Cayman avoids EU tax blacklist, for now

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The Cayman Islands was not included on a list of 17 countries that the European Union deemed uncooperative in tax matters. However, when the list was released on Dec. 5, Cayman found itself on a so-called graylist of 47 countries and jurisdictions that have made written commitments to meet the EU criteria applied to the process of singling out countries for their lack of tax transparency and “tax fairness.”

Cayman complied with most EU criteria in relation to the exchange of tax information or the implementation of the OECD’s base erosion and profit shifting (BEPS) program. It also does not offer preferential tax regimes that would treat local companies differently than Cayman-registered overseas companies.

But, according to the EU Council, Cayman has fallen foul of a fair tax criterion aimed at tax regimes that facilitate offshore structures which attract profits without real economic activity. The Cayman government has committed to addressing the concerns relating to economic substance by 2018, the EU said.

Cayman’s government in turn stated it is “further assessing the fair taxation criterion,” and will work with EU Council officials to address this issue by December 2018.

What this means and how it will be achieved is not clear. While the EU appears to expect changes in tax law, with a European Commission document stating Cayman had committed to “introduce substance requirements,” Cayman’s government seems to aim at keeping the conversation going and educating EU officials about Cayman structures.

Exempted companies in Cayman rarely have staff on island, and under the law are not allowed to offer their services or operate locally.

They are, in other words, a mere legal structure, a fact that the EU takes aim at with its desire to ensure that jurisdictions do not facilitate letterbox companies.

Premier Alden McLaughlin acknowledged that the majority of Cayman’s companies “are not bricks and mortar” but he insisted “they also are not letterbox companies” in the sense that they are solely used to avoid certain tax obligations rather than pursue economic objectives.

Instead he stated, “they are financial instruments that pool investment capital and facilitate international transactions.”

Taking into account the transparency regime that shares information with foreign tax authorities, including all EU member states and G-20 countries, the premier noted, “there is no interest in setting up these companies to circumvent tax obligations.”

Cayman Finance, the industry association that represents the financial services sector, said it is “confident that we will be able to address the areas where the EU requires some further clarification.”

The 17 countries on the blacklist that, according to the EU, had not done enough to curb tax evasion and avoidance include American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates.

To come off the annually updated list these countries should make the necessary changes to their tax regimes, the EU said, although the EU Council stopped short of agreeing specific sanctions for listed countries.

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