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Copyright 2000 Robert L. Sommers, all rights reserved.

August 2000 Hot Topics

Part 2 of a 2-part series

The Demise of the Off-Shore Tax Haven Industry, Part Two

The Cayman Islands

Just before the report was made public, six countries, most notably the Cayman Islands, agreed to waive their bank secrecy laws for those facing tax-evasion investigations by their home countries. Cayman tried to downplay this significant capitulation to the developed nations by stating that its 580 banks are not dependent upon the activities of tax evaders, drug kingpins or money launderers for their source of deposits, which they estimate at $500 billion. (Source: Wall St. Journal "Tax Havens Cave In to Global Pressure"). According to the Wall St. Journal:

The Cayman Islands also plans to issue a policy directive advising financial-service providers against the use of 'aggressive marketing policies based primarily on confidentiality and secrecy' the government said.

This turnabout in attitude within the Cayman Islands prompted tax-haven critic Jay Adkisson, in his July, 2000 edition of the Adkisson Analysis ( http://www.falc.com) to remark:

For more than a year, I have been warning that the U.S. and E.U. are totally fed up with the offshore centres and would take drastic action to eliminate them. My warnings not only fell on deaf ears, but some in the profession characterized my remarks as "hysterical".

Similarly, I have received numerous e-mails and letters from offshore service providers accusing me of spreading "false rumors" and declaring that there was "no way" their jurisdiction would ever provide information to law enforcement authorities in the "major" countries, or cooperate with them in tax evasion and money laundering prosecutions (that they held this latter to be a source of pride should tell you something about the mind-set of the industry).

Many of the harsh e-mails and letters I received came from the Cayman Islands, which ironically was one of the first to announce the precise sort of action I had predicted.

After the back peddling by the Cayman government, Jay made some general observations about the tax haven officials and the U.S. professional promoting off-shore transactions:

…you cannot trust the people offshore to give you the truth about what is happening within the offshore industry. … the people offshore will always tell you that their world is rosy, whether or not it really is. After all, that is their business.

… you cannot trust many U.S. professionals to give you good information on what is happening offshore. Many of these U.S. professionals – including Yours Truly – have business relationships offshore such that there is an inherent bias to say that everything offshore is "O.K.", but that more importantly the jurisdiction wherein their business interests lie is still prospering.

For the Cayman Islands, cooperation with the OECD is a calculated risk that it will gain more by cooperating with the developed nations of the world than it will lose in business to those countries who will no doubt attempt to raid Cayman of its tax-dodging clientele.


OECD 's Anti-Money Laundering Drive

Cayman had another political angle for cooperating with the OECD, namely, to forestall the U.S. from taking action against it as a money laundering haven. Cayman was also listed by the OECD's forum on money laundering as "non-cooperative in the fight against money laundering." This report, which was separate from the tax haven document, states the OECD member nations should impose "heightened" reporting requirements on transactions to and from the blacklisted countries, which could include reporting by U.S. banks and financial institutions to the U.S. Treasury Department of all bank transactions from the U.S. to Cayman and vice-versa.

According to Jay Adkisson, Cayman is worried that if the U.S. imposes these strict reporting requirements based on its money laundering misconduct, it will lose substantial business; therefore, Cayman hopes to avoid this possibility by cooperating with the OECD on the tax haven issues.


The Cooperating Six

In addition to the Cayman Islands, the countries of Bermuda, Cyprus, Mauritius, Malta and San Marino have accepted the OECD’s mandate that they abandon their tax haven practices, by making an "advance commitment" to "eliminate harmful tax practices by the end of 2005, embracing international tax standards for transparency, exchange of information and fair tax competition."

The advance commitment must have been made publicly and at the highest level of government. In effect, these countries had to publicly renounce their tax haven activities by their top government official. Such a declaration, should increase the level of paranoia for those tax evaders and crooks currently hiding money in those countries.


The Blacklisted Thirty-Four

The report blacklisted the following countries as non-cooperative tax havens:

  • Andorra
  • Anguilla
  • Antigua & Barbuda
  • Aruba
  • Bahamas
  • Bahrain
  • Barbados
  • Belize
  • British Virgin Islands
  • Cook Islands
  • Dominica
  • Gibraltar
  • Guernsey, Sark & Alderney
  • Isle of Man
  • Jersey
  • Liberia
  • Liechtenstein
  • Maldives
  • Marshall Islands
  • Monaco
  • Monserrat
  • Nauru
  • Netherlands Antilles
  • Niue
  • Panama
  • Samoa
  • Seychelles
  • St. Lucia
  • St. Kitts & Nevis
  • St. Vincent & Grenada
  • Tonga
  • Turks & Caicos
  • U.S. Virgin Islands
  • Vanuatu

These countries will have one year to develop a plan to eliminate their tax haven activities by abolishing their bank secrecy rules and their taxing regimes that do not tax capital and services of foreign corporations. Countries that refuse to cooperate will face an unspecified set of sanctions, which may include the following:

1. Disallowance of deductions, exemptions, credits or other allowances related to transactions with the tax haven;

2. Imposition of withholding taxes on certain payments to residents of tax havens;

3. Denial of deductions and cost recovery, to the extent otherwise allowable, for fees and expenses incurred in establishing or acquiring entities incorporated in tax havens;

4. Imposition of transactional charges or levies (i.e. tariffs) on certain transactions involving tax havens; and

5. Complex and detailed information reporting requirements for transactions with tax havens, supported by substantial penalties for inaccurate reporting or non-reporting of such transactions. Also, OECD members could instruct their banks not to conduct business or make transfers to or from blacklisted countries.

U.S. officials favor withholding taxes on all interest payments made to tax havens, along with additional reporting requirements imposed on taxpayers with accounts in these jurisdictions. Of course, imposition of these restrictions will run these countries out of the tax haven business, except for the hardcore international criminals who do not report their income or activities to their home countries in the first place.


Conclusion:

The OECD nations have targeted the tiny rogue nations of the world which are serving as tax havens. Since many of these countries are British protectorates, they are expected to comply with the OECD dictates. For the remaining countries, the proposed sanctions could effectively destroy their tax haven businesses.

The U.S., however, needs to tread carefully when dealing with the tax havens in the Caribbean. It needs to preserve their economies, lest the political structure within those countries collapse and the drug cartels take over. Thus, U.S. tax and drug prevention policies must be carefully balanced.

My prediction: Tax havens will survive, but in drastically reduced form. Tax havens will agree to information sharing with the OCED countries, but only when there is an actual tax or criminal investigation. Thus, there will not be indiscriminate disclosure of the identities and activities of those using the tax havens.

For those with assets hidden in tax havens, it's time to be nervous. Take the celebrated case of John M. Mathewson. He was the owner of the defunct Guardian Bank & Trust Limited of Grand Cayman, who provided IRS with over one year's worth of Cayman bank records on thousands of U.S. taxpayers hiding funds in his bank; despite Cayman’s secrecy laws.

The Mathewson case demonstrates how easily your "secret" bank records could easily fall into the hands of your home country's taxing authorities and you could be facing a criminal indictment for tax evasion.

With the publicly announced crackdown on tax havens, expect more Mathewson-type disclosures and U.S. criminal tax evasion indictments.




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