As you probably have seen in the media and possibly in one of many of our responses and articles, FATCA is not only here to stay but being expanded.

It is clear, at the minimum, we are moving towards a new global standard of automatic exchange of information.

We have gone from pretty basic automatic reporting of only the year-end balance and based on the main account holder (EUSD) to a system where balance and income of all kinds has to be reported, based not on the account holder but on the ultimate beneficiary or any suspicion the ultimate beneficiary might be from a certain country.

The cost of implementing such a system is not to be underestimated, and the complexities of trying to produce a new international standard will keep officials and Cayman Finance busy for many months of years to come. The good news if any is that Cayman has taken a lead role, and we expect to be engaged in the discussions to come in implementing the G5 pilot.

In July 2008, the Senate Finance Committee held a hearing about offshore tax issues and heard from the Government Accountability Office.  After hearing introductory statements from senators that were almost identical to their statements for Lew’s confirmation last week, the GAO witness introduced his report.  The 2008 report shows that claiming tax evasion in Cayman simply because thousands of companies are registered at the same address is unfounded.   Registered office services are used for legal process not to operate a business.  GAO went on to describe the strict anti-money laundering and know-your -customer requirements in Cayman.   We had hoped that having covered this same ground with the same senators before, they would have learned from the exercise. 

Mr. Lew defended himself well.  We are not his lawyers, so it was up to him to demonstrate that he has properly declared his holdings and income.   But the charges of hypocrisy and wrong-doing at the hearing and during the 2012 elections assume that something wrong is going on here.   What we try to do on this blog is to lift the horse blinders that most of the media place on the public, and explain why offshore funds exist in the first place.

Offshore funds do not free investors of their tax obligations, they provide a way for investors from different countries to co-invest together.  Investors from all over the world can join together and pool their funds without subjecting each other to their home country’s taxes or legal process.   US investors can co-invest with Saudi and Japanese investors and pay their taxes to the IRS but not worry about what their obligations might be if the investment fund was registered in Saudi Arabia or Japan.  They don’t have to worry about paying taxes twice or try to reduce those taxes through claiming tax credits or treaties.  This process is complicated and costly, but with offshore funds that offer tax neutrality, we can avoid it and not have the capital markets working in completely sealed compartments in each country.

The US is still the most powerful country on earth, but it would be better for its Senators to think a little more broadly and accept that US persons are not the only investors in the world.  If US investors want to take part in the world economy, they need to do it on terms that are satisfactory to their fellow investors and trading partners, too.   The financial industry in Cayman helps make that possible.

We hope that in President Obama’s second term the US will examine its own international tax laws, and banking and corporation statues, to strengthen compliance.   We work with the Cayman Islands Government to prevent illegal tax evasion and money laundering by cooperating with US Government investigations.     Our “know – your – customer” and corporate transparency statutes are stronger than their US counterparts.  It’s much easier to set up a shell corporation in Delaware, the Vice President’s home state, than in Cayman.   In Cayman, the beneficial owner has to be disclosed.  In Delaware, beneficial owners can remain secret, and the legal fiction of a US company established regardless of US citizenship and business activity.

We’re concerned that in its hunt for revenue, the US Congress will expand its taxes beyond its borders.  The US Senate’s Oversight and Investigation Subcommittee continues to assert that all off shore activity is suspect.  They’ve gotten support from the media coverage of the low effective corporate income tax rates for foreign income of companies such as Apple and HP. Simple, sanctioned deferral techniques such as the use of offshore companies will be challenged, moving the US away from the international norm of territorial taxation.   More complex techniques such as transferring IP offshore, and avoiding the unrelated business income tax on debt-financed income through investing in offshore funds may be attacked.    Debt-financed businesses need to be concerned that interest payments to foreign parents will be treated as non-deductible dividends.   Other rules could come into play too, such as those for permitting mutual funds to invest in commodities offshore.

For Cayman Finance, this will mean a continued focus on compliance with our already rigorous legal requirements and rules for our industry.   It will also mean a vigorous defense of tax competition and international business transactions.   We provide services to move international capital to the US, and from the US abroad, in the most efficient manner.  We provide safe and sound banks, and a fair legal system to enforce the rule of law.  Together, we can help the US, Cayman, and other economies grow during the next four years.

Take the International Herald Tribune, for example.   It’s been published in Paris since 1887, and the Times has been an owner for over forty years.  Surely the Times is aware that income from this venture is not taxable until it is returned to the US.  We can’t say whether the Herald-Trib earns a profit, but if it does, it’s not taxed in the US until repatriated.  Doesn’t that make it at a tax shelter under the standard imposed on Mitt Romney?  If not, why should income from Cayman be any different than income from Paris?   Both are deferred under US tax law.

But you don’t read Times reporters complaining that the Times is sheltering its profits in the City of Light.  They know the newspaper is based there because it’s a convenient place for journalists to cover the news for American ex-pats and tourists, while enjoying its fine museums, cuisine and high fashion.  But Cayman has some things Paris doesn’t have, too.  Our “Seven Mile Beach” is more beautiful than the Champs-Élysées.  Plus we would rather scuba dive here than in the Seine.  Regardless of where you prefer to vacation, both should be treated the same for US tax purposes.

As the US Presidential campaign continues, we will try to keep the politics from obscuring the facts.  If you want to know more about Cayman, please come visit us.  Our fruits de mer is fresher.

The Washington Post’s The Fact Checker column did an admirable job researching and discussing the Unrelated Business Income Tax (UBIT) and “blocker” corporations in a post by Josh Hicks.     Hicks recognized that many US based charitable endowments and pension funds use international investments to avoid the UBIT on debt-financed investments.   He also correctly stated that individual retirement accounts (IRAs) are subject to UBIT, and thus may use the same “blocker” structure to avoid this tax.

Blockers are simply a corporation that receives investment proceeds, thus characterizing income to investors as dividends.   Because dividends are not taxable to tax exempt entities like pension and endowment funds, no UBIT tax is due.  By establishing a blocker corporation offshore, no current US tax is due on the profits from a corporation’s business either.

Hicks should have gone on, however, to note that an IRA is a like a pension fund – both are retirement investment vehicles.   So if Mitt Romney invested in an international investment fund that had a blocker structure, he was merely using for his own IRA what millions of middle – class workers already have for their pension.  Rather than doing something that only the wealthy can take advantage of, he was putting his IRA on equal footing with autoworkers and university professors with pensions.

Some will be quick to say that this structure is a “loophole” or tax evasion.  They should keep in mind that the US Congress has been aware of this structure for years, and has kept it.  That’s because it benefits average workers with pensions and helps fund university endowments.   Plus, like millions of other Americans, Romney will have to pay tax on money he withdraws from his IRA during retirement.

Rather than mistakenly vilify Cayman as a tax haven, an informed fact checker would note that with its network of regulator to regulator cooperation agreements and tax information agreements and its long standing record of cooperating with US authorities, there is no better place than Cayman for structuring inward investments to the US.

It’s no surprise that at both political conventions, Mitt Romney has been a main topic of discussion for the fact checkers.  Whether it was the flag on a yacht he boarded, or his international investments, journalists have been investigating him.  But they bring their own bias to their work.

ABC News condemns Romney for investing in “tax shelters” in a “tax haven,” but doesn’t slow down long enough to find out or explain what that means.  Liberal blogs spread their work across the world.  Even the Wall Street Journal, in a thorough analysis of Senator Harry Reid’s speech, succumbed to the “conventional wisdom” and said Mitt Romney invested in “Cayman Island Tax Shelters.”

So it’s time for Cayman Finance blog to fact check the fact checkers.  They are wrong in saying Cayman is a tax haven.  What Cayman does is allow international investors to come together to invest in the US without adding another layer of tax.  Each investor is responsible for paying tax in their home country, a process that the Cayman Islands Government assists with by cooperating with tax authorities from other nations and promoting transparent banking.

Implying that by investing via Cayman, Mitt Romney engaged in tax fraud is wrong.  This fails to distinguish between the compliance levels of different nations.   Cayman is not a bank secrecy jurisdiction and has long since established co-operation arrangements with tax authorities and regulators in many countries.  Our banks will welcome your business, but you will have to prove your identity, and you can’t hide your assets here to avoid taxation back home.

For example, Cayman has Tax Information Exchange Agreements with 27 countries including the US, and according to the GAO, a strong record of cooperating with the US Departments of Treasury and Justice in aiding tax compliance.  Implying that Cayman enables tax evasion based on bank secrecy, or on the amount of money on deposit here, is completely incorrect.  Mitt Romney is right, investing here didn’t excuse him from paying taxes in the United States.  Nor could he hide his money.  Journalists should learn these facts before criticizing our nation.

Rather than mistakenly vilify Cayman as a tax haven, an informed fact checker would note that with its network of regulator to regulator cooperation agreements and tax information agreements and its long standing record of cooperating with US authorities. There is no better place than Cayman for structuring inward investments to the US.

In addition Cayman is regarded as a well-respected jurisdiction by financial institutions, investors, development banks and government and regulatory agencies. Global institutional investors, including pension funds and US government agencies which invest in emerging market countries, take comfort that Cayman investment funds in which they invest are established under internationally recognised legal principles which protect their rights.

In Cayman, investors from Asia, the Middle-East, Europe, and the US can form new ventures that invest worldwide.  This allows money to flow through the international financial system to the US without a toll charge being added along the way.  Billions of dollars of foreign investment passes through Cayman each year, on its way to the US and other nations, where it is used to help businesses grow.

Investments by foreign-domiciled companies and investors create well-paid jobs, contribute to economic growth, boost productivity, and support American communities… Today, United States subsidiaries of foreign-domiciled companies employ more than 5 million Americans and provide above-average compensation.  These companies invest in innovation here in the United States, spending over $40 billion each year on research and development.  And in many cases the goods and services produced here are sold around the world…

So while it’s clear that President Obama supports investment from abroad into the US, it’s not clear that he understands that international trade and finance is a two-way street.  His surrogates continue to criticize Governor Romney for investing through the Cayman Islands, while he calls for investment in the US from abroad.  Recently, the web site Gawker.com posted private financial and legal documents for Mitt Romney’s international investments.  The media and blogosphere enjoyed another chance to write headlines implying that Romney’s investing abroad via Cayman was tax evasion, and erroneously claiming that bank secrecy is permitted in Cayman.

Lost in all of the headlines were the facts.  Legal documents for investing can be long and complicated, so the public was unable to understand that these prospectuses and financial reports were routine.  Thousands of US pension funds and university endowments join Governor Romney in investing abroad via Cayman without the slightest public objection.  It’s likely the average reader’s own pension fund has a similar file of documents, which they have never read.

What the financial industry in Cayman does is allow international investors to come together to invest in the US without adding another layer of tax.  Each investor is responsible for paying tax in their home country, a process which the Cayman Islands Government assists with by cooperating with tax authorities from other nations and promoting transparent banking.

Global institutional investors, such as pension funds, take comfort that Cayman investment funds are established under internationally recognised legal principles which protect their rights. In addition Cayman is regarded as a well-respected jurisdiction by financial institutions, investors, development banks and government and regulatory agencies.

In Cayman, investors from Asia, the Middle-East, Europe, and the US can form new ventures that invest worldwide, including into the US.  This allows money to flow through the international financial system to the US without a toll charge being added along the way.  Billions of dollars of foreign investment passes through Cayman each year, on its way to the US where it is used to help businesses grow, creating the jobs for Americans the President likes.

In Cayman, we help gather capital from around the world and send it to the US to create jobs and produce goods and services.  We cooperate with governments worldwide to ensure that Cayman cannot be used to evade home country taxes.  If the US wants this investment, it should stop criticizing those who help make it possible.

The Huffington Post and Citizens for Tax Justice, a US labor union-backed pressure group in Washington, are claiming that Mitt Romney helped foreign investors escape US taxes by setting up investment funds in Cayman.  In their haste to criticize Romney, they don’t mention that the US business to which the foreign investors are contributing their capital is subject to US corporate income and payroll taxes, regardless of who owns them.

Having borne this business-level tax, these foreign investors do not want to pay three levels of tax on their investment earnings by having a U.S. investor income tax imposed on top of their home country income taxes and the business-level tax.  Cayman Island entities simply provide a tax neutral platform so that investors from abroad can pool their resources to give US businesses the capital they need to hire and grow, without being subject to additional layers of US income taxation, plus the investor’s home country tax.

Foreign investment in the US should be encouraged, not criticized.  Saying Mitt Romney is un-American for helping foreign companies hire American workers is simply misinformed.  The Organization for International Investment, a US trade organization based in Washington, reports that US subsidiaries of foreign companies  contribute $2 trillion to the US economy, accounting for 21 million jobs.    Whether via Cayman or other nations, this investment helps put food on the table for many American families.  Let’s hope that as the US Presidential campaign continues journalists start learning the facts, instead of just making up attacks.

1. Romney owns a corporation in Bermuda. Filings describe Sankaty High Yield Asset Investors Ltd. as  “a Bermuda corporation wholly owned by W. Mitt Romney.” The corporation was established by Romney in 1997, but was transferred into a blind trust under Ann Romney’s name the day before Mitt began his tenure as governor of Massachusetts. Bermuda is a famed tax shelter.

This implies that owning a corporation in Bermuda is somehow wrong, but fails for lack of facts.  Based on the Vanity Fair site, it seems that Sankaty was set up for Bain to pay Romney his post-employment share of their profits for the work he did while at Bain.   Because US citizens are taxed on a worldwide basis, siting it in Bermuda did not allow the Romneys to escape any taxes.  It did allow Ann to invest the money internationally.  She could pool the money with citizens of other countries without them being subject to tax in countries other than their home country.  That’s what finance in Cayman is all about too.  Our investors pay taxes in their home country under their home country’s rules, but don’t have to pay taxes in another investors’ home country.

2. Romney uses special, tax-free stocks to inflate his retirement account.

Romney’s independent retirement account set up during his time at Bain Capital could contain as much as $102 million — a staggering amount given limits on employee contributions. The Vanity Fair piece parses how Romney inflated his IRA so much: When Bain bought and sold companies, it gave employees select, high-risk, high-revenue shares of the business. These shares went straight into Romney’s IRA, so they were untaxed profits. And since they started off low, the shares were seen as being below contribution limits — despite the fact that they promptly grew into a large fortune.

ThinkProgress hasn’t been reading the news lately.  Forbes reports that IRAs have been successfully used by a number of investors to achieve very high returns.   Venture Capitalists in the technology industry put shares of new companies in their IRAs.  Some have succeeded immensely – like Facebook – while others have gone nowhere.   It’s only the successes like Facebook that we hear about in the news.   ThinkProgress also fails to mention that when money is taken out of a traditional IRA, it is taxed at the ordinary income rates in effect at that time, rather than the lower capital gain rates.  So it’s hardly tax free. The Romneys will have a comfortable retirement, but they will pay higher tax rates on this investment than if they had invested outside their IRA.

3. Romney’s blind trusts are not-so-blind. Ann and Mitt Romney keep their investments in a “blind trust,” which means that they avoid making investment decisions that may impact their political work. But the Romney’s blind trust, which is run by their personal lawyer, includes investments in a company owned by their own son.

We’ll have to leave this one to the Romneys, it doesn’t have much to do with offshore finance or US international taxation.  What was required by Massachusetts when he became governor is a local issue.

4. Romney uses a so-called “blocker corporation” to avoid taxes on his IRA.

Though Romney says his investments in the Cayman Islands do not help him lower his tax bill, Romney’s IRA appears to have invested in an offshore corporation which then invests in U.S. businesses, to avoid paying the U.S.’s Unrelated Business Income Tax.

ThinkProgress better check its Alumni News.  No doubt it has a solicitation for the endowment campaign and boasts of a higher ranking in the U.S. News and World Report college guide if financial security for the Alma Mater can be achieved.  Virtually every college endowment of any size in the US, and most public pension funds, do the same thing as discussed here.   If the Romney’s used their IRA to partner with pension funds or endowments to invest internationally, they had to use this same form.

It’s due to a quirk in US tax law.  Non-profit entities like endowment funds and pensions are taxed if they invest with leverage in the US.  But if they invest with leverage through an offshore vehicle, the tax doesn’t apply.

The US Congress is aware of this, but if they change it, the college presidents and labor bosses will all call and complain.

5. Bain Capital helped financial fraudsters dodge taxes. Bain received investments from “the newspaper tycoon, tax evader, and fraudster Robert Maxwell” (who has since died), as well as other financial oligarchs, which helps provide them “with additional ways to skip around tax, disclosure, and regulatory requirements that they might trigger if they invested directly.”

Hmm.  This seems to make Romney responsible for the personal failures of anyone who invested in Bain.  That’s a pretty broad standard.  It’s like political campaigns being responsible for everyone who sends them a donation.   US News reports regular turn up donors who are less than credible, but that doesn’t mean that Barack Obama or Mitt Romney engaged in or condoned their activities.

We’ll be back to set the record straight on offshore finance as the US Presidential campaign continues.