Consequences of tax transparency

The government believes committing to a multilateral tax convention will not mean significant change for the Cayman Islands. But industry professionals warn the convention has wider implications and Cayman’s competitiveness will hinge on careful implementation and a level playing field.  

  

The Cayman Islands government agreed in a meeting with UK Prime Minister David Cameron in June to sign up to the Multilateral Convention on Mutual Assistance in Tax Matters, led by the OECD, and to draw up plans on the beneficial ownership of companies, detailing the true owners of businesses.  

Unlike the 31 bilateral OECD tax information exchange agreements signed by the Cayman Islands, the convention can form the basis for any multilateral form of administrative cooperation between states in the assessment and, importantly, the collection of taxes, in particular with a view to combating tax avoidance and evasion.  

Premier Alden McLaughlin says the multilateral convention will not require Cayman to do too much differently.  

“It’s stuff that we’re already doing, mainly. It’s going to require multilateral agreements with other countries. All of us have got the ability to insert reservations in whatever agreements we reach and we get to negotiate each of the individual agreements with each country.”  

But not everybody agrees that the changes are marginal. 

The OECD Convention is not simply more of the same, says Tim Ridley, former chairman of the Cayman Islands Monetary Authority.  

“It represents a marked change from the existing agreed standard of bilateral exchange of tax information on request. It is multilateral and provides for automatic and spontaneous exchange of information and enforcement of foreign tax claims.” 

Until now, foreign tax judgments cannot be enforced by Cayman courts. The new regime could also allow other forms of mutual assistance such as service of documents, simultaneous tax examinations and tax examinations abroad. More than 70 countries have signed the convention and all of the overseas territories and crown dependencies agreed to join.  

Ridley notes that it is very important that Cayman includes specific reservations in the extension of the convention by the UK, to limit its scope and application to maintain a competitive level playing field.  

“Effective implementation of any of the foregoing will require specific bilateral negotiation between Cayman and other parties to the convention, and in due course the enactment by Cayman of specific enabling domestic legislation,” he says.  

“The attitude of the UK will be critical in the framing of the reservations and the legislation.”  

The convention allows for certain reservations, for example with regard to tax collection, but it is not possible to make reservations that apply only to certain parties to the convention. 

 

Transparency efforts  

However, any reservations to the convention could be counterproductive to attempts of the financial sector and the government to highlight Cayman’s transparency regime. 

The premier said in the hour-long meeting of the overseas territories’ and crown dependency representatives with Prime Minister Cameron about the convention, he emphasised Cayman’s business practices with regard to tax transparency. 

“The thing that we pressed really hard about is to remind him that Cayman has been at the forefront of the advances in transparency to tax matters for really a long time.” 

For instance requirements to keep careful records of beneficial ownership of companies, another issue pushed by the UK government during the G8 meetings, have been in place for years.  

“It’s harder to open a company in Cayman than it is in London and in many places around the world because of the level of disclosure that’s required,” says McLaughlin.  

Anthony Travers, senior partner at Travers Thorp Alberga, is less sanguine about what he sees as political posturing by the UK prime minister around the tax transparency issue.  

“The problem with the G8 assault on the Cayman Islands is that, in an effort to colour the criticisms with the cloak of legitimacy, Mr. Cameron has resorted to gross mischaracterisations about the tax transparency that already exists in the Cayman Islands based on the 2003 FATF anti-money laundering initiatives, the TIEA network and the EU Savings Directive.”  

Travers argues these initiatives already secure the identity of beneficial ownership in Cayman Islands companies, making the prime minister’s criticism, “which owed more to political grandstanding than technical analysis”, ill-founded. It also caused damage to the financial services industry “in that it failed to confer appropriate recognition of the significant transparency which pre-existed”, Travers says. 

“That transparency was of a standard that already served to dispense with any suggestion of tax evasion.” 

 

Competitiveness  

Following the G8 meeting, the Cayman Islands government presented an action plan that underlined the commitment to exchange tax information and included a review of the anti-money laundering regime. It also included new elements, such as plans to assess whether a centralised register of beneficial ownership information would be the most appropriate way to store and disseminate this information to foreign tax authorities.  

Ridley says the government should be careful that Cayman does not get ahead of the curve and “gold plate” the domestic regime unnecessarily and in a way that impairs its competitive position. 

Travers adds, it would be improper to seek to introduce additional measures in Cayman before they and the existing Cayman standards of transparency are introduced in competing offshore jurisdictions and the onshore jurisdictions such as the UK and the US. “And particularly Delaware, which now lags the Cayman standard by at least 20 years.”  

He also pointed to Switzerland, where the parliament recently rejected a law that would have lifted banking secrecy.  

“There is no advantage to the Cayman financial services industry in being the first to test a treatment this extreme and untested that seeks to cure a condition that does not exist,” he says.  

Paul Byles, director and CEO of First Regents Bank and Trust, even sees a “race to be the most cooperative” among offshore financial centres. He says the system of information sharing will end up revealing mostly legal activity and offer “nothing in the way of compensation to offshore financial centres in relation to the cost of implementing the necessary systems”. 

Cayman should continue to cooperate with global initiatives, but only provided there is a level playing field and the cost of implementation is reasonable, Byles says. 

Ridley also highlights that the costs could be damaging to the industry. “We should be very concerned about the ever increasing burdens and costs being imposed on our financial service providers and our government by these continuing overseas initiatives. These can all adversely impact our competitive position.” 

 

Beneficial ownership  

Of all the initiatives pushed by the UK and the G8, the proposed centralised register of beneficial ownership information has already received wider criticism.  

Gonzalo Jalles, CEO of financial services association Cayman Finance, says there are not many benefits of a centralised registry, because under the existing tax agreements it is not difficult to access beneficial ownership information and a centralised registry would not add enough value to justify the costs. 

Service providers such as incorporation and registered agents collect, update and maintain ownership information or must be able to obtain it from an authorised introducer.  

A peer review report by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes recognised in April 2013 that this information is readily available to appropriate authorities in the 31 jurisdictions with which Cayman has bilateral agreements. 

Dan Wise, a partner with Martin Kenney & Co. in the British Virgin Islands, says regulators and law enforcement are also able to obtain this information for good reason from service providers, and civil parties can receive it via court order in the Cayman Islands, the BVI and the English Caribbean.  

Wise believes a registry is not needed as long as service providers are required to hold certified copy documents regarding the ultimate beneficiary status and identity in their office. 

“In my experience from disclosure orders, this system works for the most part.” 

Because service providers require a licence to operate from the regulator, they have a vested interest in keeping that licence. Regulators should inspect frequently and impose severe penalties for non-compliance, especially regarding ultimate beneficial ownership information.  

A registry of beneficial ownership, in turn, would shift primary responsibility for the accuracy of the records to public servants.  

“In my experience, both offshore and in the UK, an unaccountable civil service apparatus often makes mistakes, with impunity. It is also open to improper influence,” Wise says. 

The service provider-based model would more likely result in accurate up-to-date information being available without compromising a legitimate desire for privacy, which is generally recognised in Western democracies. If a system was introduced under which formerly private information becomes publicly available, it could tempt people to use “nominee UBOs [ultimate beneficial owners]” and produce false documents to build a legend, Wise says.  

“This happens now, but rarely in my experience. I can only think of one example I have come across in my career. Such legends will be capable of penetration but it will be costly and time consuming to do so.” 

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