Cayman and the problem of perception

By Wendy Ledger:

While the government declared is satisfaction last week over what it considered to be a good showing in the US Government Audit Office (GAO) report, that perception was not shared by all concerned. As has been the case for some time now, Cayman has duly complied with just about every international regulation, has signed endless treaties with lots of nations and organisations, and has been an all round ‘good egg’ on the cooperation front. However, the fundamental problem remains that certain members of the US Senate, members of the British parliament and representatives of various other western and non-western governments see things differently.

No matter how regulated and compliant Cayman is, even to the extent that it has better ratings than many onshore financial centres, the fact that wealthy individuals from all over the world and trans global corporations use the Cayman Islands and other off shore jurisdictions to mitigate, avoid and even evade their tax obligations to their country of origin means people will continue to perceive Cayman as the villain of the piece.

With the notable exceptions of nations with significant oil wealth or countries like our own where the financial industry funds a great deal of services, most international governments rely on income and business tax to fund their spending. Tax is used as a political tool to redistribute wealth and in democracies it is considered a way of ensuring greater fairness in the community. What often happens, however, is the wealthier a person or company is the more they can afford to engage the services of experts who can help avoid their tax obligations – legally or otherwise. The regular man in the street or the small to medium enterprise is not in a position to take advantage of the experts and therefore usually pays more than his fair share of tax. It is this sense of injustice that the little man digs deep to meet his tax obligation while the wealthy man employs a lawyer that is fuelling the campaign against offshore tax havens.

The Cayman Islands government seems very confident that the US is unlikely to ever enact legislation that will undermine the ability of international business or the high net worth individual to use jurisdictions such as ours and that, regardless of the comments from senators like Carl Levin, all will be well.

There may or may not be truth in this. What is important for us to remember is that while some US politicians and some British parliamentarians agree with the principle of off shore finance others do not. Even among the UK politicians that visited the Cayman Islands this week, the political disagreement between them was apparent. While Conservative MP Michael Fallon may be far more disposed to the principle of free market economics, it was apparent that Ian Davidson, a member of the Labour Party, was not so accommodating about what the financial service sector is up to in Cayman, illustrated by his comment on the first morning of his trip when he noted that, “One person’s tax avoidance is another person’s tax loss."

As the political pendulum in the United States swings away from Republicanism and big business, the probability of Barack Obama’s election to the White House may well see a greater urge in the US to introduce policies which are seen to be fairer when it comes to tax obligations. Not all politicians believe that commercial activity should be allowed to flourish at all costs. Whether or not the reports coming from organisation such as Christian Aid or Action Aid, as reflected in the evidence given to the UK Treasury Committee for its enquiry into tax havens, are completely accurate may be debatable, but their message is strong.

The trans-global corporation is an easy target to dislike. Most international companies are seen only as entities wishing to feather their own nests, and for many their demise would be welcomed. When these types of organisations are seen to be exploiting labour and utilising offshore jurisdictions to limit the tax they pay, or the rights they offer to workers they are vilified even more, and the places such as Cayman and the accountants and lawyers who help them are perceived as colluding with the enemy.

Right or wrongly, as has been extensively noted in Cayman in recent times, perception can be as important as reality. Whether we are compliant, well regulated and working within international law is still far less important on the global stage of perception than the idea that is winning the day: that avoiding taxes is plain wrong and we are facilitating that wrongdoing.