For whom the bell tolls

Anthony Travers, chairman of The Cayman Islands Stock Exchange writes on the death of the OECD Harmful Tax Initiative  

Those informed observers listening very hard to the recent decisions of the European Court of Justice in Luxembourg may well have heard the distant peal of bells that herald the death of the OECD sponsored initiative on Harmful Tax Competition. The imminently retiring director of the OECD Tax Unit, Mr. Jeffrey Owens, will now no doubt be waiving his rights to his tax free pension.  

Advocate General Niilo Jääskinen has advised the Court’s Judges to rule in favour of the Gibraltar corporate taxation regime proposed in 2002 which sought to introduce a selective low 10 per cent rate of tax. The EU Commission had previously attempted to argue that this rate structure constituted unlawful tax competition.  

The precise nature of the commission’s argument is of interest. It claimed that the lower corporate tax rate constituted a scheme of state aid incompatible with the internal market on the grounds that it was regionally selective, constituting a tax regime distinct from that of the United Kingdom to which Gibraltar was subject constitutionally. Furthermore, they argued, it was materially selective in that it was inherently discriminate since the proposed tax regime would result in offshore companies in Gibraltar not being taxed at all. 

It has long been the case that high tax advocates such as John Christianson of the Tax Justice Network and fellow traveller, author Nick Shaxson, have argued that low corporate tax rates equate to state aid.  

This determination of the European Union Court of Justice destroys that misguided thought at a stroke and drives a stake through the heart of the OECD Harmful Tax Competition Initiative.  

The importance of this decision cannot be over estimated. The 1998 OECD report on Harmful Tax Competition – An Emerging Global Issue sought to establish four highly subjective criteria to define the tax haven: 

  • Low or nominal taxes; 
  • A lack of transparency in legal or administrative matters;  
  • No effective exchange of information in relation to tax matters; 
  • A lack of substantial activities.  

The assumption in that report was that lower rates of tax constituted poaching of capital flows, which in turn required a flawed and subjective assumption that in a capitalist and global trading system capital should not locate itself in the most efficient, low-cost structure. Tax is a cost.  

The Cayman Islands, pursuant to its commitment with the OECD signed in 2000, has entered into a sufficient number of tax information exchange agreements (some 22 in number) to require the OECD to remove the Cayman Islands from any blacklist and indeed to describe it as a white listed jurisdiction.  

This effectively removed further leverage from the OECD on the subject of non tax transparency, but since has precipitated the shift in the attacks on offshore jurisdictions, which now seek to establish that lawful tax avoidance is itself improper. Yet given this most recent decision it cannot now be said that the Cayman Islands’ position in respect to zero taxation is anything other than a lawfully recognised and appropriate international standard. 

In the midst of this current onslaught – led by that veteran Don Quixote of the tax evasion initiative, Senator Levin, and which the Cayman Islands is doing little to refute – the fact is that the European Union has established that tax competition itself is lawful and legitimate practice.  

The truth of the US debate on the tax avoided by General Electric and other multinational corporations is that they seek to rely legitimately on provisions of United States tax law, which provide deferral to the profits generated by their subsidiaries offshore when engaged in arms length trading with unrelated parties. The notion of Sen. Sanders’ of Vermont that money is stashed in the Cayman Islands is accordingly, on an application of the US legal test, preposterous nonsense.  

The plain truth is that if the Cayman Islands is irrelevant to that debate before the EU decision, they most certainly are irrelevant after it. But the shameless exercise in blame deflection continues, now assisted by representatives of small businesses in the US that are justifiably concerned by what they perceive as tax leakage of a sort not available to them. They seem not to understand that these US tax provisions available to multinationals are there for a reason. Good or bad, the provisions are intended to enable US multinationals that are taxable twice to compete against non-US multinationals, which are taxed once.  

As with all lawful tax avoidance, these provisions are entirely a function of domestic US law and to change them is entirely within the ability of US legislators. But it would assist the US debate if the obfuscations concerning the Cayman Islands and its involvement ceased. If solutions are sought to this perceived problem then the focus should be on domestic US legislative amendment — and more successfully than the failed endeavour to amend these provisions in September 2010.  

Ultimately, the Cayman Islands can have whatever tax rate for whatever entities they want. The European Union Court of Justice said so. 


Anthony Travers