Blacklisting threats persist as tax havens still blamed

| 28/09/2009

(CNS): Cayman and other offshore financial centres are not out of the onshore countries ‘bad books’ just yet. The latest meeting of the G20 has revealed more pressure to come on tax havens and yet more potential black lists. According to the communiqué from the Pittsburg round, the G20 countries will be continuing to fight non-cooperative jurisdictions (NCJs). Although it is widely acknowledged that offshore financial centres had little to do with the recent global economic melt down, the G20 members have agreed to use countermeasures against tax havens from March 2010.

However, the OECD has warned the G20 nations that it maybe their own tax regimes that need addressing first.

The G20 members have said they are committed to maintaining the momentum in dealing with tax havens and to deliver an effective programme of peer review.  “The main focus of the Forum’s work will be to improve tax transparency and exchange of information so that countries can fully enforce their tax laws to protect their tax base. We stand ready to use countermeasures against tax havens from March 2010,” the communiqué stated.

It also indicated that it would require the Financial Action Task Force (FATF) to issue a public list of high risk jurisdictions by February 2010. “We call on the FSB to report progress to address NCJs with regards to international cooperation and information exchange in November 2009 and to initiate a peer review process by February 2010.

However, the Organisation for Economic Cooperation and Development (OECD) has warned the G20 nations that dealing with the symptoms of the problem and not the real causes can cause more harm than good. Speaking to AFP, the OECD said reforming national tax regimes in leading countries should be where the focus is because onshore tax incentives encourage the legal use of offshore entities and complex instruments to take best advantage of onshore tax allowances.

The OECD said that the causes of the global economic crisis lay with policymakers in many fields and in many countries.

Speaking to Reuters in the wake of the summit, Leader of Government Business Mckeeva Bush said the campaign against offshore centres was misdirected. "It’s not fair," said Bush. He said that the anti-tax haven "finger pointing" by the world’s richest and most powerful governments is hypocritical and seeks to shift blame away from their own failed policies and lax regulation. "It’s the fault of the onshore centres who taxed their own people … money is running away from them now," Bush said.

An OECD report "Reform and exit strategies" implies that the main causes of the global crisis were borrowing by governments and unduly low interest rates by central banks. Official distortion of exchange rates then prevented markets from absorbing the global trade and savings imbalances which resulted. In the West, a social bias towards "easy money policies" led to "excess liquidity, asset bubbles and leverage."

Another cause was the so-called "American dream" vote by Congress to push out zero asset-backed home loans to low income households. "Banks respond to the signals they are given," the report suggests. It also points to the risk that mortgage tax relief, of the type associated with subprime loans, could result in households falling into excessive debt.

Author of the report, Adrian Blundell-Wignall, says a cause of the crisis, given little or no public attention, was national tax systems in leading economies. These unduly favour corporate risk and debt leverage and were the main force behind much-criticised structured financial instruments. But the issue of domestic tax reform "needs to be on the long-run agenda," Blundell-Wignall said.

He also cites a degree of incompetence in bank boardrooms, the pooling of businesses within financial groups which ensured contagion if part of the group collapsed, and unduly complex or overlapping rules and supervision.

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  1. CaymanMangos says:

    It need not be the end of anything, on the contrary, tightening the rules in other countries may even provide more incentives for companies to move offshore in a real sense (bodies and all), which may be a boon to Cayman as long as it continues to be regarded as a credible, professional and consistent jurisdiction.  In that light, recent British pressure with regards to imposing a system of (direct) taxation can certainly be seen as an effort to devalue the Cayman brand.

    Switzerland (which of course is an independent country) has taken a lot of flack recently for its tax haven status yet it has lost nothing of its allure, and on the contrary, has registered a definite increase in inquiries from would-be immigrants from other countries.  These are not necessarily tax evaders but rather individuals who can see the writing on the wall, as the budgetary reality of the recent bailouts will hit home in about a year or so, followed by the inevitable tax increases and movements to ‘tax the rich’.

    Cayman needs to continue advertising its definite advantages and express pride in its products instead of reacting from a defensive position. There is no reason we cannot turn ourselves from a tax haven into a ‘safe haven’.   As with most things in life, the right attitude can go a long way.

    • Anonymous says:

      I agree, capital gains and income tax rates may need to rise north of 50% for much of the western world in the years ahead.  The FCO would be foolish not to "prepare the battlefield" in anticipation of that real possibility.  

      Worst case, a modest tax rate of 1-2% could have some silver lining if paired with double taxation treaties (as Barbados enjoys).  Note to LOGB: Double Taxation treaties need to be reviewed and negotiated by intelligent people (on our side). 



      • Anonymous says:

        I also agree that there are opportunities at the moment that need to be focussed on. Unfortunately seeing the opportunities requires an element of intelligence.

        It is also important to note that some countries (examples being Bahrain and the UAE) are able to negotiate double tax treaties without having income or corporations tax or having zero rates of tax – not quitethe same thing as having no direct tax (Estonian corporations tax). On the other hand, some countries which have direct tax are not given access to double tax treaties as the onshore countries want the prospect of double taxation to deter investment.

        Barbados which has direct taxes and double taxation agreements is now having a problem with other countries trying to say that the tax treaties will not apply to their financial services sectors – again the onshore countries try to manipulate things to their advantage. 

        You are correct in pointing out that negotiating double taxation agreements is highly technical. Unfortunately Mac’s advisors apparently think that there is no advantage in Cayman having the opportunity of greater commercial certainty which is provided by properly crafted treaties as Cayman did not have access to treaties when they arrived in the 70’s. Big ego and limited knowledge appears to be a dangerous combination.  

  2. Anonymous says:

    After signing dozens of openhanded exchange agreements, would Cayman still be considered to be on a "NJC black list"? 

    Of those still on the OECD "Black List", such as Panama, what possible sanctions would the G-20 World be willing to enforce upon such a vital conduit of global commerce?  Perhaps there is a lesson in political diplomacy for Cayman’s leadership:

    "The point is that we will sit down and talk with countries with which we have an important business relationship, and not because we are being lead by the requirements of the OECD," added De Lima.

    • Anonymous says:

      would Cayman still be considered to be on a "NJC black list"

      The answer is of course, it depends on which day of the week it is and what colour of socks the LOGB is wearing – in other words it is somewhat arbitrary and dependent on the interests of the self-serving politicians in the G20 states. To the extent that our politicians do not have the b@lls to stand up to them in even a symbolic way provides an invitation for them to put Cayman on their lists.

      Whether or not Cayman is on a particular G20 list at any given point in time has nothing to do with anything objective other than the existence of Cayman’s financial services sector as a competitor.

  3. Nostradamus says:

    Now this IS the beginning of the end for us.