Quarterly Review

Premier McLaughlin leads new 13-member coalition government

The May 24 general election in the Cayman Islands brought about days of political scrambling as 19 elected lawmakers sought to form a government.

The Progressives won seven seats but also suffered the crucial loss of three former government ministers. Meanwhile, the Cayman Democratic Party was limited to winning just three seats. The remaining members of the Legislative Assembly are independent candidates.

After a week of negotiations, a new coalition government was formed led by Premier Alden McLaughlin, who will be premier for the second consecutive term. The “government of national unity” features seven Progressives party members, three Cayman Democratic Party members and three independent politicians.

CDP Party Leader McKeeva Bush was sworn in as Speaker of the House.

The former Education and Labor Minister Tara Rivers is now minister for Financial Services.

Former KPMG managing partner Roy McTaggart is the new finance minister.

Cayman beneficial ownership laws take effect

On July 1, the Cayman Islands began to operate under new laws that will introduce a technology-based system to enhance its existing regime of maintaining and exchanging information about the true owners of Cayman-registered entities.

The system is aimed at improving the speed of providing beneficial ownership information to U.K. law enforcement authorities.

Because of data security concerns, especially hacking, the ministry of financial services has opted for a so-called “air-gapped platform” that is not connected to the internet or any other network, but hosted offline. The system will require financial services providers to maintain their own beneficial ownership registers and upload the information once a month to an encrypted flash drive, which has to physically be taken to the Government Administration Building.

There, the information about the true owners of Cayman-based companies and other entities will be uploaded via a dedicated, secured transfer terminal.

As such, the system provides a secure mechanism for sharing beneficial ownership information on Cayman’s exempt, limited liability, and non-resident companies with the U.K.

As with all of Cayman’s international cooperation mechanisms, only competent authorities will be able to exchange beneficial ownership information.

In Cayman, the beneficial ownership competent authority is the minister of Financial Services, who will delegate authority to the Financial Crime Unit, which will receive requests from U.K. law enforcement.

The Financial Crime Unit must verify that any request is part of an ongoing investigation and that the alleged offense is also a criminal offense under Cayman Islands law, to prevent so-called “fishing expeditions” or wholesale requests for data.

The information that is provided in response to legitimate requests includes the names, addresses, dates of birth, passports or other identification documents, as well as the dates when each individual became or ceased to be a beneficial owner. The General Registry will hold the beneficial ownership data and the search platform.

Company formations bounce back

New company registrations in the Cayman Islands have bounced back in 2017, after a dip last year.

May 2017 saw the largest number of company formations in a single month since the financial crisis with 1,174, according to statistics provided by the Cayman Islands General Registry.

During the first five months of this year, 5,243 new company registrations represented an increase of 8.9 percent over the same period in 2016.

Last year, the number of active companies registered in the Cayman Islands briefly breached the 100,000-mark before dropping back to 96,259 after the end of the year. This was mainly because the record high of 102,369 active companies in Sept. 2016 included nearly 8,500 companies that at the time were set to be struck off the register.

In addition, company terminations jumped 16.9 percent to 14,101 from 12,062 in 2015. In 2014, there were only 7,321 company terminations.

Interest in Cayman Islands offshore companies, however, is undiminished. Despite a 3 percent decline in new formations last year, 2016 was still the second strongest year since 2008.

In contrast, in the British Virgin Islands, the leader in offshore company formations, new company registrations have been continuously declining. While the financial crisis caused the initial fall, more recently, fallout from the Panama Papers has been blamed for the decline in company formations, which dropped by half from more than 64,000 in 2012 to just over 31,700 last year.

Meanwhile, the growth in Cayman Islands partnerships continued unabated last year as the number of active partnerships on the register increased by 12 percent to 20,122.

The first five months of 2017 were the most successful period for new partnership formations so far, the statistics show, as 1,516 registrations outpaced 454 terminations.
Trust registrations, which experienced small declines in recent years, recorded the first growth quarter at the end of 2016. After five successive quarters of 1 to 2 percent falls in the number of active trusts on the register, the final quarter of 2016 showed a 4 percent increase to 1,855.

Report: BVI firms hold $1.5T in assets

An economic impact report commissioned by BVI Finance concluded that the British Virgin Islands brings a substantial net benefit to governments worldwide.

The report “Creating value: The BVI’s global contribution” by consulting firm Capital Economics found that the 417,000 companies registered in the islands hold about $1.5 trillion in assets globally.

Many of the companies are registered in the BVI to facilitate cross-border trade and investment. For instance, more than 140 corporations listed on the stock markets in London, New York and Hong Kong maintain a subsidiary in the BVI. About a quarter of the companies’ assets represent investment vehicles, whereas family wealth and property holdings make up about 5 percent each.

The investment flows mediated by the BVI support around 2.2 million jobs worldwide, the report noted, especially in Asia, where about 40 percent of the assets held by BVI companies are located. European clients represent about 20 percent of BVI companies. The U.K. alone constitutes 12 percent of the value of BVI companies, both in terms of the location of the ultimate beneficial owner and the location of the assets.

“The scale of the BVI’s global contribution to investment and jobs sheds a new light on the debate around its impact on the tax receipts of other nations,” Capital Economics stated, and concluded, “The BVI is a substantial net benefit to governments worldwide.”

Like the Cayman Islands, the BVI stresses that it is not a tax haven but rather a tax-neutral jurisdiction, which does not reduce or eliminate any tax liability in other jurisdictions.

The report argued that the BVI is not a material center for corporate profit shifting.

Multinational companies that seek to optimize their tax position would look to conduct any “profit shifting” through jurisdictions that gave them protection from double taxation, and where they would be exempt from withholding charges, Capital Economics said. But, “The BVI offers little protection to businesses from so-called ‘double taxation’ in another jurisdiction or from ‘withholding taxes’ elsewhere. Multinational companies that use their transfer pricing arrangements to shift profits into the jurisdiction will not be sheltered from taxes due elsewhere.”

This is in stark contrast to European jurisdictions like the Netherlands, which maintains a large number of double taxation treaties that reduce withholding taxes for income from dividends, interests and royalties, or low tax jurisdictions like Luxembourg and Ireland, which offer low tax rates on intra-group interest payments or royalties from intellectual property. These mechanisms are much more suitable for the shifting of profits to low tax locations to avoid taxation.

Capital Economics believes that BVI companies could be used to avoid up to $750 million of tax each year.

“To put this in context, the United Kingdom tax authorities estimate their annual ‘tax gap’ at US$59 billion alone – so any leakage through the BVI is immaterial against other sources of tax loss,” the report said. “Moreover, our estimate of the theoretical maximum amount of tax avoided assumes that the only and every use of a BVI Business Company is tax avoidance. In reality, we believe the actual number will be a small fraction of this.”

At the same time, investment flows channeled through BVI vehicles would bring substantial net benefits to governments onshore. For instance, the report estimates that the tax supported by employment related to investments mediated by BVI companies is $15.7 billion, far outweighing the potential tax loss onshore from deferred tax payments or the avoidance of property transaction taxes.

OECD tax chief: Cayman must get the narrative right

Cayman will remain a successful offshore financial center if it changes the message it has sent out to the world over the past decades, according to Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the OECD.

“You need to get the narrative right, and the narrative will be right if it is based on substance,” he told delegates at a tax transparency conference hosted by the Cayman Islands Ministry of Financial Services in April.

Cayman needs to explain what is happening in the jurisdiction, but, he added, “you need to understand the outside perspective that is full of suspicion about how there can be so much business in such a small jurisdiction without any substance.”

Politicians and industry representatives should stop with the narrative used 20 years ago that offshore centers lower the cost of capital by allowing tax avoidance. Yes, tax avoidance reduces the cost of capital, but it also deprives countries of taxes that they are entitled to, he noted.

The head of tax at the OECD believes Cayman already has a good narrative if it focuses on properly dealing with any past misconduct and developing a good strategy for making beneficial ownership data available and accessible.

Legacy issues exist even in the most advanced jurisdictions, and the U.S. Department of Justice together with public pressure from campaigners and whistleblowers should make the business community focus on past conduct, Saint-Amans said.

The next big thing ahead will be the issue of beneficial ownership, he predicted, but acknowledged the public availability of information on who truly owns Cayman-based companies and other entities raises privacy concerns.

“It is true, there is an issue of privacy and that is why privacy is at top of the OECD priority list.” The same applies to the automatic exchange of tax information.

The countries that want more transparency will need success stories to demonstrate that the system works, the OECD tax chief said, and claimed that it was also in the interest of offshore centers to stop further leaks of client data.

Offshore centers must play long game

Offshore financial centers should focus on simplifying their business and having economic substance in their jurisdiction to thrive. “Having warm bodies in cool offices making real decisions,” is part of what Tim Ridley calls the long game that offshore centers must play to survive.

In his lecture at the annual STEP Caribbean conference in Cayman in May, the former Maples and Calder partner and Monetary Authority chairman said the Organisation for Economic Co-operation and Development’s initiative to tackle the erosion of tax bases and profit shifting and the latest offshore blacklist from the European Union both include actual economic activity criteria. One way to demonstrate substance in the wealth management industry is to have fully staffed family offices offshore.

This would bring the obvious direct and indirect economic benefits for offshore centers that do not suffer from overcrowding, have good office and residential property available at reasonable prices, good accessibility, weather and general infrastructure.

But to take advantage of this potential business, Ridley said, offshore financial centers must put in place the necessary and simple “package” that can be promoted internationally by the public and private sectors and encourage potential candidates to relocate.

Offshore centers must be particularly vigilant in ensuring that they have the right home-base infrastructure, such as stable political and economic environment, a welcoming immigration regime, the appropriate financial laws and structures, top quality courts and judges that are particularly important in the trust area, tax neutrality and quality professional services.

Ridley’s second point, simplifying the business, may seem counterintuitive at first, he said. In a world where tax information is exchanged automatically between countries through the common reporting standard developed by the OECD, reporting may result “in conflicting or confusing reporting from different jurisdictions up the ownership chain.”

One school of thought therefore argues for concentration of entities and activities in a single reporting jurisdiction, whereas another favors no reporting under common reporting standard with critical family members moving to the jurisdiction where their offshore structure is domiciled.

With global wealth creation still on the upswing, wealth creators are becoming more global.

The best jurisdiction for “some of the critical cogs in the structure” may be onshore, offshore or a combination of the two, he said.

Critically, Ridley said, offshore centers must find the right balance between legitimate privacy rights and the proper needs of law, regulatory and tax enforcement.

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Michael Klein
Michael Klein Editor Compass Media Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: [email protected] Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

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