Tax and the Cayman Islands

Grey skies in the Caribbean

The taxmen circle the white beaches

THE seas round the Cayman Islands may be blue, the sands white and the coral reefs a rainbow, but to the OECD, an economic group of rich countries, the Cayman Islands are grey. On May 14th the OECD ruled to keep the British colony on its list of unco-operative tax havens.

That has miffed the Cayman Islanders. In April the OECD gave a clean “white” grade to rivals such as Jersey, Guernsey and Barbados. These lists rank a financial centre’s willingness to share information about offshore bank accounts with tax authorities around the world. To get on the white list, a dozen or so tax-information exchange treaties are needed. Barbados has 19. Until recently the Caymans had just one, with the United States. On April 1st it signed agreements with five Nordic countries. It now reports income from savings accounts to European Union countries. It has offered to share tax information with 12 other countries.

The OECD is not the only group pressing for more openness. Barack Obama’s budget proposes to close loopholes which allow American companies to use offshore centres to avoid taxes. A Stop Tax Haven Abuse bill in the American Congress would assume that Americans who set up companies in tax havens are their owners and levy penalties on financial institutions that block tax enforcement.

The bill’s sponsors are disdainful of the tax treaties favoured by the OECD, which work only when the supplicant tax authority can name a particular taxpayer and bank. Under their measure, which in an earlier version in the last Congress was sponsored by Mr Obama, companies that are registered offshore but do most of their business in America would be taxed there. Mr Obama has pointed to Ugland House, the Cayman Islands’ office of a law firm, Maples and Calder, which last year was the legally registered address of 18,857 companies and other bodies, almost half of which had an American billing address.

Anthony Travers, a former managing partner of Maples and Calder who chairs the Cayman Islands Financial Services Association, argues that this bill would damage the American economy, by tempting hedge funds to move their managers from Connecticut to the Caymans, for example. Better, he says, would be a “proactive” treaty, with the American authorities automatically notified of their taxpayers’ offshore accounts.

Over the past half-century offshore finance, along with tourism, has lifted the Cayman Islanders from poverty to prosperity. Both have been hurt by world recession. The islands’ new government, elected on May 20th, has its work cut out.