If one believed all the PR that comes out of tax havens all is sweetness and light in these places and the land is flowing with milk and honey.
If you know these places - and I do, a bit - you know that this is far from the truth. Still, it is unusual to see that stated as bluntly as it is was in an article in CaymanNetNews in an article last October which has however only just been drawn to my attention. In it Bo Miller, an election candidate in Cayman said:
Cayman's economic survival is on the line and in order for us to provide any opportunities for the next generation, a new economic model must be crafted now.
For the past 40+ years, Cayman has been providing a variety of investment vehicles to enhance business and create wealth for offshore clients. These vehicles have taken many forms, from exempt companies, to trusts, reinsurance, to the latest hedge fund craze. There is no question that these services have brought a significant improvement in the standard of living of all who live here. It has provided hundreds of millions of dollars into government's treasury over the years and it has made millionaires of many of the professionals who operate the financial services firms.
Despite these successes, this industry has operated as an invisible hand in the lives of many of our people, and there has been no attempt to bring these tools from the boardrooms to the living rooms to help enrich individuals who may not be direct participants in the financial services industry.
We brag to the world about our rankings in the funds business and we have some of the best expertise; so my question is, why this is so difficult for us to do for ourselves some of the things we have been doing for others for years?
Until I am proven wrong, I am convinced that the economic model that brought us the 40-year miracle, of which I was fortunate to be a part of, has expired and must be retired.
He's right. And his reasoning was blunt:
It is time to escape from the old Cayman or we are heading for national bankruptcy and our own government shutdown. The financial trajectory of this country is simply not sustainable.
This, of course, is an argument I have made for other secrecy jurisdictions, like Jersey, as well.
This is what John Christensen and Nick Shaxson call the Finance Curse spelled out for a domestic audience. The message will get louder and clearer as time goes on.
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If people like this are speaking out then it must be significant – the 40 year neoliberal world of wealth syphoning must be transformed – an analysis of the social impact of the proliferation of ‘financial instruments’ (laundering!) is needed. Have just listened to an Al jazeera report on land speculation in Ethiopia -wealth syphoned and poverty abounding. Will it take 40 more years to wake up to this.?
The technical term for “finance curse” is “busted flush”. We will soon be at the point where all those at the table are holding busted flushes and are frantically trying to bluff their way out of losing. They do this by upping the bidding (chucking money around) until the others fold. The problem is then that the money they have all thrown in has become worthless.
Actually the biggest threat to Cayman income is the AIFMD rules on investment management. It is one more example of the collusion between banks and politics to bring onshore Europe the funds managed in Cayman, even though most of these are 100% legit from a tax perspective (depending on your views on tax deferral within a fund, which is still OK in the UK). This will kill a lot of the business in Cayman and makes life difficult for the smaller managers in London. All benefit to the banks and Luxembourg/Dublin.
One should know that the vast majority of the US funds in Cayman, the ones hidden in the famous Ugland House Obama one day mentioned in one of his speeches, are actually US LLCs, i.e. transparent entities and that the Cayman managers (often London businesses) send every year full tax reporting to the IRS, the so-called K1s.
The really shady business is far more based in the BVI…
So the question will be from some: why set up funds in Cayman in the past. Very simple. It was easy, fast and cheap. Less expenses to the investors (often pension funds by the way).
But the new rules will increase the cost to onshore funds and depress pension fund returns. See previous post on Pension Accounting by Richard.
I wish you were right re Cayman Lucas
I do not think you are
This may happen
But not nearly as much as you suggest
There may be more people in finance who actually comply with the vast majority of rules and regulations than many people here seem to assume.
Do I know people who brutally try to break the rules? For sure… I do also know that they are usually well known and that many people do their very best to avoid them.
Do I disagree with you that part of the accounting profession goes too far. Not entirely, but at the same time, I can tell you that, even within the Big Four, you will find senior advisors who will keep you well within the rules and show you what can be done, in theory, and then advise you NOT to consider the options in question. I am specifically thinking about the offshore EBTs etc… So no, they are not all that bad.
I know quite a few people with Cayman funds and Cayman management companies. As far as I know the funds are 100% clean and the management companies are for the vast majority, in the context of the rules as they stand. Admittedly, I am not privy to the private equity type structures, where I totally agree that there is a clear problem with the “carry” which seems to be treated as capital gains as opposed to income. Closing that loophole alone, and I cannot understand why that would be so difficult, just by doing a proper analysis of what that carry actually represents, could possibly represent a very very large part of the 45 versus 50% differential we are talking about these days.
Lower the top rate of tax and close the obvious loopholes!
Ah, now you reveal your hand as a flat tax, tax haven lover
Please don’t waste my time
We all know some people using tax havens declare the tax they do not owe as a result
We also know that they provide a useful smokescreen for other activity – including in Cayman, where HMRC are now investigating
1) the specific private equity loophole is huge, as it both defers income for years AND transforms income, or what should be income in capital gains, and
2) closing such a massive loophole would increase the effective tax rate on the people who escape a lot of your statistics enormously.
3) quite a few of them actually escape taxation completely, as when they cash in the carry, they leave London. Bottom line ZERO tax altogether.
4) there is in the traditional asset management a concept called the IME (investment manager exemption), which specifically allows for the use of offshore entities, PROVIDED that all “customary remuneration”, which is pretty well defined, gets repatriated into the UK and getting taxed. I am not saying that this is 100% fool proof, but it is actually quite well followed, even though there is some playing on the margin. The private equity business seems to completely escape this. An idea would be that any partner in an LLP who is party to the launch of a private equity offshore fund should become liable on launch of his share of the carry payout, wherever he is resident at the time of the payout. I know this is probably not straightforward, but if you want to talk about practical and FAIR practices, you may actually come up with some good ideas.
5) The 40/50/60% tax rate leaves such people actually completely indifferent. They won’t pay anyway… (or at most they only pay on a small part of their real income). Don’t call me a flat tax lover. I am not. 40% is great, but then in a fair and comprehensive way. Tax everything. No conversion of income into capital gains.
6) The main reason that these practices do not seem to be discussed in greater detail and with more coverage is that this is all pretty obscure and wouldn’t make for good press coverage. Raising the rate to 50%, that is something that attracts attention (and some hope votes). Is it good, useful or beneficial for the state?
OK, in this post you have clarified where you are
And the point you make is key: 40/50/60 – they won’t pay anyway
So lower rates make no difference
Capture is key
Still, being owned by a hedge fund based in the Cayman Islands has brought about a remarkable change in the fortunes of Coventry City Football Club.