To lead or not to lead?

Published by the Cayman Islands Journal – 5 March 2014

The Cayman Islands has undertaken a proactive stance when it comes to a number of global initiatives that have attempted to increase transparency of tax information around the world. 

Critics of this position on transparency of tax information argue that taking such a proactive stance will damage the jurisdiction’s financial services industry, which is the core of its economy, contributing directly to 55 percent of its gross domestic product (over 70 percent indirectly), 40 percent of government revenue and 36 percent of all employment (as per a study undertaken by Oxford Economics called Economic Benefits of the Financial Services Industry in the Cayman Islands).

Cayman has the 10th highest GDP per capita of any country around the world – a standard by which the quality of life is measured in countries throughout the world – largely due to the vital role the financial services industry plays within Cayman’s overall economy.

Supporters of the proactive approach to tax transparency argue that not taking the initiative would damage Cayman financial services industry. They argue that not responding quickly enough could put the island at a competitive disadvantage among its competitor jurisdictions and could even place Cayman in an unfavourable light with onshore regulators. This has happened in the past, not long ago, when Cayman was blacklisted by the OECD for not having enough tax information exchange agreements.

As with most interesting debates, both sides have potentially valid arguments. The right answer may lie somewhere in the middle and requires a difficult balancing act with a strategic and pragmatic approach at the same time.

Not long ago, the Cayman Islands lagged behind in the number of tax information exchange agreements (TIEA), ending up in one of the usual name and shame lists issued by several international bodies. The consequences were significant and we found ourselves rushing to sign as many agreements as we could without any margin to negotiate at all, in exchange we got to a total of 33 TIEAs we have today.

That is not a position we want to find ourselves a part of again, and within the realities of our size, we find ourselves taking significant roles in the discussions on how to implement some of the current initiatives, we can say we are punching above our weight.

Just as enough TIEAs were in place and things started to calm down, the United States brought in new legislation, the Foreign Account Tax Compliance Act, known as FATCA.

Unprecedented legislation 

FATCA is an unprecedented piece of legislation that has challenged some of the preconceived notions of international law and politics. The United States found a way to leverage its dominant currency to force most, if not all, of the world to spend significant amounts of money to deliver information in order to collect suspected undeclared tax that is estimated not to rival the cost imposed to the world economy. From a pure economic perspective, the U.S. found a way to collect a few additional dollars at significant cost to the financial industry in the rest of the world.

Cayman was one of the first countries to commit to an intergovernmental agreement to implement FATCA. This was because there was no escape from FATCA. Our currency is pegged to the dollar, transactions in local currency are cleared between the banks in U.S. dollars, and our financial industry would disappear overnight if local institutions could not clear U.S. dollars or had to pay 30 percent withholding tax. So, as local institutions were required to accept FATCA, it was important to implement it in the most efficient manner possible, which also allows us to show willingness to play in the sand box that has become the globalized economy.

The downside 

However, there is a big downside to agreeing to the type of agreement that Cayman endorsed (IGA1), as more and more countries chose IGA1. Other countries around the world do not have the ability of the U.S. to impose such legislation. The U.K. forced its overseas territories and crown dependencies, but if it had tried to impose it beyond that, most countries would have simply stopped using the Pound Sterling.

As the IGA1 becomes a standard with more and more countries signing such an agreement, the risk is that the issue is not an economic one to be decided by private entities, but a political/diplomacy issue. As an example, how can France justify politically to provide this information to the U.S. and not to Germany?

That is how the multilateral pilot on exchange of information came to be, originated by five European countries. Cayman was the first country outside Europe to commit to it, because again there was no escape and little downside. This is the new reality of the world we live in, facilitated by technology and promoted by the global fiscal crisis. Additionally, the concept is not wrong in principle and is aligned to our strategy to provide other relevant authorities with the information needed to enforce their laws. The multilateral pilot attempts to produce a level playing field where there is a standard applied across the globe.

Beneficial ownership registry 

Our early reaction has granted us a key role in the committees working through the implementation of this initiative.

The question then arises as to whether the Cayman Islands ought to do the same and jump at the tone of Prime Minister Cameron’s tune and implement a public central registry of beneficial ownership information. The ground may not be that stable on this one and certainly is not leveled; it may be better to stop the music and turn on the lights before moving.

The U.K. does not regulate their service providers; there are thousands of U.K. companies for which no one, not even the tax authority, knows who the ultimate beneficial owner is. In Delaware even today you can form a company without declaring beneficial ownership.

Cayman is years ahead of these countries and most others around the world, regulating the service providers and demonstrating as per the FATF (part of the OECD) reviews that we can and do access and provide beneficial ownership information in a timely fashion when requested to the appropriate authorities.

A central registry may be an appropriate solution for those countries that have not put their houses in order, but it does not add any value in itself for Cayman.

The issue of whether this information should be open to the public is a major debate. As opposed to FATCA and its cousins, where the information goes to the tax authority of the appropriate country, some proposals ask to have the beneficial ownership open to the public, but more dangerously it also exposes the information to criminal organizations. The promoters of this information being made public more often than not live in one of the nine richest places in the world that we mentioned above, and cannot understand the valid reasons people may have to want confidentiality, as opposed to secrecy.

Prime Minister Cameron seems to have understood this after his initial statement, expressing in writing in a much less publicized letter, that a public registry may not be appropriate for trusts.

This latest initiative is significantly different from that of FATCA and its cousins.

On this one Cayman should not lead, as the music is not sounding very clear yet and the field is definitely not leveled. Let’s instead stay in our chair and watch the dance floor.

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