The Offshore Debate: To Avoid or Not To Avoid

Originally Published in Cititrust EDGE E-magazine
May 2012

Perhaps the most remarkable feature of the debate concerning the offshore financial jurisdictions, specifically the British Overseas Territories and the Crown Dependencies, is the extent to which representatives of the "high tax for all groups” such as Tax Justice Network continue to mischaracterise the role of these tax transparent offshore financial centres by mis-applying the terminology of tax evasion. Their effect is not as irrelevant as it should be. Mr. Peston, Financial Editor of the BBC, as recently as last week, incorrectly referred to the Cayman Islands as a “secretive tax haven”.

Before turning to the particular tactics of dis-information, let us start with an analysis of the factual position of the Cayman Islands. Firstly, it should be said that the All Crimes Anti-Money Laundering Law and Regulation is instituted as a result of the FATF initiatives exists to a standard that exceeds that in effect in most onshore jurisdictions. Specifically, the requirement to obtain documents to identify every 10% beneficial owner and at least two directors applies to every existing client regardless of when the relationship was established. No such retroactive obligation exists in the United Kingdom or the United States. In fact the documentary does not exist at all in the United States. Secondly, the obligation to undertake suspicious activity reporting, which includes an obligation to undertake a source of funds enquiry, applies to every professional including attorneys-at-law. No such obligation applies to the legal profession in the United States where the principles of client-attorney privilege supervene the anti-money laundering regulation. Thirdly, the Cayman Islands has entered into proactive reporting with every one of the 27 European Union jurisdictions pursuant to the European Union Savings Directive entered into in 2003 which means that there is specific reporting of every European Union resident who established a bank account in the Cayman Islands directly to the Treasury Department of his or her jurisdiction of residence. This contrasts notably with the non-disclosure regime which continues to operate in, for example, Switzerland and Liechtenstein and other European jurisdictions, where withholding tax arrangements exist in place of the disclosure of identity to the account holder. The United States has no similar arrangement. Fourthly, the Cayman Islands has entered into an extensive network of Tax Information Exchange Agreements, with some 28 of the major G20 jurisdictions including the United Kingdom and the United States, which provide full authority to the IRS, HMRC and the respective revenue authorities to make enquiry in relation to any tax matter concerning a Cayman Island entity or its owners. Fifthly, similar authorities exist with respect to any enquiry in relation to any criminal activity or money laundering. Lastly, the Cayman Islands Monetary Authority is a full member of IOSCO and full disclosure exists in relation to all financial entities in the Cayman Islands.

The net effect of the foregoing summary is that tax evasion and criminal activity are off the table in so far as the Cayman Islands is concerned.

That notwithstanding, a handful, of tax campaigners of the extreme left continue to conflate tax evasion with tax avoidance. There is of course a fundamental distinction; tax evasion is unlawful and there is little to no evidence of it in the Cayman Islands whereas tax avoidance is lawful and is practiced routinely by most tax payers. It is accepted that there is a category of tax avoidance that may push the envelope of legitimacy but one fundamental point must be made. Tax avoidance is by definition a function of onshore domestic law; one man’s “loophole” is another man’s “legitimate tax mitigation”. Mr. Milleband, the leader of the Labour party, condones and endorses the tax avoidance arrangements undertaken by Mr. Livingstone, former Mayor of London, who uses a privately owned services company to reduce his income tax bill from some 50% to some 20% payable on dividend income. This, says Mr. Milleband, is “correct and proper”, yet Mr. Romney is targeted by the hard left and vilified in the press for using a “tax haven” to pay a 15% tax rate in the United States. Two points are deliberately misrepresented. Firstly, the 15% tax rate paid by Mr. Romney is the rate mandated by US law to be paid on the dividend income and long term capital gains received by Mr. Romney and secondly, the involvement of the Cayman Islands is an irrelevance; Mr. Romney would have paid precisely the same rate of tax had his investment been in a United States vehicle.

The continued use of the expression “tax haven” is instructive in the ongoing mischaraterisation. A "tax haven”, whatever that expression may mean, is only offensive in legal terms if it does not provide transparency in relation to tax matters thereby enabling a resident of another jurisdiction to evade tax. This is no longer the case with regard to neither the Overseas Territories nor the Crown Dependencies and yet the expression “tax haven” is still misapplied in a pejorative manner and notwithstanding approval by the OECD. Evidently, the credibility of those continuing to utilise this tactic is fast diminishing as the facts become more and more widely understood. Consequently the criticism shifts from tax evasion to tax avoidance or tax leakage. But here the hard left are on increasingly thin ice, not only because tax avoidance is lawful but because tax avoidance is a routinely adopted strategy by virtually every tax-paying individual in any jurisdiction; certainly those who take advantage of deductions permitted by law. Here therefore, the moral repugnancy argument falls away. The question of what is legitimate tax avoidance is only at the most extreme end of the spectrum a question of law but for the vast middle ground the debate is entirely subjective. According to Mr. Milleband, Mr. Livingstone’s tax avoidance is legitimate. According to Mr. Clegg, the leader of the Liberal Democrats, Mr. Romney’s is not. The truth is that as tax avoidance goes Mr. Livingstone has the more aggressive and less defensible structure. But since when was offshore structuring, or indeed any form of structuring regarded as acceptable or not on the grounds of moral repugnancy. Mr. Livingstone’s structure may well be regarded by some as morally repugnant but his tax structuring is lawful and that is the only meaningful test.

The simple fact is that we in the Cayman Islands really care less about the debate on tax avoidance. It is too politically coloured and determined entirely by a subjective view point. Nor does it have a material bearing of the forms of vehicle established in the Cayman Islands Tax avoidance is a matter for onshore legislation; if there are individuals who do not like the consequences of onshore legislation, they must go about amending that law and in doing so would be more credible if they left the Cayman Islands out of the debate completely.