21 December 2018

Substance in Cayman: An update

With the 31 December 2018 deadline fast approaching, the Cayman Islands’ Government has published draft legislation to prevent the jurisdiction from being placed on the European Union’s “blacklist” – jurisdictions that have been determined to be uncooperative in tax matters. As was to be expected since the deadline was announced at the end of 2017, there is a growing list of off-shore jurisdictions publically demonstrating their efforts to show their compliance, by drafting, proposing and implementing applicable legislation. The Cayman Islands has now joined this list, with the legislation expected to take effect from 1 January 2019.

So what is this all about?

In December 2017 the Code of Conduct Group for Business Taxation (the body of taxation experts established in 1998 by the Economic and Financial Affairs Council) compiled an initial list of 17 non-cooperative tax jurisdictions, now ominously known as ‘the blacklist’.  The premise was that a common EU list would ultimately be more effective at tackling countries encouraging abusive tax practices.  Following detailed screening, 72 jurisdictions were asked to address perceived deficiencies in their tax regime based on (i) tax transparency; (ii) fair taxation: and (iii) compliance with anti-Base Erosion and Profit Shifting (BEPS) measures.

Together with Bermuda, Guernsey, Jersey, Isle of Man and Vanuatu, the Cayman Islands made a high level commitment to address the identified deficiencies by 31 December 2018 and in doing so avoided being included on the inaugural blacklist with the likes of Guam and Samoa.

But how significant is omission from the blacklist?

Beyond being named, there is uncertainty surrounding the proposed impact of the EU’s blacklist, whether countries could face sanctions from the EU and its individual members states or whether their reputations could be tarnished.  The EU Commission claimed other legislative proposals will reference the list perhaps leading to stricter reporting requirements, but this is still hypothetical.

The EU’s blacklist has been subject to a great deal of criticism, including the inconsistent treatment of non-EU jurisdictions that have been targeted compared with countries within the EU’s borders.  Critics at the time called the list “toothless” and “pointless…with no sanctions”.  But for all its teething issues, the blacklist was created to clamp down on tax evasion, and optically offshore jurisdictions do not want to be seen on the wrong side of such measures.  As a jurisdiction, the Cayman Islands has always been committed to supporting global efforts to combat tax evasion, corruption and money laundering.

Ok, has progress been made?

Until recently, it was difficult for the public to ascertain what meaningful steps were being taken by the Cayman Islands’ Government to ensure the 31 December deadline was met.  Unlike the commitment letters from other ‘grey listed’ jurisdictions, which can be viewed online and which in many cases set out an implementation timetable for various remedial steps, the Cayman Islands’ Government’s letter remained confidential.

Jersey, Guernsey and Isle of Man set the early standard, by working closely together on a public consultation, following which Jersey lodged draft legislation which would incorporate statutory substance requirements for certain companies.  Similarly, statutory amendments have recently been debated as part of Guernsey’s 2019 Budget which would empower the Policy & Resources Committee to require certain Guernsey companies to have a substantive presence in Guernsey.  The Cayman Islands Government has now followed suit and published draft legislation on 6 December that would introduce a 3-tier economic substance test for certain “relevant entities” carrying out “relevant activities”.

So what's the forecast?

Whilst the actions of the Cayman Islands’ Government have been less in the public eye than other compliant jurisdictions, the reality of the work that has been undertaken behind the scenes tells an eminently different story.  The initial commitment letter was sufficient to satisfy the EU Council, and Tara Rivers (the Minister for Financial Services) has shown cooperation throughout the year by meeting with the Code of Conduct Group and other EU bodies.  These discussions, ostensibly to ascertain which entities are deemed acceptable and what corresponding measures need to be put in place will have highlighted the complexities of such a task.  It is increasingly clear that there is not necessarily a ‘one-size fits all’ substance test, and the draft legislation does not purport to complete the picture.  It does, however, provide a framework which can be developed, and it showcases the Cayman Islands Government’s commitment to international tax co-operation and transparency.  Further clarity is expected upon the legislation being passed this year and the anticipated accompanying guidance notes being issued.


An original version of this article was first published by Asian Legal Business, December 2018.

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