US Senate takes aim at Cayman

Depending on which side of the Caribbean you’re on, a US report released about tax minimisation (or avoidance) in the Cayman Islands last week was either ‘hugely troubling’ or a ‘validation’ of Cayman’s financing regimes.

The US Government Accountability Office report, based on the non-partisan auditing agency’s extensive research over the past year, took a look primarily at the operations of Ugland House in George Town and the law firm that is the building’s sole tenant, Maples and Calder.

It found that the five-storey building served as a registered office for 18,857 entities as of March. According to Maples’ partners, about five per cent of those entities were entirely US-owned. About 40 per cent to 50 per cent had a US billing address, but were not necessarily owned or operated out of the US.

The GAO report noted that the Cayman Islands financial sector serves as a facilitator for US-foreign transactions and allows individuals or companies to minimise taxes, which attracts a great deal of US investment.

‘This activity is typically legal,’ read a statement from Michael Brostek, the director for tax issues at GAO, ‘such as when pension funds and other US tax-exempt entities invest in Cayman hedge funds to maximize their investment return or minimize US taxes.

‘Nevertheless, as with other offshore jurisdictions, some US persons may use Cayman Island(s) entities to illegally evade income taxes or hide illegal activity.’

The basic problem, according to the GAO’s overview, was in policing and reporting such incidents of illegal activity. Officials stated that while Cayman cooperates well with the US in specific instances of criminal investigations, it doesn’t necessarily volunteer information on suspicious cases if US authorities don’t ask for it.

‘Voluntary compliance with US tax obligations is substantially lower when income is not subject to withholding or third-party reporting requirements,’ Mr. Brostek said in his statement to the US Senate Finance Committee on Thursday. ‘Cayman Islands financial institutions are often not required to file reports with the (US Internal Revenue Service) concerning US taxpayers.’

However, the GAO report noted that Caymanian government officials and the Maples law firm partners said it wasn’t their job to administer the tax laws of other nations.

‘Cayman officials told us that until a request is made by the US for tax related assistance, the Cayman Islands government is neutral and does not act for or against US tax interests,’ Mr. Brostek said.

Leader of Government Business Kurt Tibbetts said Cayman’s government was largely pleased with the GAO report, which he said ‘generally presents an accurate description of the Cayman Islands legal and regulatory regime.

‘In several respects, we believe the report recognises the stature and strength of the Cayman Islands financial services industry,’ Mr. Tibbetts said. ‘Lest this point be misunderstood; the fact is that no jurisdiction can claim credibly to have 100 per cent eliminated criminal activity.’

Cayman Islands Deputy Financial Secretary Deborah Drummond said the US GAO report actually pointed to several areas where the problems in prevention and enforcement of tax evasion lay with the US government, and not in Cayman.

Senate Finance Committee Chairman Max Baucus urged the US government to provide the groundwork for ‘decent oversight’ of Ugland House and other offshore entities.

‘If we strengthen transparency for US holdings in places like the Caymans, it will be a lot easier for the IRS to tell who’s not playing by the rules,’ Mr. Baucus said.

In his statement to the committee Thursday, Mr. Baucus proposed reforming the US tax code to make moving businesses offshore less attractive.

A bill before Congress last year called the Stop Tax Havens Abuse Act aimed to curtail offshore activities by US corporations. The proposal targeted some $30 billion a year in US corporate taxes, which supporters said companies were avoiding by incorporating in the Cayman Islands and other offshore jurisdictions.

Cayman does not have a corporate tax. The US taxes corporate income at some 35 per cent.