Death of A Tax Haven: Cayman Islands Share Information With IRS
The Cayman Islands have long been considered an ideal tax–planning jurisdiction because of strong privacy laws and nominal taxation. As a result, the Cayman Islands became the fifth–largest financial center in the world, trailing only New York, Hong Kong, London and Tokyo. At the time of this article, the islands were the location of over 57,900 international corporations, 465 financial institutions, 2,621 mutual funds, 114 trust companies and 541 insurance companies. As of June 2000, Cayman banks carried total assets of approximately 747.6 billion dollars. All of this changed on November 27, 2001, when the Caymans entered into an information sharing agreement with the United States.
For reasons ranging from anonymity to aggressive tax strategies, many businesses have moved their financial operations to offshore jurisdictions. Historically, the Cayman Islands were a popular choice because of its strong financial industry, legislation and communications facilities. Unfortunately, the anonymity aspect of doing business in the Islands has tempted many people. Frankly, they have failed to report the existence of accounts in the Caymans. They are now in serious trouble in light of the information sharing agreement.
The Agreement between the countries provides a ridiculous amount of access into the private finances of individuals and companies using the Cayman Islands. Specifically, the U.S. need only make a request for information on persons or companies that it believes may be evading taxes illegally. The U.S. is not required to make any showing that the belief is valid or even remotely credible. Upon receiving such a request, the government of the Cayman Islands has agreed to supply information regarding all filings in the country regarding offshore trusts, international business companies and other business entities. The government has also agreed to supply all information pertaining to bank accounts, investments and any other financial holdings of the person or company in question. In short, the strong privacy laws of the Cayman Islands have been terminated.
Perhaps even more troubling, if possible, is that the request from the U.S. can be for “criminal, civil or administrative tax investigations.” This definition is extremely broad and as a simple tax audit can arguably be considered an “administrative tax investigation.” If this interpretation is applied, the IRS can submit requests for information for every single person or company that it audits in a particular year. The severe privacy violation that results from this action is predicted to seriously damage the status of financial institutions in the Cayman Islands. Indeed, many financial institutions are already moving to other jurisdictions that maintain strong privacy laws.
For readers that are concerned about any offshore transactions, an immediate evaluation of their position must be undertaken. The Cayman Islands have committed financial suicide in entering this Agreement. It is vital that those that do business in the Caymans understand as much and avoid falling down the same hole. Implementation of the Agreement begins on January 1, 2004.