The OECD and the increasingly

wild, wild West

In light of the readily verifiable standard setting advances made by the Cayman Islands with respect to all crimes anti-money laundering and tax transparency, a recent outburst from Senator Dorgan on the floor of the Senate erroneously describing the Cayman Islands as a “tax secrecy” jurisdiction, seems politically and factually out of touch.

Is this an isolated error explained away by inadequate briefing and misplaced reliance on the statements of Attorney General Morgenthau (whom the Senator is happy to quote) or is it indicative of something more sinister?

Certainly the Senator’s tirade seems consistent with the strange, but continuing public relations negativity to which Cayman remains subject, even though that negativity has no basis in fact or law. Perhaps we can connect the dots between this ill-founded outburst and recent comments of Mr Jeffrey Owens, Head of the OECD Tax Division, who says he fully supports the use of illegally obtained or stolen financial information from financial firms in order to track down tax cheats.

“What we don’t condone”, says Mr Owens with impressive moral authority, “is tax payers who do not comply with their obligations”.

He is seemingly oblivious to the well-established principle of tax law that renders a tax liability in one jurisdiction unenforceable in another and the illegality involved when an OECD member country pays an unlawful bribe to a bank officer to gain protected information in stark violation of an individual’s right to privacy.

But tax evasion was off the table in the Cayman Islands a decade ago and even the Swiss are a mere referendum away from the understanding that tax evasion is wrong. So what now are the ramifications of the New World Order suggested by Mr Owens?

Of course there is nothing wrong with progressive thinking, even if inspired by left wing European anarchists, but before we tear down the rule of law in any area we, and those who might unwittingly jump on the same bandwagon, need to better understand what exactly replaces it. On this important point Mr Owens seems strangely silent. Is it then the case that we condone, in place of the rule of law, the outright illegality suggested by the OECD? Is it right that he now suggests the outright violation of criminal law in countries where private rights are protected is acceptable, provided this violation meets with the objectives of an international body?

If that is the case where exactly do we find the basis of this new OECD philosophy? Interestingly, we find nothing in support of illegal conduct in the constitution of the OECD, which the original framers wisely felt should be limited to the promotion of economic well being of member and non-member states and which is, perhaps understandably, silent on the subject of renegade lawlessness. If then, as it seems, the OECD as an organisation has been hijacked and cannot lawfully follow its own objectives, what is the prospect that its policies should follow recognised legal principle either?

To find the root of much of what is now occurring we must look back to the 1998 OECD Report on Harmful Tax Competition. Here we find described a vision of an alternative world of which Lewis Carol would have been proud. It is a world envisioned by the OECDs socialist-inspired belief in one global high rate of tax fixed by a universally omnipotent mad hatter which seeks to render all tax competition unlawful. Everyone is entitled to their own deranged vision. What is more troubling is the recent evidence that apparently the OECD does not regard itself as constrained to achieve its objectives by means that the rest of us regard as lawful.

Evidently hamstrung in the pursuit of its objective, with the troublesome distinction between lawful tax avoidance and unlawful tax evasion, the OECD seeks firstly to evade the distinction altogether by introducing the principle of “escaping taxation”. This new and nebulous concept is apparently of application at any time an otherwise lawful arrangement does not meet with the philosophy of the relevant government with respect to the redistribution of wealth.

The problem with this approach for the right minded is that it replaces a code or set of rules with entirely subjective thinking. The essence of legal tax structuring is that the rules are certain and enforced by the courts. This blurring of the rule of law involves an erosion of fundamental rights that should concern law abiding people not just in the Cayman Islands but everywhere. And we need to know with whom the OECD is aligned, because we now know from Mr Owens’ utterances that in pursuit of its objectives, the OECD does not regard itself as in any way constrained by the application of recognised criminal law.

The OECD notion that tax competition is harmful is itself entirely subjective and is based on the belief that individuals or corporations must pay the highest rate of tax without the right to lawfully mitigate or reduce taxes even though legitimate provisions of domestic law to do so are available. This philosophy ignores the well-established principle that the right to any property, income or indeed tax revenue is a fundamental of a properly functioning legal system. Decent laws in decent places establish the rules whereby a competitor in the marketplace can, provided he does not induce a breach of contract, obtain market share at the expense of an existing supplier.

But according to the OECD, tax revenues “lost” by mobile capital and labour being attracted to more tax-competitive jurisdictions (consequent upon the sovereign right of an independent nation to fix its own tax laws and rates) is a “harm” against which any high tax jurisdiction is entitled to be protected. So the OECD claims:

“That it is therefore worth exploring the possibility of addressing harmful tax competition using a wide range of nontax ‘measures’”.

Although it has taken some 12 years for the OECD to come out in favour of illegality in the pursuit of its objective, we now have a clear indication that from the outset the OECD regarded the word ‘measures’ as entirely supporting illegal and abusive conduct.

And we see the same approach underlying the OECDs suggestion that any jurisdiction which conducts financial activities with a lack of “substantial presence” should be regarded as a ”tax haven” and “harmful” regardless of the tax transparency in effect in the jurisdiction and the absence of tax evasion. But this too is no more than a blatant attack on the rule of law. If the structuring of offshore hedge funds, private equity or structured finance vehicles complies with the laws of the various jurisdictions through which they inevitably operate, then they are necessarily lawfully conducting business.

The fact that they do not resemble in form or operational function, a car manufacturing plant in Detroit with 5,000 people under one roof should not be regarded as an appropriate basis of criticism. It goes without saying that you cannot structure over US$3.6 trillion of hedge fund investment from vehicles in the Cayman Islands for the benefit of institutional investors and to their satisfaction on the basis of full transparency and with fully audited accounts and reporting function without the activities from subscription to investment to audit to regulation and reporting being substantial.

The marketplace considers these vehicles to be real and justifies the fees paid. What we are left with from the OECD is the troubling suggestion that the laws and accounting principles which apply to these vehicles should count for nothing and that these financial arrangements amount to a “tax scam” simply because the economic activity does not conform to a highly subjective view of what the OECD and apparently, Senators Dorgan and Levin think economic activity should look like.

Thinking of this sort is increasingly endemic in Europe and indeed underlies the EU attack on what was a well-regulated fund management industry in the City of London. It was perhaps amusing to some that the OECD were encouraged to represent this left wing dogma as policy when the Cayman Islands was the target. It is less amusing now that the bull’s eye sits on the City of London, and the UK veto having been lost, threatens also to exclude the United States from EU fund management.

What is harder to understand is why US Senators should be seen to support an approach that detaches itself from legal precedent and principle and who therefore align with the extreme socialist anti-rule of law dogma that propels the OECD. It may be convenient in blame-deflecting political speeches that seek to support amendments to domestic US tax policy to ignore fully functioning treaties between the United States and the Cayman Islands that have been negotiated in good faith, executed and implemented, and indeed to ignore legitimate provisions of US tax law that provide for tax deferral.

But in detracting from the application of recognised legal principle and therefore the rule of law, certain persons in the United States are becoming worryingly European and it’s not, therefore, just the public of the Cayman Islands who need to be concerned.

If the rule of law is eroded in this manner what exactly is suggested to replace it?

Highly subjective and arbitrary solutions cobbled together outside of a recognised legal framework on a case by case basis do not provide sufficient certainty to an economy to promote the essential element – investor confidence. The non-arbitrary and non-prejudicial operation of rule of law is an essential that underpins investment and economic development and provides certainty for tax structuring in any developed economy.

If we move from that premise to a place where the rules are subjective (and whether it is the OECDs thinking about what constitutes inappropriate corporate behaviour in relation to the legitimate structuring of tax affairs, or any other abusive exercise of executive authority) we will find that thus eroding the fundamental principles governing economic activity, legal relationships and the rule of law will have far reaching unanticipated and negative consequences.

It is a mistake to disrespect or erode the rule of law without having a superior system developed to replace it. As any bondholder in GM or shareholder in BP will tell you as yet, none has been suggested.

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Anthony Travers

Anthony Travers, OBE, is the Chairman of the Cayman Islands Stock Exchange, former Chairman of Cayman Finance and former President of the Cayman Islands Law Society. Having qualified at Clifford –Turner in 1975, he spent his thirty year legal career years with leading offshore law firm Maples and Calder where he served as Senior Partner and a Managing Partner for over twenty years both in Cayman and in various foreign offices that he established for the firm.  He has extensive experience in all aspects of Cayman Islands law and has worked closely with the Government in the development of Cayman Islands legislation particularly the Mutual funds and Private Equity legislation and legislation relating to the establishment of Private Trusts.

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 Travers
Senior Partner
Travers Thorp Alberga
Harbour Place, 2nd Floor
PO Box 472
Grand Cayman, KY1-1106, Cayman Islands

T: +1 (345) 949 0699
E:
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