it would take a separate article to discuss them. Even the UK seems to have dropped the concept of such registry being made available to the public.

The Cayman Islands should continue to announce to the world how far ahead the jurisdiction is in maintaining such information, especially when compared to the likes of jurisdictions such as Delaware. Cayman Finance believes a centralised registry would add significant costs at little-to-no benefit in comparison with the current system in Cayman that permits the information to be available to competent authorities upon request and the multilateral implementation of FATCA that requires the reporting to be made on the ultimate beneficiary; it fully supports the decision of the government to conduct a proper analysis of this alternative.

Cayman Finance continues to support the implementation of widely-adopted global standards that ensure a level playing field. In the area of beneficial ownership of companies there is much to be done by others to be as transparent as Cayman already is.

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