Caribbean tax havens under attack in US Senate
Published on Thursday, July 24, 2008
By Barry Randall
Caribbean Net News Editor
WASHINGTON, USA: Caribbean tax havens came under attack in the US Senate on Thursday during a hearing by the Finance Committee on the Cayman Islands and offshore tax issues.
Senators as well as witnesses had much to say about tax avoidance and evasion by US individuals and corporations using offshore financial centres.
Finance Committee Chairman, Senator Max Baucus (left) and Ranking Member, Senator Chuck Grassley (right)
In his opening statement, Chairman of the Senate Finance Committee, Senator Max Baucus, referred to Ugland House in the Cayman Islands, a five-story building that has some 18,857 tenants.
“Today, we’ll examine whether many of those tenants are feasting at American taxpayers’ expense,” Baucus said.
Senator Chuck Grassley added that the hearing would also examine the problem of US income tax evasion by taxpayers who hide their assets and income in foreign bank accounts and foreign entities.
Jack Blum, a Washington DC attorney with long experience in dealing with the issues of offshore tax evasion, money laundering, and related financial crime, in testifying before the Committee on Thursday, said that offshore tax evasion is a serious and growing problem.
Blum referred in particular to three Caribbean jurisdictions: the British Virgin Islands (BVI), Nevis and Belize.
The BVI is the place to go for quick, cheap, anonymous incorporation, as evidenced by its “more than 500,000 shell companies,” Blum said. “It is important to understand that the structures are mere pieces of paper with no commercial reality,” he added.
The BVI has also developed a new trust “product” that allows a “trust” to be the owner of a corporation without the trustee having any knowledge about the operation of the corporation. “Under US law this is not a trust,” Blum said.
Blum claimed that Nevis is home to “tens of thousands of corporations,” all of which have boards of directors. When banks and brokerage firms ask about the control of the corporation for anti-money-laundering purposes, the person opening the account furnishes the passport photos of the nominee shareholders, officers and directors. The same twenty people are the nominees for thousands of corporations. They have no knowledge of, or fiduciary responsibility for the corporation’s business, he went on to say.
“If the nominee directors and officers were water-boarded they could not tell you what the corporation was doing or who owned it,” Blum said.
The directors and officers do not participate in “corporate” decisions and keep no records relating to corporate activities. They do not even know where the records are, Blum testified.
Blum told the Committee that the BVI is not the only jurisdiction that has legalised “sham” trusts. Other jurisdictions have passed trust laws that leave the trustee with little or no responsibility. In Belize, he said, you can be the grantor, the trustee, and the beneficiary, and have the trust considered valid. You can include provisions allowing you to redraw the trust instrument and add a flee clause which allows a change in situs for the trust in case of criminal or tax investigation.
Blum summarised his testimony by saying that offshore evasions is a massive threat to the integrity of the US tax system.
“We cannot continue to treat entities without substance or purpose as real and expect our tax authorities to navigate their way around the obstacles. We must close the loopholes foreigners use to put money in the US market without leaving a trail,” Blum said.
Michael Brostek, Director of Strategic Issues at the United States Government Accountability Office (GAO) testified as to the GAO’s investigation and report concerning Ugland House in the Cayman Islands.
According to the GAO report, Ugland House provides an instructive case example of the tremendous challenges facing the US tax system in an increasingly global economy.
In particular, the ability of US persons to establish entities with relatively little expense in the Cayman Islands and similar jurisdictions facilitates both legal tax minimisation and illegal tax evasion. Cayman entities can be used to obscure legal ownership of assets and associated income and to exploit grey areas of US tax law to minimize US tax obligations, the report concluded.
“Balancing the need to ensure compliance with our tax and other laws while not harming US business interests and also respecting the sovereignty of the Cayman Islands and similar jurisdictions undoubtedly will be a continuing challenge for our nation,” the report said.
Frank Ng, Internal Revenue Service (IRS) Commissioner of Large and Mid-Sized Businesses, also testified as to the GAO report.
He pointed out that, while the GAO made no recommendations as part of its report, the report noted some of the difficulties faced in dealing with the companies located in the Cayman Islands.
Specifically, Ng said, the attraction provided by Cayman Islands to many companies seeking to do business there is based on a number of legitimate business reasons.
“The difficulty we generally face in obtaining information in jurisdictions such as the Cayman Islands is our inability to identify with specificity the individual and activities to establish the basis for an information request,” Ng said.
The tenor of much of the oral testimony and other remarks at Thursday’s hearing indicated that senators are determined to crackdown on offshore tax havens. Along with increased Congressional scrutiny, the possibility of shifting the burden of proof was suggested. In that event, the onus would then be on the taxpayer to prove that any offshore entity was being used legitimately, instead of the IRS being required to show that it was not.
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