The Darling of the tax haven

(CNS):  The Cayman Islands, along with the United Kingdom’s other overseas territories and crown dependencies that have offshore financial service industries are to be the target of yet another review according to the UK Chancellor. Alistair Darling said in Monday’s pre-budget speech that the current global economic crisis had highlighted potential problems as the territories attract banking customers with lower taxes – without contributing to the UK Exchequer.

Despite the fact that earlier this year the UK Treasury Committee began an inquiry into Offshore Financial Centres and invited them to submit written evidence for a report which has yet to be released, the UK Chancellor says he has asked for a review of the regulatory arrangements surrounding territories and dependencies which he says will report to him in the spring.

The global financial turmoil has spurred most western government’s to seek explanations and while most experts have pointed the finger squarely at onshore jurisdictions and their poor levels of regulation the tax free or low tax status of places such as Cayman make them consistently attractive targets for ministers looking for scapegoats. Dalring said in his 24 November speech that in times of stress, depositors need to know who will compensate them.

“The British taxpayer cannot be expected to be the guarantor of last resort. The Government will shortly commissionan independent review of British offshore financial centres; their role in the global economy; and their long-term business strategies," it was stated in the pre budget report.

"The review will not consider changes to the UK’s constitutional relationship. It will work with the crown dependencies and overseas territories to identify current and future opportunities, risks and mitigation strategies, including issues such as: financial supervision and transparency; fiscal arrangements; financial crisis management and resolution arrangements; and international cooperation," the report continued.

Former chair of the Cayman Islands Monetary Authority (CIMA) Tim Ridley said that Cayman needs to pay attention to this latest development.  He notes that in the pre-budget report Darling makes it clear he is seeking full exchange of information when it comes to tax issues. “The words that should really make us nervous in the pre budget report are “there is growing international pressure to line up standards of regulation and meet international norms with regard to taxation. Increased engagement, increased transparency and enhanced cross border assistance and exchange of information are essential to preserve our industry," Ridley added. 

In the report Darling does acknowledge that progress has been made by most offshore financial centres to improve financial regulation and transparency, and tackle financial crime. However, he states that these jurisdictions also, “face challenges and opportunities as the world is changing.”

The idea that UK residents can reduce their tax obligation legitimately through the use of offshore financial service jurisdictions such as the Cayman Islands continues to irritate the UK Treasury. In times such as these where the UK government faces pressure from its electorate as a result of enormous economic uncertainty, the offshore tax haven remains a favourite target.

While Cayman is certain to figure in this UK review it appears however, that Darling’s first target is the Channel Islands and Allan Bell, the Isle of Man’s Treasury Minister, hit back at the UK, saying that the Government was orchestrating a campaign to make the Isle of Man a scapegoat for the Icelandic banking crisis, which has cost British local councils with deposits in Icelandic banks millions of pounds in lost savings. The Isle of Man subsidiary of the Icelandic bank Kaupthing collapsed when its parent was nationalised in September. British savers with the offshore bank have called on the Government to refund their deposits in the same way as it has compensated savers with the bank’s onshore UK subsidiary.