Responding to global tax initiatives

As the tectonic plates of international taxation and tax cooperation continue to shift and reshape the global taxation landscape at an unprecedented pace, they nevertheless do so with ever-increasing synergy.  

And, with the endorsement of greater convergence of several tax-related initiatives being articulated more clearly in successive communiqués from the G20 leaders and the G20 finance ministers and central bank governors, it is clear that this shifting and reshaping is the new normal. 

This fluidity will be the trademark of the global taxation environment in the future. More specifically, this fluid global environment will be a reality in which the Cayman Islands, as an international financial centre, must continue its informed and positive engagement.

This is necessary because it is not possible – and if it were possible, it would be unwise – for Cayman to think and take action in isolation from global initiatives. For the stability and reputation of its financial services industry, it must participate fully. Cayman must know the rules of engagement and whenever practical, provide input into the development, application and evaluation of those rules.

Consider these six global initiatives, all launched or expanded within the past three years, and all of which will affect the Cayman Islands. The joint OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters has featured prominently in international tax cooperation conversations since a 2010 Protocol opened it to all countries. While designed to achieve US objectives, the unilateral FATCA initiative also is proving to be a catalyst for a broader, multilateral approach to automatic exchange of information for tax purposes.

Tax evasion is now included as a predicate crime in the revised Financial Action Task Force (FATF) Recommendations, issued in February 2012. A ‘whole of government’ approach to tax and financial crime, together with greater interagency cooperation, is advancing through initiatives such as the Oslo Dialogue and the Tax and Crime Forum. And last by no means least, the Global Forum on Transparency and Exchange of Information for Tax Purposes, as it enters its Phase II review process, has extended its mandate to 2015.

It therefore is abundantly clear that global taxation matters are in the midst of a particularly active period that will result in a changed landscape. Global players – a group that includes the Cayman Islands – need global awareness and global engagement.

While government’s engagement stretches back many years, its more recent actions include participation in the 2009 restructured Global Forum on Transparency and the Exchange of Information for Tax Purposes, the continuing work of the Cayman Islands International Tax Cooperation Team and the establishment of a dedicated anti money-laundering unit:

In 2008 and 2009, as the world was reeling from the initial punch of the global financial crisis, the G20 Leaders called on the existing Global Forum – established in its original form by the OECD in 2002, and of which Cayman was an active member – to help secure the integrity of the financial system through the uniform implementation of high standards of transparency. The Global Forum is mandated to ensure that its 109 member countries adhere to the high standard, which it set in 2009, of international cooperation in tax matters.

It does this through a comprehensive, rigorous and robust peer review process. Cayman was selected among its Global Forum peers to be a member of the forum’s 18-member Steering Group, which guides its work; and its 30-member Peer Review Group, which carries out the Global Forum’s review process. 

The Cayman Islands International Tax Cooperation Team negotiates and concludes, for referral to Cabinet, international agreements on exchange of information on tax matters, including tax information exchange agreements and double taxation agreements. Cayman now has 27 exchange of information agreements.

These allow Cayman, and the specific jurisdiction that is a signatory to each individual agreement, to exchange information through their competent authorities, in cases in which an investigation into tax-related activity is being considered or has been initiated. The International Tax Cooperation Team also advises government on how best to meet current and evolving international standards on transparency and exchange of information for tax purposes, as set by the OECD and other international standard-setting bodies.

Established following Cabinet approval in late 2011, the anti money-laundering unit will coordinate Cayman’s law enforcement and other authorities dealing with anti-money laundering efforts.  The unit also will combat the financing of terrorism, and the financing of the proliferation of weapons of mass destruction.

The anti-money laundering unit will advise the Anti Money-Laundering Steering Group, which is chaired by the attorney general, regarding legislation and operational tools to ensure Cayman complies with contemporary international best practice.

Furthermore, it will review enhanced risk-based initiatives, international cooperation and tax offences. The unit also will assist Cayman in upholding the revised FATF standards, which among other things makes tax evasion an offence leading to a charge of money laundering, and obliges banks to be vigilant for suspected tax evasion by their clients.

While successive governments in the Cayman Islands certainly have been active on these matters, the breadth and depth of their work has not been widely publicised locally.

However, by virtue of government’s involvement in international taxation efforts, its work has a high profile and broad recognition on a global level, as evidenced by positive evaluations from the Financial Stability Board, Caribbean Financial Action Task Force, the Global Forum and other supranational assessment bodies.

To provide context for all of this activity, it is useful to understand the modern roots of international cooperation efforts.

For this one has to recall the mid-1950s, when onshore jurisdictions realised that their residents were moving capital to what are now called international financial centres. These capital movements increased over the following years, facilitated by improving technology and the IFC’s favourable exchange controls.

Onshore jurisdictions perceived this movement of capital as a threat to their abilities to raise public revenue through taxation, and an erroneous claim began to gain traction: That IFCs intentionally made themselves available for the avoidance of tax that otherwise would be paid in high-tax countries.

This comment set the stage for the current global discussion of tax competition.

While competition is inextricable from capitalism, the competitive approach of low- or tax-neutral IFCs has been seen by onshore jurisdictions as hindering their abilities to derive income for public services.

However, the discussion on global taxation is evolving – the tectonic plates are shifting. From academics, tax experts and even the general public, there is increasing acknowledgement that IFCs do contribute positively to the global economy.

There also is growing recognition that IFCs adhere to international tax cooperation standards as well as, or better, than onshore jurisdictions. This is a critical development, as governments with deficit budgets increasingly attempt to maximise public revenue through tax collection efforts, and yet find the task more difficult because of the labyrinthine global business environment.

However, because of that complexity, the concept of automatic information sharing between jurisdictions is gaining concurrence.

In a June 2012 report, the OECD states that “automatic exchange of information proves to be a useful way to implement enhanced international tax cooperation”, and that “the OECD stands ready to develop a multilateral platform to facilitate that practice for the countries interested in joining the Convention”.

The convention is the Multilateral Convention on Mutual Administrative Assistance in Tax Matters – to which the G20, in a 19 June 2012 declaration issued at the conclusion of its Mexico summit, called on all jurisdictions to sign.

For IFCs such as the Cayman Islands, the provocative question is this: How will this latest global initiative of automatic information sharing affect our financial services industry? What will be our response?