Tax law to affect personal accounts

Tuesday,  June 28, 2005

As an offshore banking tax haven, the Cayman Islands has provided a certain level of privacy for its clients. However, much of this will disappear in the advent of the EU Savings Tax Directive for 25 countries of the EU and their territories – a list that includes the Cayman Islands.

The Directive is an agreement through which all relevant territories will provide automatic exchange of information on savings accounts held by European Union residents. With this, the nationality of the resident is of no consequence – his country of residence is the sole criteria.

The Directive’s aim is to crack down on perpetrators of tax evasion by providing a uniform structure of information exchange between EU member states. Persons affected by the Directive are the people of Europe and not legal entities.

“A lot of the money that is held in the Cayman Islands is held as funds and not as personal accounts,” said Lecturer in Economics at the University College of the Cayman Islands (UCCI), Tom Phillips. “Therefore a lot of the activity here is more about managing funds rather than individual accounts. The Directive is a good move because it shows that the Cayman Islands is not avoiding issues of integrity. The move speaks to issues relating to international compliance, financial credibility and recognition of international regulations.

“This is the way we are going with regulations, internationally and it is good. We can recall where the International Monetary Fund (IMF) gave Cayman a very positive review and this has much to do with international compliance”, added Mr Phillips. 

“Granted there are issues with international finance. The international financial world is a little nervous about the United States and China. However, overall, this move is not going to be a terribly bad one for us.”

Director of Public Relations, Portfolio Finance and Economics, Ted Bravakis said: “On 13 February 2004 the Cayman Islands agreed to this move. The move involves the exchange of information on interest payments on savings incomes of EU residents.

“The impact on the Cayman Islands is not as severe as people may think. In large part the Cayman Islands is involved in large institutional funds. The Directive will affect individuals only,” he explained.

As far as changes to be set up within the local economy are concerned, Mr Bravakis said: “They will be more procedural than anything else. The onus is on the paying agent to implement these changes.

“It is not like there is going to be a whole new regime that needs full introduction. Yes there will be some changes in the industry but there will not be the need for large capital-intensive investment. “From a government perspective this Directive ensures our best interest while still meeting our obligations to the UK,” Mr Bravakis continued.

The EU Tax directive is levied on interest earned on deposits, interest bearing debt claims, such as bonds issued after 1 March 2001, accrued or captalised interest (zero coupons), investment funds with at least 40 per cent of the underlying investments in interest bearing instruments and, distributions from investment funds which relate to the interest income of the fund income from the sale, repayment or redemption of investment fund units. 

The Tax Directive is not levied on insurance companies or insurance income from insurance policies, stocks and shares and currency trading.
Recently the House met for the reading of the Bill to make the Tax Directive law.

The EU has given its member states two options in implementing it. The withholding tax method poses a problem for Cayman since we do not have any tax laws. Alternatively, by exchange of information relating to savings earned. 

In essence this means that an individual who is a national of a member state and has an account in the Cayman Islands, which earns interest will automatically be reported to the relevant authorities in their EU state.

Disclosure will relate to the identity and residence of the beneficial owner, the name and address of the paying agent, the account number of the beneficial owner and information concerning the interest payment. Either way the confidential status of an individual will be disclosed to some extent.

However, the consensus in the Legislative Assembly last week on the Directive is that only time will tell the true impact on the financial industry and on the citizens of this country for that matter. 

What is certain is that the UK, in its bilateral agreement with the Cayman Islands has already taken positive steps as a means of striking a balance to this potential financial threat. The Minister responsible for the International Initiative affecting the Financial Services Industry, Hon Alden McLaughlin said: “The Government fully intends to pursue negotiations on the bilateral agreement to a successful conclusion.”

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