The Cayman Islands are Becoming "Transparent" For Tax Purposes

By Ron Cohen, CPA, MST
Partner
Greenstein, Rogoff, Olsen & Co., LLP

The Cayman Islands is becoming transparent. Tax Evaders with Cayman bank accounts and unreported income should be warned that their bank account information may be shared with U.S. and European tax authorities.

Becoming a member of the Organization for Economic Cooperation and Development (OECD) provides many benefits to a nation.  China is pursuing the same recognition.  To become a member of the OECD, the sharing of tax information is required.  The Cayman Islands, long a haven to tax evaders, is clearly going in that direction....see below. 

GRAND CAYMAN, Cayman Islands, April 3 /PRNewswire/ -- We are pleased to see that the decision by the Organization for Economic Cooperation and Development (OECD) to place the Cayman Islands on a list of jurisdictions that have committed to "internationally agreed tax standard[s]" recognizes the significant cooperation by the Cayman Islands over the years with several governments and other organizations like the OECD. For example, the Cayman Islands have entered into twenty tax information exchange commitments, both bilateral and unilateral, the largest number of any offshore financial centre, and have implemented the automatic information-sharing with all EU states under the EU Savings Directive.

Although the OECD is still reviewing the Cayman Islands legislation introducing the unilateral mechanism and therefore chose not to include the unilateral arrangements in the total number of commitments that the Cayman Islands have entered into, several OECD member states have nonetheless already recognized the validity of the unilateral mechanism. Indeed, the German government has announced that it is "in accordance with the standard laid down by the OECD".

The Cayman/US Tax Information Exchange Agreement

The agreement specifies that the Cayman Islands will share tax information to help the US government trace financial criminals. Former IRS Commissioner Donald Alexander told the US media that the treaty will enable the IRS to overcome the secrecy surrounding the accounts of financial institutions in the Cayman Islands to allow it to launch audits for tax evasion and money-laundering.

"Right now," said Mr Alexander, "nothing is a fair description of the cooperation the United States is getting. It's a hotbed of tax evasion. This is a good step in the right direction."

The agreement covers information relating to "the administration and enforcement of the domestic laws of the parties concerning the taxes and the tax matters covered by this Agreement, including information that may be relevant to the determination, assessment, verification, enforcement or collection of tax claims with respect to persons subject to such taxes, or to the investigation or prosecution of criminal tax evasion in relation to such persons".

Information has to be provided by the Cayman government without regard to whether the person to whom the information relates is, or whether the information is held by, a resident or national of a party; and provided that the information is present within the territory, or in the possession or control of a person subject to the jurisdiction, of the requested party.

The taxes covered by the Agreement are federal income taxes, "but the types of tax covered may be extended by agreement between the parties in the form of an exchange of letters". That appears to mean that the Cayman government can agree with the US to extend coverage to other taxes.

The agreement covers "criminal tax evasion", which means: "willfully, with dishonest intent to defraud the public revenue, evading or attempting to evade any tax liability where an affirmative act constituting an evasion or attempted evasion has occurred. The tax liability must be of a significant or substantial amount, either as an absolute amount or in relation to an annual tax liability, and the conduct involved must constitute a systematic effort or pattern of activity designed or tending to conceal pertinent facts from or provide inaccurate facts to the tax authorities of either party."

Information must be provided even if the alleged criminal behavior was not criminal in the Cayman Islands. The signatories agree to provide themselves with the authority to obtain information held by banks, other financial institutions, and any person, including nominees and trustees, acting in an agency or fiduciary capacity; information regarding the beneficial ownership of companies, partnerships and other persons, including in the case of collective investment funds, information on shares, units and other interests; and in the case of trusts, information on settlers, trustees and beneficiaries.

For the US to make a request under the agreement, it must provide:

• the identity of the taxpayer under examination or investigation;
• the nature of the information requested;
• the tax purpose for which the information is sought;
• reasonable grounds for believing that the information requested is present in the territory of the requested party or is in the possession or control of a person subject to the jurisdiction of the requested party;
• to the extent known, the name and address of any person believed to be in possession or control of the information requested;
• a declaration that the request conforms to the law and administrative practice of the requesting party and would be obtainable by the requesting party under its laws in similar circumstances, both for its own tax purposes and in response to a valid request from the requested party under the Agreement.

US officials are permitted under the agreement to "enter the territory of the requested party in connection with a request to interview persons and examine records with the prior written consent of the persons concerned", or "attend a tax examination" in the Cayman Islands.

Information need not be provided if it is subject to legal privilege, or if it would not have been obtainable by the US under its own laws, domestically.

The Agreement took effect from January 1, 2004.