Cayman » Tax Research UK

Romney’s in deep trouble in Cayman – and he’s not alone

Jan 232012

This is from Left Foot Forward, with permission:

Mitt Romney’s week from Hell is about to get worse. On Saturday he was trounced by Newt Gingrich in the South Carolina Primary; tomorrow he will reveal his tax returns for 2010, a move he has been forced into; and now Westminster MPs are calling for his Cayman Islands tax haven to be closed.

As Left Foot Forward reported last week:

Frontrunner for the Republican presidential nomination Mitt Romney has been under fire over in the United States for not being entirely open about his tax arrangements – and it is clear why.

The former Massachusetts Governor stashes an awful lot of his wealth and income away from the yes of the American Treasury and in the Cayman Islands – international tax haven and overseas British territory, or in old-fashioned language, a colony of the British Empire.

The House of Commons Early Day Motion (pdf) on “Tax Havens, transparency and the top 1%” states:

“This House notes the OECD and G20’s identification of the role of tax havens by wealthy corporations in fuelling the global economic crisis from 2009 onwards; is alarmed by reports that US former Massachusetts Governor Mitt Romney is also using the Cayman Islands, a British territory, to avoid paying the same tax rate as other US citizens; is concerned about the continued use of tax havens by the top 1% in the US and UK to avoid paying the correct tax in their own country, particularly at a time when living standards are being squeezed and services lost for ordinary working people in many Western economies; and calls on the UK government to introduce urgent legislation to help close tax havens and increase transparency so that the very richest pay their fair share of tax in their respective countries and enable governments worldwide to invest more in jobs and growth.”

The Early Day Motion has been proposed by former treasury select committee member John Cryer, Labour MP for Leyton and Wanstead.

He told Left Foot Forward:

“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 and take-home pay stagnate or reduced.

“It reminds me of President Kennedy’s comment in his inaugural speech, ‘pay any price, bear any burden’. Except it’s hard-working, modestly paid majority who are bearing that burden.”

With the Primary race set to drag on long into the Spring, this renewed scrutiny of his tax affairs is the last thing Romney needs; with Romney’s team even denying the Cayman Islands are a tax haven and more scrutiny of how the murky offshore world works, tax could become a recurring problem for Team Romney.

——-

I sincerely hope so.

This is the testimony to what tax campaigners have achieved.

The need to tackle the substance of tax havens

Cayman, India, Secrecy jurisdictions, Tax avoidance, Tax Havens 32 Responses »

Jan 212012

Vodafone won its tax appeal in India yesterday, saving it a substantial tax bill that India had been claiming was due on its takeover of the Hutchinson mobile phone network in that country. The Economic Times of India has as good a comment on the implications of the case as could be made:

The Supreme Court has ruled that Indian tax authorities have no jurisdiction over Vodafone’s purchase of Hutchison’s interest in its mobile telephony joint venture in India with Essar, as the deal was executed through sale of a holding company registered in the Cayman Islands.

The ruling is a setback not only for India’s fight against tax havens but also for taxation in general. For, the court’s privileging of form over substance, maintaining the corporate veil, could lead to elaborate and extensive tax planning that results in enormous leakage of revenue.

The implication is clear. The judges are interpreting the law as it stands. India needs to rewrite its tax laws, to enable it to deal with commercial practice in a globalising world.

If every ABC Ltd operating in India is henceforth not to be owned through a holding company registered in some tax haven or the other, so as to permit acquisition by XYZ Ltd through its holding company registered in another tax haven without paying any capital gains tax, the language of tax law will have to make it clear that what counts is whether value accrues to the company changing ownership because of its economic activity in India.

Precisely so.

This was a transaction relating to Indian assets that India wanted to tax, and thought it could tax. But it was recorded ‘elsewhere’ in a tax haven structure. And the result is that the legal form of recording it ‘elsewhere’ has meant that Inida’s laws have been subverted and tax is not due. That’s the tax haven issue in a nutshell.

Now it is time for the OECD, UN and others to agree how such abuse can be tackled so that transactions are not taxed where there form is but where their substance is. Because the cost to society otherwise will be enormous, as it is in this case where a developing country has lost out on resources it badly needs.

Romney’s Cayman Explanations Don’t Tell the Whole Story

Cayman, USA 6 Responses »

Jan 202012

The following comes from the Middle Class Political economist blog in the USA, and is shared with permission:

Brian Beutler at Talking Points Memo has a story purporting to tell us the “real deal” on Mitt Romney’s investments in secret Cayman Island corporations. Surprising, given theABC News (which originally broke the story) and Wall Street Journal articles he links to, Beutler nowhere mentions that these accounts are secret, in accordance with Cayman Islands bank secrecy provisions, which are some of the toughest in the world.

Worse still, Beutler gives the impression that there is nothing unusual about Romney’s use of these accounts. He writes:

The offshore funds story is about a strategy investors use not to defer income and reduce their tax burden, but to attract foreign investors who want to avoid U.S. taxation.

“One of the reasons to have a Cayman Islands entity is so that foreign investors will not get hit with U.S. income, and that’s consistent with our general tax policy,” says Victor Fleischer, a tax professor at the University of Colorado Law School. This can give American investors who offshore a competitive advantage over those who don’t, and can cost the Treasury revenue, but it’s on the level.

I contacted Richard Murphy, head of Tax Research UK and an internationally known expert on tax havens. He called this argument “ludicrous.”

Remember, there is nothing of significance in Cayman, and no money of any significance is made in Cayman. Nor is there indigenous wealth. So all money coming into the US from Cayman came from somewhere else. Now where is the most likely source? I’ll wager it’s the USA. So money flees illicitly out of the US to Cayman so it can come back in a supposedly tax free structure – that’s called “round tripping.” Not all is that way – some will come from South America and very little from Europe – wrong time zone - but the sole reason for Cayman secrecy is mainly to hide the round tripping and that’s the most venal tax sin. So to argue that you’re luring money in requires you to lure money out of somewhere first – and there’s the weakness in the argument presented – precisely because that dimension of the story is ignored in all the reports on this issue.

In other words, following this logic, if Romney (and Bain) secretly put millions of dollars into the Cayman Islands to attract funds into the U.S., as he has claimed, he’s ignoring or not saying where he thinks those funds came from, and that’s the weakness in his position. It’s at least possible that those funds were round tripping as Murphy suggests, and in that case the so-called foreign investment is in fact just U.S.-based investment repackaged to look like foreign investment with all the tax advantages that attach to that.

The round-tripping phenomenon is well-known in China, where Chinese investors put money into a Hong Kong or other location, and then send the money right back to China so it can claim subsidies not available to domestic Chinese companies.It’s entirely possible that U.S. citizens have done the same using the Cayman Islands, and Romney does not appear to be addressing that issue.

Amazingly, the Romney camp claims that the Caymans are not a tax haven. Beutler’s article misses the entire round-tripping aspect and focuses too much on legality. While at present there is no indication that he broke any laws, Romney’s actions highlight that there is one tax system for the 1%, and a different one for the rest of us. As David Cay Johnston put it, the real scandal in U.S. tax law is what is “Perfectly Legal.”

Ed Miliband says it’s time to come clean to the UK’s tax havens

Cayman, Guernsey, Information exchange, Isle of Man, Jersey, Secrecy jurisdictions, Tax avoidance, Tax Havens 11 Responses »

Jan 152012

Ed Miliband’s announced a new initiative today that is sure to resonate around the offshore world.

As I understand it he, in essence, has said three things. The first is that the UK should push as hard as possible for the European Union Savings Tax Directive (ESTD) upgrade planned for 2013 to be implemented as soon as possible. Second, in the process he suggested George Osborne had put back the whole process by negotiating the Swiss tax deal over which the EU is now threatening to pursue the UK because it does not comply with the requirements of the existing ESTD, let alone the revised one. And third he said that if for any reason the EU can’t deliver the ESTD on time because Austria and Luxembourg continue to try to block it then the UK should go ahead and demand that its Crown Dependencies and Overseas Territories enter into deals equivalent to those required under the ESTD with any reasonable country that wants one.

Now this is radical stuff. The ESTD is about tax evasion, that’s all. It has no other purpose. So this initiative extends the whole debate about corporate responsibility from the issue of company tax into the whole arena of the tax evasion that some companies – and notably banks – facilitate through their offshore operations, whether knowingly or not.

Second, whilst the ESTD has been in operation since 2005 it has been widely acknowledged – even by the EU itself since 2008 - that there are gaping loopholes in it. The Tax Justice Network view of this is here. The key points are simply though. First, the existing directive only applies to cash deposits – and based on my research of offshore portfolios that’s rarely more than 20% of offshore asset holdings – meaning 80% or more of all income escapes the arrangement and so remains untaxed in most cases in the country where it should be declared for tax purposes whilst, second, the ESTD only applies to income held in an individuals name so that cash and other assets held in companies, trusts and other arrangements also avoids or evades tax as well. Put the two facts together and I estimate well over 90% of all income that should be known about in tax havens like the Channel Islands is not advised to HMRC.

Those are loopholes too big to tolerate at a time when tax revenue is the scarcest commodity in the UK economy.

The big question then is, can Miliband do this? My thinking is yes, he could. First, this is about the international relations of the Crown Dependencies and overseas territories, and we are responsible for them, and as such can legislate them if we wish to do so, and opinion that the House of Commons Justice Committee came to in 2010 when reviewing this issue, basing their opinion on the Kilbrandon report. Second, knowing this the Crown Dependencies have actually done all we have ever asked them to do on such issues. That is exactly why they have adopted the European Union Savings Tax Directive and the EU Code of Conduct on Business Taxation despite their reluctance to do so. In practice they knew they had no choice but do so. Third, if they really want to be awkward we could simply remove the exemption from tax being withheld on payments of interest, royalties, dividends and other sums to these places that are in operation at present and they cease to be tax havens overnight and lose their entire financial services industry at a stroke. Given they publicly say they don’t want tax evaders to use them there is no way on earth they’d risk that, but we could impose it, and they know it.

So Miliband, if he were prime minister, would hold all the cards in his hands, and the Crown Dependencies would have the 2,3 and 4 of spades when hearts are trumps. In other words, this threat isn’t hollow; this threat is for real.

And what would we win by doing it? Well, I suggest it could be £2.4 billion a year. That’s best on my 2009 estimates, here and taking just the part relating to the Crown Dependencies into account.

That’s why I applaud this move: it’s a straightforward attempt to tackle tax evasion. That’s exactly what government should be doing now. And it’s a low cost attempt to do so as well. It works by shattering secrecy. After that’s done the pressure on those with these accounts to disclose will be very high indeed – and so the measure is virtually self-policing.

Of course the Crown Dependencies will protest – but if they do so then they’ll be coming out on the side of tax evaders. Is that what they really want to do?

And if their reply is those tax evaders will just move their funds? Then, I suggest, we have to look at regulating the banks involved a lot more aggressively because in that case they will be willingly assisting tax evasion. That’s the next step. But for now let’s note that a politician has taken a courageous line on this issue.

Simon Jenkins on tax justice

Cayman, Jersey, Tax Havens, Tax justice 8 Responses »

Dec 212011

A decade ago an article like this would not have happened.

It does now.

Don’t say changing moods is not possible.

This is Simon Jenkins in the Guardian today (edited, of course):

Osborne is the scourge of public sector unions and condemns tax avoidance, yet he refuses to end the scandal of crown tax havens, from Jersey to the Caymans, that enjoy the benefits of British citizenship while enabling individuals and corporations to evade British tax. Last week the European Union lectured Britain on financial regulation, while harbouring on its borders such fiscal black holes as Monaco, Liechtenstein and Switzerland. The thesis, accepted by governments of all parties, that the rich should be allowed to escape tax for their “wealth-creating potential” has surely been exploded by the credit crunch. It is not the kind of wealth Britain can afford. If Goldman Sachs dislikes paying British taxes it should go to Dubai, not just the first-class lounge at Heathrow.

The control of public expenditure is never perfectly equitable. It is war by other means. But when large sections of the public are being asked to bear the burden of cuts in their standard of living – largely through the action and inaction of government – they are entitled to see at least a semblance of fair play.

Just because lobbyists say bonuses and tax havens are “essential to Britain’s recovery” does not mean they are. The government’s tolerance of both is more than stupid. It induces cynicism in the public realm and recruits fair-minded people to the cause of St Paul’s protesters and public sector strikers. Nothing is more crucial to national wellbeing at a time like this than a sense of equality of misery. The British government derides Greece and Italy as countries where taxpaying is “voluntary”. It appears to be voluntary in Britain too.

He’s right.

Creating this awareness has taken a lot of effort. Now we need action to address the issues. When will people get serious about the Tax Gap? It’s entirely possible to do so. But only the Greens take it seriously as yet. That’s to their credit, and none to anyone else.

Blair in Cayman to support KPMG – just the perfect fit!

Cayman, KPMG Comments Off

Dec 192011

The Telegraph reported this weekend that Tony Blair was in Cayman recently to speak at a dinner celebrating the KPMG Legends Tennis Championships.

KPMG, the Cayman Islands and Tony Blair.

Made for each other.

PS They are his accountants.

Cayman fears the UK will leave it to ‘sink or swim’

Cayman 3 Responses »

Nov 232011

I was amused by an article in the Telegraph this morning that says:

A public consultation with the people of the Cayman Islands formed the basis of the report, entitled United Kingdom and Cayman Islands Relationship Review, and revealed that while loyalty to the Crown is still strong, there is a sense of dissatisfaction among islanders.

The feedback will be used by the UK Government as it prepares a new white paper outlining the UK’s strategy for the Overseas Territories.

The biggest concern among Caymanians was the deterioration in relations with the UK and whether this would ultimately lead to Cayman being cut off completely and left to either “sink or swim”.

The report said: “The dissatisfaction with the way in which the relationship is presently operating has largely coalesced around the perception that the two parties have often appeared to be at ‘loggerheads’ with one-another and that as a consequence, the Cayman Islands may simply be left to ‘sink or swim’.

“Thus, when the Cayman Islands came under pressure from the international financial community, there seems, amongst several contributors, a sense that the Cayman Islands was let down by a failure on the part of the United Kingdom Government to fully represent the interests of the Cayman Islands and indeed protect these where necessary.”

So let’s get this straight. First Cayman thinks it will sink without support from the UK. I think that’s right.

Second, they think the UK should therefore defend Cayman’s right to run a tax haven that deliberately seeks to undermine the UK’s tax system and regulation.

And third they think the UK should support them both against people like me and internationally when that’s what they actually do.

Might the absence of logical flow in that argument have passed them by?

I think so.

And sink they surely will now that the flaw is apparent.

And let me assure Cayman: we won’t cry.

But I will support their bail out – on condition the tax haven is swept away. But that will be the pre-condition.

The Cayman Islands’ director – almost as flexible as the Sark postman

Cayman, Corporation Tax, HMRC, Secrecy jurisdictions, Tax Havens, Uncategorized 39 Responses »

Nov 212011

Once upon a time the postman on Sark was the symbol of offshore farce: rumour had it he held more than 2,000 directorships and quite clearly knew little or nothing about any of them, each being held as a pure nominee to supposedly locate the company of which he was a director for tax purposes on that once idyllic and now rather troubled Channel Island.

Then the ‘Sark lark’ was brought to an end, the postman went back to the day job and examples of such farce, where nominees were so blatant that the sheer lack of likelihood that they really undertook the task supposedly entrusted to them was harder (not not impossible) to find.

Today the FT reveals the practice of nominee directors holding far more positions than they can possibly manage is alive and well and riddles the Cayman hedge fund industry, which claims to be resident in those islands even though it is very obviously likely that real decisions must be made elsewhere. As they report:

A small group of Cayman Islands “jumbo directors” are sitting on the boards of hundreds of hedge funds as demand for independent directors booms in the Caribbean tax haven.

At least four individuals hold more than 100 non-executive directorships each, and 14 have more than 70 – each worth as much as $30,000 a year.

One has been listed as on the boards of 567 Cayman entities, almost all of which were hedge funds.

The revelation of the figures, in a Financial Times investigation, comes amid calls from some of the world’s leading hedge fund investors for greater transparency in the Caymans as part of a global effort to improve fund governance.

This practice suggests three things. First of all, as I have often argued, the supposed centre of decision making that suggests these funds are located where their directors are is little more than a charade in many cases.

Secondly, any directors who can believe in this charade must have suspended their judgement: if you can believe in these structures it is highly likely that sound governance has flown out of the window.

Thirdly, and as I have again argued, often, the time for a change in the rules regarding the determination of residence on the basis of where the directors of an entity supposedly meet is more than overdue for reform. As is likely in these cases, real decisions are almost certainly taken in places like London and New York but ta x is not paid there as a result of playing games in Cayman. That has to stop. Pretending we can determine residence on rules written for the era of the steam ship and telegram when we live in the age of the internet is just madness, and is giving companies the most massive loophole to abuse the tax rules and revenues of major democratic states. The objections of business have to be ignored and such schemes have to be looked through now wherever possible.

Is this a case for the proposed GAAR? I think it should be, but I fear the hurdle has set been too high for it to be used in such cases. If so then specific legislation is needed. Either way, reform is possible and overdue.

Offshore lawyers admit that tax haven claims of transparency are bunkum – as some of us have argued for a long time

Cayman, Information exchange, Jersey, Lawyers, Secrecy jurisdictions, Tax avoidance, Tax evasion, Tax Havens, Tax Justice Network, Uncategorized 7 Responses »

Oct 182011

Cayman News Service has blown the lid on one of the biggest lies of recent years about tax havens / secrecy jurisdiction. It’s been claimed since 2009 that tax information exchange agreements – promoted by the Organisation for Economic Cooperation and Development as the way to tackle tax haven abuse – mean that tax havens are now ‘open and transparent places’. Those most inclined to say so are minsters of the UK and the representatives of the offshore finance industry in places like Jersey.

But as Cayman News Service reports from a conference on the issue of confidentiality, obviously so secret that they omitted to mention where it was held:

A panel of trust experts from Cayman, Guernsey, the UK, Switzerland and the Bahamas examined whether the right to privacy for trust clients could continue in light of the push by international bodies to live under regimes of disclosure during an industry conference last week where the issue of confidentiality was the top talking point for delegates. Despite the tax information agreements signed by offshore centres in recent years however, there were still ways that trust professionals could protect beneficiaries and confidentiality because of the hoops tax authorities needed to go through to extract information, the conference heard.

The central paradox for trustees, according to Shan Warnock-Smith QC, was how to reconcile the principles of confidentiality and disclosure, which were both expected to be observed by trust professionals. Warnock-Smith QC mediated a panel at Mourant Ozannes first conference of its kind last week where she described the issue as a balancing exercise.

Panelist Robert Shepherd from MourantOzannes in Guernsey said onshore governments’ requirement for money had resulted in the UK tax collectors beefing up their staff recruiting 2,200 more tax inspectors. He said that the onshore governments have tried two ways to get at funds – by getting offshore institutions to disclose more and alternatively by circumventing offshore jurisdictions by getting investors onshore to tell them what they know. Tax Information Exchange Agreements (TIEAs) had been created by onshore governments to try and force offshore institutions to provide more information which would then bring in more money for them, Shepherd believed.

On the face of them TIEAs appeared “fearsome” with one tax authority forcing another to disclose information on foreign nationals, Shepherd noted, but actually there was a good deal that trust professionals could do to protect beneficiaries and honour obligations of confidentiality, citing a number of hoops that tax authorities needed to go through to extract information. For example, the onshore authority must initially identify the tax payer in question about whom they require the information and equally they must have exhausted all local powers to gain information first.

As I and the Tax Justice Network have argued many times, this does in effect mean that the prospect of making a enquiry from a trust is in most cases non-existent – as these lawyers well know. This was confirmed at the meeting:

Julien Martel, from Butterfield in the Bahamas said that the issue about TIEAs was a “storm in a tea cup”and the issue did not come up frequently in conversation. He went on to say that the issue of confidentiality in the light of increasing burden of disclosure was actually a global issue and not just a question for international financial centres, which were in fact better positioned to deal with the conflict because of their flexibility.

Flexibility should be read in its true light here – it’s a weasel word, often meaning the ability of these places to move client funds out of a jurisdiction before an enquiry can develop, thwarting it before it really gets under way. And the reality is:

Confidentiality was an issue for clients but it was not stopping business, he added.

But this comment was also telling:

Alan Milgate, from Rawlinson & Hunter in Cayman said that in certain cases trustees wanted to disclose specific information to beneficiaries and that it was the duty of the trustee to try and establish the costs and benefits for disclosing the information. Some beneficiaries were better able to process information than others, he said, and added that deciding how much information to give out to beneficiaries was sometimes a difficult exercise, because not giving information bred suspicion. Effort needed to be put into explaining and planning the structure of a trust up front, he said.

As this reveals, these lawyers don’t even tell their clients what they’re really up to. Which is really convenient when the client’s money is under the lawyer’s control, and fuelling the bafflement I have always had about why anyone would trust an offshore lawyer with their money.

But perhaps most telling was this, which blows apartt the bunkum put out by the OECD, states like Jersey and Cayman and ministers like David Gauke in the UK who constantly claim that tax avoidance in tax havens is under control because of the existence of tax information exchange agreements:

Ziva Robertson from Withers said that there was a big difference between the political will to be seen to be creating TIEAs and the actual economic effect of their implementation.

To put it another way they don’t work. It doesn’t take a lawyer to work that out. And why don’t they work? Because:

She also said the situation could sometimes be exacerbated by instances of privacy laws which explicitly prevented a trustee from providing the beneficiary with information. Trusts were becoming increasingly complex and often spanned a number of jurisdictions, with confidentiality meaning different things in different jurisdictions and meaning different things in times of war and in times of peace, she observed

In other words, the pinstripe brigade of offshore lawyers, accountants and bankers make sure that there is a self perpetuating income stream for themselves at expense to their clients and the governments of the world. At least they’re honest enough to admit it. Which is why I’ve taken the liberty of quoting at length.

The argument is over: tax information exchange agreements don’t work. Everyone knows it. The time for automatic information exchange has arrived.