“Nie Wieder” – And Yet Here We Are: The View From The Offshore Financial Centre

The OECD felt entitled, on no evidence, to assert it, and solved a nonexistent problem by mandating under threat of blacklist that the Cayman Islands introduce economic substance legislation which has proved to be an irrelevance. Emboldened by the success of the blacklist threat, the EU Code of Conduct Group then insisted on the regulation of Cayman Islands private funds and then extension of economic substance legislation to partnerships. The indisputable conclusion of any fact-based research, however, is that none of these EU extra territorial initiatives has the slightest thing to do with EU tax avoidance or more astonishingly anything to do with protecting the EU investor base since Cayman Islands companies and partnerships do not benefit from an EU cross border marketing passport under Alternative Investment Fund Managers Directive (AIFMD) and are not marketed in the EU directly. But aggressive EU propaganda and control of the relevant media appears to dictate the narrative. The time is right for the new Cayman government to reset the narrative. 

If doing so it is worth restating that Government of India v Taylor[i] remains good law. This 1955 House of Lords decision held foreign tax claims are not admissible in the United Kingdom and nor, therefore, are they in the Cayman Islands.  Evidently, this proposition may be varied by treaty agreement but the Cayman Islands has none that would do so with the major EU jurisdictions. In the Cayman Islands court, a foreign tax claim is unenforceable, although each of its 36 tax information exchange agreements enable foreign tax authorities to make enquiry and the Foreign Account Tax Compliant Act (FATCA) and the Common Reporting Standard (CRS) automatically disclose to relevant tax authorities all financial accounting information of Cayman Islands entities and their investors.  What follows from this is that legally, the Cayman Islands is under no obligation to agree to the imposition of any form of taxation or tax related legislation let alone the private fund regulation suggested by the extraterritorial tax initiatives of the EU. And particularly not when there when there is no concomitant extension to Cayman Islands issued securities of the AIFMD. The EU is simply all stick and no carrot. Perversely, too, it should be noted within the EU under current EU law the 27 member states retain a veto over internal tax matters. It is the absence of any sound legal basis for its extraterritorial tax initiatives that causes the EU to rely on the threat of blacklists to achieve its objectives.  

But both the OECD and the EU were aware in the court of public opinion that they needed to do more. They needed first to create a narrative which suggested that each is in the right to threaten without legal basis. They did so by establishing a false narrative that the Cayman Islands is in some way involved in avoiding taxation within the EU with a result that harms the EU’s tax collections and that, therefore, the EU position about its threats and blacklists is morally sound. 

This false narrative was at the core of the highly subjective and widely criticised 1998 OECD Harmful Tax Competition Report. The deceptive analysis within that Report is now evident, given the tax and all crimes transparency introduced in the Cayman Islands as a result has not discernibly increased tax revenues in any EU jurisdiction. And yet the Report has at no time been rejected. The OECD now finds the Cayman Islands not harmful in relation to tax matters. The EU, however, concludes to the contrary.

Unsubstantiated Assertions

Throughout the EU, practice is to make unspecific, unsubstantiated dogmatic assertions which are no more than propaganda. Mr. Pierre Moscovici, the former EU Tax Commissioner, and now Ms. Lyudmila Petkova, chair of the informal European Code of Conduct Group, describe the Cayman Islands, in their attempt to justify the blacklist threat, as “non-compliant”. Ms. Petkova is well schooled in OECD philosophy but here chooses to rely on a highly subjective and by its own admission no longer remotely correct OECD determination relating to transparency. EU Economist, Paul Tang, another dyed in the wool career socialist who has unsurprisingly risen to the position of chair of the EU Parliament sub-committee on tax matters, has a newer and equally subjective non-evidence-based commentary which follows the EU Parliament resolution of 21^st January 2021 that confusingly (for all) seeks to reverse the EU Tax Commissions removal of the Cayman Islands from the EU blacklist.

“By calling the EU list of tax havens “confusing and inefficient” the Parliament tells it like it is.  While the list can be a good tool, member states forgot something when composing it: Actual tax havens. The fact is, the list is not getting better it is getting worse. Guernsey, the Bahamas and now the Cayman Islands are only some of the only well-known tax havens that member states have taken off the list. In refusing to properly address tax avoidance, national governments are failing their citizens to the tune of over US$140 billion”.

This is bare faced hypocrisy taken to a new level. Tang, who is an economist and should know better, makes the elementary mistake of equating a jurisdiction with a zero rate of relevant tax and applying tax neutrality to capital and income flow throughs with tax avoidance in the EU without ever explaining how this is supposed to occur or providing any example.  Further, whilst the US$140 billion figure may well represent EU tax losses through tax avoidance, in no way does Tang evidence how this relates to any form of Cayman Islands structure. The possibility that tax losses occur through the double tax treaty jurisdictions within the EU which are not on the EU blacklist appears not to be within the EU Parliament’s contemplation. Tang seems incapable of providing any example as to how EU tax avoidance occurs or from where. And for good reason. The predicate tax avoidance without which the transfer pricing cannot occur is necessarily occasioned by abuse of a double tax treaty of an EU jurisdiction, most typically Ireland, Luxembourg or the Netherlands.

What is astonishing about the traction of this oft repeated false narrative is that whether asserted by Moscovici, Petkova, Tang or Pascal Saint-Amans of the OECD (it is a mistake to regard the OECD, the EU Tax Commission, The EU Parliament or the EU Code of Conduct Group as anything other than inexplicably politically linked with a common objective) at no time have any of them stated with which principle of international law, the Cayman Islands was supposed to be non-compliant. 

Answer The Questions

What is even more astonishing is that at no time in the Cayman Islands government’s responses to the EU’s aggressive extraterritorial tax initiatives, specifically the Economic Substance Act, the regulation of private funds under the Private Funds Act and now the extension of the Economic Substance Act to include limited partnerships, have the following questions been asked by it; specifically:

1.  a) Given the complete transparency afforded to the relevant EU jurisdictions on distributions from Cayman Islands investment structures to EU investors pursuant to the tax information exchange agreements and the automatic reporting under the Common Reporting Standard; and 

b) Given that taxes on the investments made by all Cayman Islands structures are verifiably paid in the jurisdiction of investment, in what way is the zero-tax rate in the Cayman Islands regarded as harmful?  Provide examples and calculations showing the tax regarded as avoided in the EU.

2. Why does the EU regard the Cayman Islands tax system as in any way harmful or non-compliant when the OECD does not?

3. Specify, with examples, how precisely the OECD and the EU regard Cayman Islands structures as involved in base erosion and profit shifting when the Cayman Islands is not a double tax treaty jurisdiction.

4. How precisely, given the Cayman Islands is not a double tax treaty jurisdiction, is the concept of economic substance relevant to base erosion and profit shifting?

5. It is stated repeatedly that the Cayman Islands is non-compliant. With what international legislation do you regard it as non-compliant and particularly in the light of the pro-active and reactive exchange of information agreements and arrangements above-mentioned?

6. Provide examples precisely specifying the tax you regard as having been avoided in the EU by Cayman Islands entities.

The reality is that the repetition of the false narrative has been perpetuated, (occasionally backed by EU generated “research” reports adopting an unspecified methodology) and the EU given a free ride for a want of a robust, technically based response from any offshore financial centre. Rather, the overriding view of the Cayman Islands government  has been that blacklisting the Cayman Islands, regardless of the propriety of so doing, would indeed cause harm to the Cayman Islands financial services industry. But in adopting a policy of appeasement, the Cayman Islands government has been tacitly endorsing the false narrative and is itself therefore complicit in the outcome. There is no doubt that in fostering a false narrative the EU, and indeed the OECD, have acted in bad faith throughout.  We now know that to be the case. The EU Parliament now comes clean. It states categorically in the above-mentioned resolution of 21^st January 2021 that a “zero per cent tax rate policy in a jurisdiction should automatically lead to being placed on a blacklist”.  But for the reasons mentioned above, unless it can be shown, and it cannot, that the zero percent tax rate and tax neutrality in the Cayman Islands is causing tax leakage in the EU, there is not the slightest justification in this new EU Parliament proposition. It is regrettably an indicator of the confidence that the EU now places in the success of its blacklisting initiative that it feels no need for further subterfuge or disinformation. 

It is for the new administration in the Cayman Islands to establish that the tax neutrality of the Cayman Islands system does not create tax leakage in the EU. But even so doing is unlikely to change the EU approach because it cannot be the case that Moscovici, Petkova, Tang and Pascal Saint-Amans, who are each reasonably well educated, did not from the outset fully recognise the fallacies in their assertions. And it is for that reason that the above-mentioned questions will not be answered.

If memory serves, preventing the implementation of unjustified harmful behaviour based on nothing but propaganda and asserting the same extra territorially was one of the reasons the EU was founded. And yet here we are. But nor should it be the case that users of the Cayman Islands should be in any way persuaded by threats of EU blacklists based on no more than a tired and manifestly false narrative.

Footnotes:

[i] 1955 AC 491

For further reading, see also:

https://www.ifcreview.com/articles/2020/february/the-cayman-islands-and-the-eu-blacklist/

https://www.ifcreview.com/articles/2020/june/the-new-eu-blacklist-and-other-inventions-of-the-seriously-deluded/

https://www.ifcreview.com/articles/2021/february/juicy-fruit-for-all-the-lunatics-are-finally-in-charge-of-the-asylum/

Anthony Travers OBE
Anthony Travers OBE is the Senior Partner of Travers Thorp Alberga, former Chairman of Cayman Finance and former President of the Cayman Islands Law Society. The former Managing and Senior Partner of Maples and Calder, he has extensive experience in all aspects of Cayman Islands law and has worked closely with the Government and prepared the Cayman Islands legislation for Mutual Funds and Private Equity vehicles, in the Private Trusts area, the Asset Protection Legislation and drafted the Cayman Islands Stock Exchange Law. Anthony was made an Officer of the Most Excellent Order (OBE) for his services to the Government and the Financial sector in August 1998. Anthony has written numerous articles and has spoken regularly at conferences and seminars.