Levin’s bill – and its likely effect

| 17/03/2009

Iguanas have always fascinated me. Whenever I see one, the question I always ask myself is this: Is it actually asleep – like a fish – or is it just pretending to be (secretly hoping that you will lose interest and go away) – like the CI government?

Whilst iguanas may leave me feeling confused, I would never make the elementary mistake of confusing government ministers for fish. It is quite evident to me that Cayman’s government ministers are not literally asleep with their eyes open, because they do on occasion speak. For example, they came back from their Washington trip last week and were reported in the Compass to have said: “We talked about the Levin Stop Tax Haven Abuse Act and the people we met with said the senator has introduced something akin every year. Coupled with the fact the time it takes between laying it in the house and having it pass into law is considerable, so that we can lay some store in that not being a major concern right now.”

Not a major concern right now? I couldn’t agree less. Have they not read it? The senator has not introduced something akin every year. The version he introduced at the beginning of this month is much more serious for Cayman than the previous ones. Whereas once he planned merely to crack down on individuals and corporate entities that were hiding behind Cayman’s confidentiality laws to evade tax, now Levin is planning to close down entities that were previously tolerated as being legal. In short, he plans to close down Ugland House. He actually names it.

Before I explain, let me reiterate: Levin is a tenacious, dangerous operator riding – causing even – a global wave of anti-tax haven sentiment. It is not just rhetoric; there is a permanent sea change of opinion in the air. Last week, for example, Andorra, Austria, Belgium, Liechtenstein, Luxembourg and Switzerland all appeared to indicate that they will no longer differentiate between tax evasion and fraud. In other words, they will no longer allow their secrecy laws to expedite illegal tax evasion – although legal tax avoidance is still OK.

So what’s legal and what’s not?

Tax is a hugely complex subject. You can adopt a legal approach, avoid it, minimise it, adopt an ‘aggressive’ legal approach, sail close to the wind, ignore it, evade it, adopt an ‘aggressive’ illegal approach, wriggle a bit in your chair, but if all else fails, you can pay it. And if you pay it late, you get a socking great big fine.

Let’s take individuals, because individuals (as opposed to corporate entities) are said to account for 70% or so of the problem. Broadly speaking – and correct me if I’m wrong – onshore individuals are supposed to pay tax on the distributed income (dividends) and profits from their investments wherever in the world they arise, even if the funds are never repatriated. (All in spite of the fact that these funds have already been taxed when you earned them and are going to be taxed again when you die a tax-induced early death – but I mustn’t get sidetracked here by the iniquity of the tax system.)

Last year, the United States Government Accountability Office (GAO) published a report on US activity in the Cayman Islands; in particular, they wanted to know what is going on in Ugland House. The report can be found at http://www.gao.gov/new.items/d08778.pdf and it makes interesting reading. It mentions a number of reasons why Cayman attracts legitimate business; these include Cayman’s creditor-friendly bankruptcy law, its physical proximity to the US, its prominence as an English speaking international financial centre and its business friendly but cooperative regulatory environment.

But Cayman’s biggest draw is its absence of corporation tax; as I understand it, onshore individuals can legitimately invest their personal wealth in offshore corporate entities – and so long as any profit or income stream is rolled up or reinvested within the entity rather than being distributed, these individuals can defer their onshore tax liability indefinitely. This is because non US earnings of non US entities (in which the individual’s funds are invested) are not generally liable to US tax. Tax deferral, then – and there are various other tax avoidance techniques – is quite legitimate.

The reason Levin is incandescent with rage is broadly two-fold. (His latest report, which was published earlier this month, can be found at www.levin.senate.gov/newsroom/release.cfm?id=308945. It’s packed full of ideas, with case histories that “unfold like spy novels, with secret meetings, hidden funds, shell corporations, and complex offshore transactions spanning the globe …”)

The first reason for Levin’s rage is individual illegal tax evasion: some individuals are apparently forming their own personal entities which are not genuine corporate global entities at all, but which are incorporated for no reason other than to escape personal taxation. (Whatever is the world coming to?) These people employ compliant offshore ‘puppet’ controllers, but in reality the onshore citizens own and control the assets themselves. According to Levin, their strategies are also often extremely complex. MEGOs, no less (which stands for my eyes glaze over). After all, if a personal case history is complicated enough, no one can be bothered to get to the bottom of it all.

These are the illegitimate tax evaders, and they are aided and abetted by offshore confidentiality laws. In general, Europe and the US want to do away with confidentiality laws altogether; in addition, Levin proposes to deal with them by establishing rebuttable evidentiary presumptions such that the individual will be presumed ‘guilty’ until he can prove his innocence. In other words, any assets sent offshore – to any of the countries in Levin’s list of ‘offshore secrecy jurisdictions’ – will be deemed liable to tax.

Even more potentially serious, perhaps, will be the how Levin will deal with the problem of Ugland House because – and this is the second reason for his rage – “very few Ugland House registered entities have a significant physical presence in the Cayman Islands”. They will be tolerated no longer. Section 103 of Levin’s law proposes, therefore, that if a corporation is publicly traded or has aggregate gross assets of $50 million or more, and its management and control occurs primarily in the US, that corporation will be treated as a US domestic corporation for income tax purposes.”

Now, I am English and English people do not like to be the bearer of bad tidings. It is part of our national psyche. This is because in the old days, if you went to the King and said, “Your Majesty, I return home from lands afar, and I have to report that we lost the war and your magnificent empire is slightly diminished”, the King would chop off your head.

So how would Levin’s law affect Cayman? In its present form, its financial centre would struggle to survive. In fact I will go so far as to say that sooner or later, one way or another, I think the party could be over. But, I hasten to add, that may turn out to be a good thing…

Coming next (after the G20 summit). Make way for a physical influx of fund managers and tax exiles… whose bright idea was it to build Camana Bay, anyway? Maybe I should take back that iguana/CI government comparison thing. Maybe the government is very clever after all.

Print Friendly, PDF & Email

Category: Viewpoint

About the Author ()

Comments (6)

Trackback URL | Comments RSS Feed

  1. Jenny Canty says:


    Sir, I believe ‘the future of tax havens’ is an appropriate subject for serious, civilised, public debate.
    Registered corporations represent just one aspect of the perceived problem. Senator Levin did not say that 100% of corporations with registered offices at Ugland House are controlled by US persons. He said “GAO determined that about half of the alleged Ugland House tenants – around 9,000 entities – have a billing address in the US and were not actual occupants of the building. In fact, GAO determined that none of the nearly 19,000 companies registered at the Ugland House was an actual occupant. Approximately 96% of these entities were classified as exempted entities under CI law, and were thus generally prohibited from carrying out domestic business within the Cayman Islands.
    Section 103 of the bill is a new addition to the Stop Tax Haven Abuse Act designed to address the Ugland House problem. It focuses on the situation where a corporation is incorporated in a tax haven as a mere shell operation with little or no physical presence of employees in the jurisidiction … and where its management and control occurs primarily in the United States, that corporation will be treated as a US domestic corporation for tax purposes.”
     I have 4 questions on the corporate question (as opposed to the question of individual tax evasion, the trusts ‘loopholes’. And thank you for your input on the tax liability of US individuals which is different from CGT liability in the UK.) 
    1)      If Levin’s bill is enacted, then is it correct to say that roughly 50% of the Ugland House (US billing address) tenants – at least those with assets of over $50m) will lose the tax advantage they previously enjoyed?  
    2)      And if – and I put it clumsily – the Rest of the World continues to follow the US lead on this matter, would it not be fair to say that all 96% of Ugland House tenants will find themselves similarly disadvantaged?
    3)      Ugland House has – according to Senator Levin – 18,800 registered companies, but in total there are apparently more registered businesses in the Cayman Islands than residents.  How many of these additional businesses are also managed and controlled from outside the Cayman Islands, if indeed they are? 
    4)      If the momentum against ‘tax havens’ persists to fruition, where do you see Cayman’s financial centre in ten years’ time?
    Jenny Canty    
  2. Anonymous says:

    US persons tax liabilities for foreign co’s are assessed on a deemed P/L for the tax period – the gains do not necessarily need to be realized as you maintain.  So there is no legal tax deferral for an overseas corporation under the control of a US Person.   

    Furthermore, stating that 100% of corporations with reg’d office at Ugland House are controlled from US Persons is a preposterous claim, particularly considering there are Resident Companies, Non-Resident Companies, Exempted Companies, and Foreign Companies with registered offices there.


  3. Jenny Canty says:

    What I meant by tax referral is – as I wrote – that onshore individuals are not liable to tax until they make a disposal or receive a dividend.  Therefore, any long term investment in a company that does not make any distributions is, in a sense, a deferral of tax.  A long term investment in a Cayman based company, that itself does not pay corporation tax, can allow a personal invesor to accumulate tax free returns so long as she does not realise them.  

    THe reason I write about ‘legal’ Cayman based activity is precisely so that I do NOT imply there is ubiquitous sinister intent.  

    Similarly, US-based multinational business may create a CI subsidiary to hold foreign earnings which are not generally taxed in the US unless or until repatriated.  (GAO).  Again, perfectly legitimate.

    One reason for my concern is that Levin intends to outlaw another – previously tolerated as legal – activity.  Any Cayman based company will, if he is successful, be liable to US tax if it is controlled predominantly from the US.  That is the whole of Ugland House, for a start.  

    How many companies are there in Cayman that would be affected, do you know?  My membership to the London Stock Exchange expired over twenty five years ago, and I confess that I write no longer in my professional capacity, but as an interested bystander.    

    Finally, I do not mean to imply that the US is any worse than any other country.  Indeed, only 50% of the Ugland House companies have US registered addresses.  It is just I have been reading US research.     Jenny Canty


  4. Anonymous says:

    I recommend you consult one of the many US Accounting Tax Experts on (or off) the island before your next Op-piece concerning US Corp Tax.  There are material inaccuracies inyour understanding and portrayal.  I think you will find that currently there is no legal deferal of tax for US persons, which also extends to any Partnerships or Corporations that may be investing overseas on their behalf. 

    It is perfectly legal for a US Person to invest though an overseas company if they make a correct and accurate annual tax filing.  Many people do, as I believe they do also in England and elsewhere.  The actual tax fraud and evasion comes in when a person fails to file a truthful report, or neglects to make a report at all. 

    One should not assume that all overseas corporations are fraudulent or extrapolate a presumption that there is an American linkage or some sinister intent.  Indeed, there is a whole planet of sophisticated people from many countries other than the USA that conduct some of their financial affairs in the Cayman Islands.   

  5. Anonymous says:

     Thank you for a clear summary for those of us who are not financially oriented. Can you or anybody suggest what concrete steps the CIG should take or could take to avoid becoming a ghost town?Surely this should be the major issue for the upcoming elections or this place could be surviving on tourism alone in the near future? There are few Caymanians who wish to work in the service sector. Why are so few people not desperately concerned with this or is it less iguana than an ostrich syndrome?