Is There a Limit to the Misinformation Over the Cayman Islands Tax Transparency?

Whilst the recent headlines surrounding the statements of UK Chancellor, Mr George Osborne, at the G7 Conference on the subject of global tax evasion and avoidance once again achieved maximum points for political grandstanding, they left much to be desired from the perspective of the Cayman Islands and other Overseas Territories. In response to the clichéd assault on the Cayman Islands by Ms Fekter, the Austrian Finance Minister, the Chancellor responded not with an endorsement of Cayman tax transparency but as follows:

“All jurisdictions should take part in the initiative to stop tax evasion”

“I am determined that tax that is owed must be paid. We all agreed on the importance of collective action to avoid tax evasion and avoidance …And the Crown Dependencies and the Overseas Territories need to play their part in that drive. They will need to do more.”

It would have been nice to conclude that the Chancellor meant ‘more than Austria’, which of course in maintaining absolute old style bank secrecy, provides no transparency at all. But that is not what he meant. So his statement missed any reference to the significant and leading steps that have already been established in the Cayman Islands and other Overseas Territories to eradicate tax evasion, to establish the transparency that enables definitive analysis of tax avoidance by HMRC and the IRS, and the necessary conclusion that, whatever new measures might be established under FATCA, as far as the Cayman Islands is concerned additional tax revenues to the United States or the United Kingdom will, as a result of the existing transparency procedures, be statistically irrelevant.

It might also be mentioned that in his endeavour to sound ‘tough’ (the word appears repeatedly in the Reuters press release), the Chancellor chose to ignore the letter from the Premier of the Cayman Islands to the Prime Minister, Mr David Cameron, dated 25 April 2013 which welcomed

“The opportunity to be part of the pilot”…

“to promote an effective global mechanism for automatic exchange of information for tax purposes in which all (emphasis supplied) jurisdictions participate and where a common approach will not only ensure efficiencies of cost and resources but will also avoid the cost of multiple competing standards.”

The Premier’s letter had added somewhat optimistically as matters transpired:

“Given the significant commitments we have expressed in this letter it is our sincere hope that the Cayman Islands will received its fair share of recognition from Her Majesty’s Government”

In the event, not only did the Cayman Islands not receive any recognition for its globally leading legislative position with regard to tax transparency but clearly received no recognition for having committed on 15 March 2013 to sign up to the US FACTA arrangement and the similar pilot projects (known as Son of FACTA) between Britain, Germany, France, Italy and Spain and well before the Chancellor met with the G7 in Buckinghamshire on 11 May 2013.

But the confusion does not end with the misdescription of the Cayman Islands position with regard to these new initiatives. The misunderstanding suggested by the Chancellor reflects the popular confusion, propagated by the NGO’s and other extreme left-wing sources with which the Chancellor appears happy to align, not only as to the distinction between bank secrecy and a legitimate right to privacy but more centrally on the distinction between tax evasion and tax avoidance. With these essential distinctions blurred there is very little possibility of the United Kingdom Government coming to the right solution let alone for the right reasons.

An analysis of the legal position of the Cayman Islands with respect to tax transparency which the OECD after inspection has just described as “robust”, might have been helpful. Firstly, as the Cayman Islands Premier pointed out in her letter of 25 April 2013, the Cayman Islands has since 2005 engaged in proactive automatic exchange of information in relation to the bank deposits of all EU residents. The Chancellor stated “tax that is owed must be paid” but the publically available statistics (and available to the Chancellor) reveal that such deposits, which are fully disclosed, amount to a statistically irrelevant US$25 million out of a total of bank deposits and interbank bookings of some US$1.7 trillion. (It should also be noted that 92 per cent of such interbank booking and deposits are made by other banks which are themselves regulated by the FATF and under the Basel accords). Secondly, HMRC has had full rights to obtain any information in any Cayman Islands account whether banking or otherwise, but certainly including trust and corporate accounts since the 2009 Double-Tax Treaty with the United Kingdom. So too does the United States. Similar rights exist in favour of the IRS under the 2001 Cayman Islands - USA Tax Information Exchange Agreement. In total, there are some thirty of such agreements with the major industrialised countries but as recently as of 10^th May in a BBC televised interview, a representative of a charity suggested that these arrangements were useless as information did not extend to the beneficial ownership of Cayman Islands vehicles. That is simply nonsense. Details of all persons with 10 per cent beneficial interest in Cayman Islands vehicles will be recorded as will the identities of at least two directors to the latest FATF Know Your Customer (KYC) standard. If not, there must be an introducer’s certificate from an FATF approved entity in a jurisdiction making it plain where that information may be located.

A reasoned approach would have concluded that this standard, as verified in the Cayman Islands by both the FATF and the OECD, would have sufficiently disincentivised tax evasion and would have been worthy of credit. This is particularly so given that it exceeds, by a country mile, the information available in Austria where the ill-informed Miss Fekter accused the Cayman Islands of facilitating tax evasion. So too it exceeds the information available in Delaware, Wyoming and Nevada to name but three US states where the FATF and OECD standards are not of application at all. Indeed, a Delaware company can establish a corporate bank account without the service provider concerning himself as the beneficial ownership of the company.

This double standard has prevailed now for long enough and we would have anticipated the Chancellor in defence of the Cayman Islands and the Overseas Territories making precisely that point, rather than weighing in with the politically convenient but erroneous assumption that the Cayman Islands, and other Overseas Territories, were currently in breach of the recognised international tax transparency standard. The Chancellor was wrong to suggest that. The Cayman Islands are not.

But by then conflating tax evasion and tax avoidance the Chancellor perpetuates as great a misperception. Tax avoidance is a function of domestic legislation, well within the legislative competence of HM Government. No question can arise in the case of a Google, a Starbucks or an Amazon (assuming any of them are connected to the Cayman Islands which they are not), other than one where HMRC, or indeed the IRS could make full enquiry in the Cayman Islands pursuant to the respective Treaty. The problem with respect to tax avoidance arises not in relation to the offshore jurisdiction but in relation to the ineffective nature of the OECD anti-transfer pricing mechanisms which have been legislated into domestic law and which manifestly fail to prevent base erosion and profit shifting. The main cause here is the ‘abusive’ use of double tax treaties, notably those of Ireland and the Netherlands (but there are others) which enable the shifting of profits from high tax jurisdictions to a low tax jurisdiction in a manner which appears under current domestic legislation perfectly lawful. It is careless at best for the Chancellor to suggest that these practises based as they are on lawful tax avoidance are in any way a fault of the Cayman Islands or other Overseas Territories. Nor will moral outrage do as a basis for tax collection. As a Google representative has stated;

“We comply with all the tax rules in every country in which we operate”.

If he is wrong about that, it is for the Public Accounts Committee and HMRC to make the investigation onshore; the existing Cayman Islands legislative framework would assist if relevant.

Tax assessments must operate in accordance with the rule of law or we erode an essential tenet of a civilised society. If the onshore legislation on tax avoidance does not work, the solution is to amend the onshore law; this type of political finger pointing at the offshore jurisdiction is simply a transparent political exercise in blame deflection.

Mr Angel Gurria, Secretary General of the OECD, puts the issue of tax avoidance more correctly. He is quoted in the Financial Times of 29 April 2013;

“We cannot blame business for using the rules that policy makers themselves have put in place.”

He did not add that those tax rules were based on the OECD’s ten year analysis and recommendations for domestic legislative enactment on transfer pricing.

But no reconsideration of onshore tax avoidance policy and legislation has the slightest bearing on the FATCA legislation, the effects of which in relation to the Cayman Islands, although extremely burdensome and administratively complex, are unlikely to raise any additional revenues whatsoever for the benefit of the United Kingdom or the United States Treasury. This is simply because not only is it the practice of Cayman Islands financial institutions to favour institutional and not private client business but because of the point the Chancellor misses completely. No well advised tax evader would have considered the Cayman Islands as a sensible base given the unrestricted powers of enquiry of HMRC and the IRS. The paucity of any formal enquiry from either is indicative but does not feature in the debate.

The problems with FACTA require separate and lengthy consideration as they are many fold. Firstly, FACTA requires information to be collated in respect of an account holder which does not correspond with the FATF required information already on file, notably the US version requires a US Federal Tax paying identifying number and the UK legislation a National Insurance number, neither of which feature in the FATF documentary requirements. Secondly, FACTA requires the foreign institution to undertake an analysis of United States or United Kingdom tax law on the question of whether or not the individual account holder or an entity controlled by a resident account holder is indeed resident in the United States or the United Kingdom. This is not simply an exterritorial application of domestic tax law but an exterritorial application that could only normally be expected to be properly undertaken by a qualified practitioner in either US or UK tax law.   It is a wholly inappropriate burden to place on an institution of a foreign country. Other anomalies abound; no guidance is given, for example, on how the role of a ‘Controlling Person’ of a foreign entity is supposed to mesh with the UK test for residence of a company for UK tax purposes.

The suggestion that the costs and burden of legislation be imposed in a handful of Overseas Territories (there is no possibility of it applying reciprocally in the US without Congressional approval) is egregious.   But that point too is lost in the commentary;

“Of course”, added Mr Osborne

“You have to respect that many of these Territories have important industries and we don’t want to unnecessarily damage them”.

But the cost of the application of these new FATCA provisions is substantial and should not have been contemplated without some better analysis of the likely revenue to be raised than the derisorily suggested US$21 trillion of ‘offshore tax evasion money’ calculated by the Tax Justice Network on the back of an envelope. The US$25 million known to be the deposit base of European Union depositors in the Cayman Islands is a more correct number. Had the Chancellor been aware of that fact and undertaken an analysis, he might have been somewhat less enthusiastic as to the likely benefits of these new and unwelcome tax transparency mechanisms and as to their prospective benefits to the UK Treasury.

Nor is there proportionality in the debate. It follows also that if a global tax evasion problem exists, the solution must be global. Of the 13 billion Euros owed in unpaid tax by 1500 tax debtors, in Greece, only 19 million Euros has been collected. Imposing increasingly burdensome legislation on the Cayman Islands and other Overseas Territories to chase phantom tax evasion does nothing to cure the real problems we know to exist. What can also be said, with certainty, is that there is very little prospect of the FATCA legislation becoming a globally accepted standard, save where authority exists to impose it unilaterally. There must now be a limit to what can be anticipated of the Cayman Islands and the Overseas Territories in terms of further initiatives without some substantial levelling of the playing field between the offshore and the onshore jurisdictions.