Trouble coming for Cayman tax paradise?
For the headquarters of more than 14,000 companies, Ugland House is a quiet place.
A few lawyers, accountants and secretaries wander into the five-story building each weekday morning, but by midafternoon the black marble lobby is about as busy as a bank on Sunday.
Ugland House is what’s known as an “address of convenience” for many of the 70,000 U.S. and other foreign companies, limited partnerships and trusts that are based in this Caribbean locale.
“All offshore jurisdictions do is facilitate and ameliorate the conduct of global business,” said Gus Pope, managing partner of law firm Maples & Calder, which occupies Ugland House and represents nonresident clients.
But in recent months, these “offshore” operations of U.S. companies have been under renewed scrutiny in Congress, where some lawmakers say the U.S. Treasury is losing millions of potential tax dollars.
Many U.S. firms have subsidiaries registered in the Cayman Islands. Big energy players such as El Paso Corp., Transocean Inc. and GlobalSantaFe Corp. have local subsidiaries. So do hotelier Marriott International Inc., aerospace giant Boeing Co. and food producers Sara Lee Corp. and Coca-Cola Co.
Most U.S. companies say they situate corporate units offshore for strategic, financial and tax reasons, and they make no attempt to hide them.
But a lingering taint from days when small islands were the refuge of tax evaders means that “anything that happens here is looked at more closely, because of the image of offshore,” said Andy Stepaniuk, a Canadian and chairman of the Cayman chapter of the Alternative Investment Management Assn. He is also a partner with the local unit of KPMG International.
“The human capital is in the United States. How many people are making their living in the hedge fund industry in New York, paying income tax and purchasing goods and services?” Stepaniuk said of the benefits for the U.S. economy from the thousands of financial industry workers hired by companies with their offshore profits.
In all, according to the Cayman Islands Financial Services Assn., the 70,000 entities here have $1.4 trillion in assets in this “tax neutral” venue, if not so many employees. Most of them comprise only a post office box and a figurehead from a local law firm or consulting firm to represent them.
By registering a subsidiary here and making use of the islands’ profit-reporting loopholes, U.S. companies can reduce their tax burden from the 35% the Internal Revenue Service levies on onshore profits to, in many instances, nothing. Cayman collects neither personal nor business taxes.
Cayman authorities and industry analysts contend that in today’s interconnected financial world, U.S. corporations with international business are compelled to move offshore to compete with companies from less tax-burdened countries.
But shifting political winds in Washington are threatening to stanch the flow of taxable business offshore -- a practice that senior senators, including some Republicans, denounce as corporate America skipping out on the bill for running a democracy and forcing the IRS to take bigger bites from wage earners and homeowners.
With their Stop Tax Haven Abuse Act submitted in February, Democratic Sens. Carl Levin of Michigan and Barack Obama of Illinois and Republican Sen. Norm Coleman of Minnesota want to label the Cayman Islands and 33 other territories or countries as “offshore secrecy jurisdictions” where U.S. citizens’ financial activity would be automatically suspect.
“There is an estimated $100-billion gap between taxes owed by taxpayers and the nonpayment of those taxes due to offshore abuses,” Levin said. “If this bill collects even 5% of that offshore tax gap and stems what is now a growing abuse, its impact will be significant.”
The Cayman Islands, one of dozens of small venues that have transformed themselves into international financial centers, has grown over the last 20 years from a dodgy domicile for money launderers and tax evaders to the world’s fifth-largest banking center and the global leader in mutual and hedge funds.
Consultants, auditors and analysts here accuse tax-hunting politicians of shortsightedness and misconceptions about offshore activity and its effects on developed economies like that of the United States.
In a world where 60% of global trade occurs within multinational firms and financing deals blend capital from a multitude of sources, U.S. activity cannot be sorted out for tax purposes from that of other countries, lawyer Pope contended.
Eighteen of the 34 countries and overseas territories targeted by the Senate bill are in the Caribbean. Some, like the Cayman Islands and Bermuda, are under British rule.
Hong Kong, Switzerland, Singapore and European Union member Luxembourg are also on the secrecy list. Such a branding could inflict diplomatic as well as financial damage on U.S. allies, warn industry analysts such as Brett Wolf of Complinet, which provides information and software for financial services.
Pope acknowledges that the mood in Washington seems to portend a backlash against offshore operations.
Tolerance of and support for expatriated financial activity have always been cyclical, he said. As Washington trends away from the Republicans’ traditional support for big business, the latest legislative onslaught “has a better chance than most of gaining some traction.”
Cayman government officials see the U.S. political designs on offshore operations as an antiquated view of a financial world that operates in cyberspace, not in buildings. “The concept that all companies’ activities have to be anchored in bricks and mortar is like trying to apply a phonograph needle to a CD,” said Deborah Drummond, Cayman Islands deputy financial secretary and the government official responsible for the financial services industry.
Those familiar with U.S. politics recognize that they may be confronting an issue often driven as much by emotion as by economics.
Pope recalls the public uproar triggered five years ago when Stanley Works tried to move its headquarters to Bermuda to save $30 million a year in taxes. The Connecticut-based toolmaker abandoned the move under pressure from tax reform advocates and had to cut 1,000 jobs a few months later when its share value fell by 12%.
Coca-Cola spokesman Dana Bolden said the company would have no comment on why it registered subsidiaries offshore.
Houston-based El Paso had more than 200 subsidiaries in tax havens five years ago but has refocused the company since 2003. It sold most of its foreign holdings, said media relations manager Richard Wheatley.
Marriott International registers dozens of subsidiaries offshore because the hotel chain’s business is global, and “operating a development office or the like in the general area where we are pursuing business just makes sense,” said Thomas Marder, vice president for corporate relations.
The Tax Justice Network, a group committed to reducing tax avoidance and evasion, estimated in a 2005 briefing paper that individuals had about $11.5 trillion in offshore havens. The network calculates the worldwide loss to governments at $255 billion a year.
“This amount would more than plug the financing gap to achieve the United Nations’ Millennium Development goal of halving world poverty by 2015,” the network’s analysts concluded.
Whether targeting offshore profits for U.S. taxation is justified or not, Eduardo Silva, president of the Cayman Islands Bankers’ Assn., said he doubted that the effort would reap much reward.
“Almost all the business in Cayman that originates from the United States is from American corporations and banks that I’m sure pay their taxes,” Silva said, estimating the number of individual accounts as a fraction of 1% and an even lesser proportion of assets. “Cayman is not a jurisdiction used by individual taxpayers to conceal funds.”
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