As we do on the eve of every US presidential election, it’s important to consider how the 2012 US election might impact that country’s policies regarding Cayman and offshore international finance. This was an important issue in the US Congress before Mitt Romney won the Republican nomination for US President. Now that his investments and taxes have become the central issue for the Obama – Biden re-election campaign, it’s going to be all the more important thereafter, too.
How things are shaping up in the US
International tax reform in the US has moved from being a subject for lawyers, bankers and accountants to a stump speech topic for many members of the US Congress. Conservative politicians there are arguing that the US’s worldwide tax system puts them at a disadvantage in the world marketplace. At the same time, liberal politicians continue to argue (ignoring FATCA’s enactment) that the rich hide their money in offshore banks and that taxing it would solve the US’s budget deficit.
They go on to assert that American businesses are evading taxes on their tax-deferred profits overseas, too. This is all occurring within a weak economy and with numerous temporary US tax policies expiring on 31 December, 2012. New higher rates for individual income taxes, corporate taxes, taxes on investments and estate taxes all go into effect in the US on New Year’s Day, 2013.
Obama vs. Romney
The impact on Cayman from US tax reform will vary depending on the outcome of the November elections. If President Obama remains in the White House, he will seek to impose significant new “earnings stripping” restrictions on the deductibility of outbound interest from the US affiliate to its foreign multi-national parent; require US multi-nationals to pay a minimum tax on overseas profits, especially from intellectual property; defer US interest expense deductions deemed attributable to US multinationals’ foreign earnings until such earnings are repatriated to and taxed in the US; and impose an entity level tax on income of large businesses operated in pass-through form.
Governor Romney’s tax plans are less focused on international issues, but he would broaden the tax base to eliminate “loopholes,” without specifying which provisions he would target. He also would move the US to a territorial tax system and provide for a repatriation tax holiday.
If Obama is re-elected, we are likely to see more efforts to close so-called loopholes and raise taxes, such as those listed above and possibly a renewed effort to end deferral of foreign profits for US companies.
If Romney wins, revenue will still have to be raised to reduce the deficit, but international tax reform will be more of a competition among industries to avoid new taxes and lower existing taxes.
However, given the controversy over Romney’s investments via Cayman, it’s likely that his administration would be circumspect about providing any benefit that could be construed as favouring Cayman. A Romney administration might instead work to inoculate him against further criticism by adopting the Democrats’ anti-offshore agenda. They could also work to change US tax laws to try to reduce the need for offshore financial centres like Cayman.
For Cayman Finance, the important first step in addressing these proposals is education and engagement in Washington. US politicians can’t make responsible and economically efficient decisions about Cayman without knowing how our financial service industry works and how their decisions will impact new investments and existing business structures.
Both during the election, and thereafter, we will be working to try to better inform Washington how offshore finance works and how Cayman has created the most transparent, efficient, and professional environment to facilitate international business.