The realities of protecting the interests of the Cayman Islands financial services industry
By Paul Byles, Director, First Regents Bank & Trust
For years, members of the Organization for Economic Co-Operation and Development (OECD) have sought a solution to deteriorating fiscal balances, owing partly to tax evasion and tax avoidance. And while the two areas are distinctly different in that one is illegal and the other not, OECD rightfully took a pragmatic view that legal or not, they needed to improve tax revenues by any means necessary.
The challenge is that addressing tax avoidance requires essentially harmonizing tax policies effectively across countries, as well as agreeing that there is some sharing of the burden of the cost of ‘policing’ this perfectly legal activity across borders. It also requires a level playing field. Neither the EU or OECD members have been able to come to common ground on these issues for more than two decades, and there is still no sign that this is likely to occur anytime soon if one follows the debates at the OECD level. The G5 and G8 initiatives reflect the most recent efforts.
The various high level initiatives that have been introduced to encourage cross border sharing of tax information first on request, then spontaneously and in recent years automatically, may provide a sense of cooperation and may even be enough to create some anxiety among the few who are looking to abuse the system. But it is unlikely to proffer any material benefit to anyone other than those who are in the business of creating new systems and procedures and serving as tax compliance officials.
Even if we assume that these agreements can surmount the difficulties associated with each country having to abide by their domestic policy framework and address various sovereignty concerns etc., we are likely to end up with no more than a network of high level agreements to share information based on certain circumstances while permitting each country to maintain their own domestic tax regimes.
The realities of cross border cooperation
The fact that we could well end up with this result while the domestic loopholes and disincentives to businesses in OECD countries’ legal frameworks remain unchanged, is owed at least partially to the political and economic realities faced by those Governments, if they were to make such changes. This is an irony that has cried out for further scrutiny for some time and supports the idea that while a lot can be done by way of political rhetoric and high level agreements to share information, the economic realities faced by corporate Europe and America in particular, are actually very clearly understood by their country’s respective policymakers.
That reality is the facilitation of global transactions by offshore financial centres (OFC) serves a positive economic role, which directly benefits OECD economies. At the same time, the highly sought after network of agreements gives credibility to the idea that ‘unscrupulous tax minimisers’ are at least partly to blame for OECD’s fiscal woes. This arrangement means that OECD based policymakers can continue to pretend that they are addressing an issue, while quietly allowing the necessary pressure valve effect of OFCs to assist OECD economies, when all the rhetoric is said and done.
With this context firmly playing itself out over the past decade or so, OFC Governments should carefully consider at a minimum, the cost implications of their cooperation with these various initiatives.
Who will win the race?
There is now among OFCs, a very clear ‘race to be the most cooperative’. But while cooperation is necessary in the case of tax evasion, promoting global financial stability and addressing various forms of financial crimes, it is at best questionable whether an ambitious attempt to establish an information sharing network will address the OECD’s fiscal challenges.
This is certainly not a ‘race to the top’, a term that would be appropriate if we were talking about, for example, having a very effective anti-money laundering regime. Participation in a system of information sharing which will potentially end up revealing largely legal activity only serves the political purposes of OECD, while offering nothing in the way of compensation to OFCs in relation to the cost of implementing the necessary systems.
In fact, this may well be a race to the ‘sidelines’ which eventually puts each team off the field of play and entirely out of the game. In that scenario the referee is the clear winner, not either of the teams desperately trying to win the award for ‘Most Cooperative OFC’.
The Cayman Islands should continue to cooperate with all global initiatives – provided there is a level playing field. The cost of implementation must also be reasonable and preferably covered by an underlying business model which addresses the resources required to process and share the information.
That means negotiating with the UK and other parties with a primary objective being to prevent putting the Cayman Islands economy at risk under any circumstances. In playing the game and seeking to cooperate, Cayman and other OFCs must negotiate firmly (and preferably jointly), with confidence and the right technical expertise to protect their interests on any of the recent G5, G8 initiatives. To do otherwise simply means heading for the sidelines.