Mr. Romney and the Cayman Islands

Published in IFC Review, March 2012

It is remarkable testimony as to the failure of the public relations campaigns of the offshore jurisdictions, and the Cayman Islands in particular, that of the 313 news items from around the world published on 25 January 2012 concerning Republican Presidential candidate Mitt Romney's overseas investments, not one journalist properly comprehended the involvement of the Cayman Islands nor chose to comment as to the propriety of Mr. Romney's investment.

The bias demonstrated by this reporting tsunami was no better summarised than by the two journalists Mr. Brian Ross and Ms Megan Chuchmach jointly responsible for the attention grabbing ABC news piece, who reported:

"Mr Mitt Romney has millions of dollars of his personal wealth in investments funds set up in the Cayman Islands, a notorious Caribbean tax haven"

It is interesting to note how far we have descended from an accurate base line that nothing more, apparently, needs to be said to support an implication of wrong doing than to use the expression "notorious tax haven". Some reports were less pejorative, but none the less damming, referring sometimes to a "noted tax haven" or adopting the kinder, gentler and possibly more accurate reference to an "historical tax haven".

But as an exercise in vacuous populist grandstanding, the ABC news report was handily trumped by a new expert on offshore financial centres, John Cryer, the Labour MP for Leyton and Wanstead, who stated assuredly in a motion in the House of Commons:

"As a former member of the Treasury Select Committee, I think it is a disgrace that the Cayman Islands, a tax haven, can enable wealthy corporations and individuals such as Mitt Romney and others in the wealthiest 1% to avoid tax and still be cloaked in secrecy. Meanwhile, all across the Western world, hard working people are seeing their living standards stagnate or reduce".

As commentary goes this is markedly less speculative than President Obama's reference to 12,000 companies in a building in the Cayman Islands of itself being evidence of a "tax scam". But the truth is that both comments whilst long on socialist propaganda carefully skirt the truth. The expression "tax scam" is not, of course, a term recognised by law; the President was no doubt careful not to use a technical term incorrectly, Mr. Cryer is less careful, and the implication of wrongdoing by Mr. Romney and, somehow, the Cayman Islands is the stronger. Mr. Cryer and his colleagues in the House continue that they are "alarmed" at the use of the Cayman Islands for these purposes. But what is missing is any technically supportable reference to wrong doing.

And with good reason. In fact, Mr. Romney's investments in the Cayman Island vehicles have no different a legal and tax status under United States law than they would have had if the investments had been made in a Delaware investment fund, with possibly one distinction. Since the returns from Cayman Islands investment funds are very often superior to those of domestic United States funds, the annual tax paid by Mr Romney to United States Treasury as a result of his Cayman Islands investments is no doubt greater.

So let us analyse why the journalistic criticisms of Mr Romney and the particularly hysterical comments of Mr Cryer are ill founded.

Firstly, reliance on the expression ‘tax haven’ as being of itself a pejorative term is hopelessly outdated. Even the OECD and no lesser personage than President Sarkozy have accepted that this terminology with its implication of banking secrecy and tax evasion is of no relevance to the Cayman Islands. The expression "cloaked in secrecy" in the context of the Cayman Islands is pure nonsense. This is so because the IRS, the Inland Revenue (and others) have absolute authority to make investigations in relation to any account in the Cayman Islands under the relevant Tax Information Exchange Agreements which date back over a decade. But the critics of the hard left, notably Jack Blum of the Tax Justice Network, continue in their endeavours to conflate the absence of direct taxation in Cayman Islands with banking secrecy of the sort still obtainable in Switzerland. Not incidentally, the position as between the Cayman Islands and any EU state on the subject of tax transparency is even more favourable since the Cayman Islands in 2003 adopted proactive not reactive tax information exchange (and which statistics indicate that the deposits of European Union residents in the Cayman Islands are statistically irrelevant). In no sense therefore does the expression "tax haven", when used to describe the Cayman Islands have any bearing on the applicability or avoidance of taxation on investments made in the Cayman Islands under the laws of an investor's residence, citizenship or domicile.

Secondly, Mr Romney, no doubt well advised as to his obligations under United States law, clearly appears to have made full disclosure to the IRS with respect to the investment income and long term capital gains from his Cayman Islands investments and has paid the appropriate United States tax on them. The implication that Mr. Romney, or any user of a ‘tax haven’, is therefore necessarily engaging in illegal tax evasion is low and unjustifiable whether made by a US or UK politician. The suggestion that tax avoidance is itself somehow immoral and therefore wrong in the same sense as illegality is no more than dogma. Politicians should be required to demonstrate a better understanding of the rule of law.

Thirdly, on the subject of the appropriate rate of tax, and in response to what is perhaps the most derisory comment made by Mr. Cryer, namely, the issue of Mr. Romney's applicable 15 per cent tax rate on long term capital gains, dividend income or general partners carried interest, this is exclusively a question of United States law determined by United States legislation. So too is the issue of the deductibility for United States tax purposes of the charitable donations that Mr. Romney makes to his Church which results in a tax rate slightly lower than 15 per cent. The tax rate paid by Mr. Romney on his Cayman Islands investments has nothing whatsoever to do with Cayman Islands law and regulation. It is a function exclusively of United States law and in no way is this a loophole and certainly not a "controversial tax loophole" as suggested by Mr. Jon Swaine of the otherwise balanced Daily Telegraph. This tax treatment is not only available in clear terms to any United States citizen but is the tax treatment of Mr. Romney's investments mandated by United States tax law.

Any UK voter should be concerned that a former member of the Treasury Select Committee should be capable of such inept and misleading analysis. If Mr. Cryer wishes to "shut down" the Cayman Islands, he should at least demonstrate a sustainable argument for so doing and possibly take into account the hundreds of millions of dollars of tax revenue that the United Kingdom derives from the investment management industry based in Mayfair which is largely dependent in the assets invested by Cayman Islands hedge funds. If President Obama wishes to have a higher rate of tax than 15 per cent payable on long term capital gains or dividend income he must go about effecting an amendment to United States law.

More importantly, in the meantime, we in the Cayman Islands would welcome the election of a President of the United States who has demonstrated a superior understanding of the relevance of the offshore world and who is attuned to the value added by the enhanced investment return provided by well regulated tax transparent offshore financial centres like the Cayman Islands.