The Cayman Islands is touted as one of the world’s top 10 finance hubs. The chief reason that the Caribbean hotspot holds such cachet is an epic perk it provides – freedom from income tax.
The global tax haven has attracted droves of Australian companies. The likes of QBE, News and Macquarie are there. Even the Future Fund has 35 entities on the offshore international tax haven. In step, Australia and the Caymans have a Tax Information Exchange Agreement (TIEA). Yet Australian Taxation Office scrutiny of Aussie companies with Caymans dealings seems unwelcome.
In May, the ATO dropped Cayman tax evasion charges against Sydney accountant Vanda Gould, who fought a decision made by the Cayman Islands Tax Information Authority to give information about his company. Siding with Gould, the Grand Court found that the information should have been withheld and that the authority had breached the Bill of Rights and confidentiality laws.
Tax adviser Tony Anamourlis said the Gould decision raised doubts about whether TIEAs were “a workable tool to tackle tax evasion, fraud or criminality”.
Despite efforts to impose transparency, the Cayman Islands remains a magnet for wannabe tax evaders, according to retired private banker Frederick Parsonage, the author of a novel about area intrigue.
“They will just continue to take the risk of not being caught, aided and abetted by the financial institutions in the Cayman Islands, who – it must be said – tend to condone tax evasion by their clients,” Parsonage claims.
Remember that banks represent the client, not foreign tax authorities, he adds, also noting that investors may still strain to repatriate Cayman-based assets, unless their home countries declare amnesty on tax evasion.
Meanwhile, there has been a shift toward stashing assets in inert “shell companies” that act as vehicles for fiscal manoeuvres. Because no central registry of shell company shareholders exists, that tactic creates another layer of confidentiality, he says.
On the wane
In contrast to Parsonage, another Cayman insider – education consultant Emma Donaldson – paints shady dealings as on the wane. “The eye certainly is on the island to ensure fraudulent action is stamped out,” she says, adding that wayward Caymanians she knows have had run-ins with United States police.
Investors who play it straight – legitimately seek to move to the islands – still struggle. “You need to arrange a work permit before entering the island, which is wrought with numerous red-tape and labour laws which can make it very difficult to enter or stay,” says Donaldson, from St Arnaud in central Victoria.
Keep fighting, she says, but warns that if you gain traction, further paperwork lurks. Realising how tough it is to set up a personal bank account – let alone a business account – was an eye-opener.
Worse, expenses are even higher than here. “Whilst there is no income tax, the cost of living and fees which appear exorbitant in comparison to our native countries can make this advantage non-existent,” she says, citing set-up fees, work permit charges and land taxes.
The “debilitating” hidden costs, which sound like stealth taxes, are the worst drawback, according to Donaldson, who says the deal works for the uber-rich embedded on the islands for a decade.
“If you are in a profession earning a very high income, the no-tax incentive is a definite benefit,” she says, adding that wealth boosts your chances of making Cayman your full-time home.
Likewise, Parsonage depicts the islands as a retired tycoon haven – living costs are exorbitant because everything is imported, he says, adding that property ownership, which you need to win residency, is expensive.
Ditto private medical insurance because, like many small islands, Cayman just has basic facilities – serious sickness must be treated in the US, he says.
According to former Bank of America executive turned whistleblower, Brian Penny, the ethics of using a Cayman-style tax shelter hinge on your status.
“If you’re a citizen, you’re the little man and need every advantage you can get to compete. If you’re a CEO, you have an ethical duty to support any economy in which you do business,” Penny says.
“Another perspective to ponder is the angle of the country you’re using as a shelter. Nothing in life is free: what’s its stake?” he says, raising the spectre of the dreaded fees.
Also assess whether your money is truly safe and whether your deposits are insured, he says. And think about the interest rate you are getting and whether there are withdrawal penalties. Oh, and consider whether currency conversions will sap your savings.
“When you look at the numbers,” Penny says, “there’s always a possibility it’s cheaper to just pay the taxes.” Stormy past
The Caribbean paradise designated a British Overseas Territory has been tax-exempt since the wreck of the Ten Sail, which happened six years after Australia was settled, in 1794. When a 10-strong merchant fleet struck a reef in rough seas, Caymanians supposedly saved every soul.
Because one survivor was a British royal, King George III rewarded the islands by pledging never to introduce taxes, legend says. The policy gelled with Caymanian identity, becoming part of the scenery just like the turtles dotting the lagoons.
In 2012, the last premier, McKeeva Bush tried to buck tradition – establish an income tax for expatriates, which he deftly pitched as a “community enhancement fee”. Still, an outcry erupted. Eventually, the proposal was killed by the united front that locals and expatriates presented.