The Cayman Islands has come under enormous regulatory pressure last year and that is not expected to change in 2019. This month, the EU is set to update its tax blacklist of uncooperative jurisdictions in tax matters. Cayman and other offshore jurisdictions introduced substance legislation, forcing companies to demonstrate sufficient economic activity locally to be deemed resident for tax purposes, in an effort to stave off a blacklisting.
However, it is not clear whether this effort will be successful, nor what the economic impact of the legislative changes will be.
The Caribbean Financial Action Task Force, meanwhile, is about to publish its fourth-round anti-money laundering assessment of the Cayman Islands. Although the mutual evaluation report, rumored to be highly critical of Cayman, has been discussed at the FATF Plenary meeting on Nov. 22-23, 2018, in Bridgetown, Barbados, it still has not been released.
The Cayman Islands government and lawmakers have been caught between a rock and a hard place in their endeavor to appease onshore governments by rapidly complying with every new regulatory hurdle that is put up in front of them.
But the government’s mantra of “embracing” international regulations and being “at the forefront” of the latest regulatory initiatives is facing criticism by some industry practitioners.
Speaking on a panel discussing the threats and opportunities for offshore financial centers at the STEP Cayman Conference on Jan. 31, James Quarmby, partner at Stephenson Harwood in London, said “embracing the EU is like embracing a hungry Grizzly bear.”
How to respond to the threats from the EU was going to be extremely important, he said, but it should be recognized that EU regulators will “continue to move the goalposts” and “curtail what you do for a living.”
“When I look at what the EU are doing and who they are influenced by, they are doing their best to put you on a blacklist,” the U.K. lawyer said.
Regulations had taken on a new guise, he argued, both through “increasingly assertive and muscular law making from national governments,” who seek to restrict and regulate the engagement with offshore jurisdictions and “governments coming together and cooperating on tax,” for example under the OECD Base Erosion and Profit Shifting initiative or the EU blacklist. The new “substance” requirements were a particularly “interesting weapon” with rules that look specifically designed to harm the British Virgin Islands, he noted. Cayman can survive because of the nature of its business that has substance, Harwood said. “But the BVI may be better off being on a blacklist.”
The new requirements around “core income generating activities” amounted to an “awful double standard.” Of the currently 4 to 5 million U.K. companies probably less than half have any substance, he estimated, and very few Delaware companies would be able to prove that they have people, premises and equipment.
Andrew Morriss, Dean of the School of Innovation at Texas A&M University and a main researcher of offshore financial centers, agreed that onshore governments in Europe are out to destroy centers like the Cayman Islands.
“The French do not want you to survive. The Germans do not want you to survive. The current Labour Party in Britain does not want you to survive,” he said. But the attacks on offshore centers are not new and the centers that survived in the past had been very adept at finding the next opportunities and building new laws and regulatory structures.
Referencing an idea of economist Richard Florida, Morriss said places that have a lot of creative people have an advantage over places that do not. Cayman was such a place for financial services.
The U.S. for instance was not a real competitor for Cayman, he said, because it cannot replicate what Cayman is doing. Even states like Delaware, that are “very good at corporate law with excellent corporate statutes and really good corporate judges and reasonable service provider infrastructure,” are operating within the constraints of the federal government.
“You have two problems,” Morriss said. “One is you need to start playing offense. Cayman has been very good at playing defense. But the offshore jurisdictions in general have not played offense.”
And Cayman should invest in infrastructure and anticipate the next regulatory issues and be proactive by building up intellectual arguments and shaping the debate, rather than react, for example to economic substance demands.
Groups like STEP could make a difference, just as they did when they countered the OECD idea of “harmful tax competition” first launched in 1998. In addition, Cayman needs to keep investing in having up-to-date laws. “Over the years, Cayman has always been ready to jump on the next thing,” Morriss said. “It takes political will, it takes education and money from the industry, but there is opportunity there.”
Stella Mitchell-Voisin of Summit Trust International in Switzerland believes there are in fact many opportunities for the private client industry.
Because the business is getting harder to do, not only as a result of the OECD, beneficial ownership registers and tax reporting but also due to growing tax complexity, service providers need to become the “trusted guides for wealthy families.”
That would mean that Cayman as a jurisdiction needs to tread differently and bring in expertise from outside, she said.
Substance could also be a real opportunity for the Cayman Islands, Mitchell-Voisin noted. Cayman has a competitive advantage if it wants to build substance and attract people to the jurisdiction. “If you want people to bring in more expertise, this is a jurisdiction I would choose,” she said.
The same applies to clients. Some wealthy families had already decided to move their tax residence to Cayman and live permanently on the island.
Moreover, Cayman’s foundation company regime is particularly helpful to Latin American families and established Cayman again as an innovator.
Tax reporting requirements such as the common reporting standard could also be turned into opportunities. A bank that could deal with the process “seamlessly and painlessly” would receive all her clients, she said. “Instead, I am dealing with 70 different banks, who all want their forms filled in differently and none of them can agree on how things should be classified.
“There is an opportunity there for someone to get it right and be a trusted guide.”
Cayman can stand out as a jurisdiction, but it needs to market itself better, the Geneva-based trust practitioner noted. Jersey and the BVI were frequently promoting their industry in Switzerland, and while Cayman practitioners come to Geneva, “we don’t hear the Cayman story as a jurisdiction,” Mitchell-Voisin said.
“May be because you are doing well you have become a little bit complacent, but I think you need to go out and beat your drum.”