The Government of the Cayman Islands unveiled three legal bills that will fundamentally alter its offshore banking legislation. The move comes just weeks before the European Union’s deadline of 31 December, after which the EU will release its latest blacklist.
A deadline has been implemented by the EU for all offshore financial centres to address measures over perceived ‘unfair tax practices’ in order to avoid the blacklist.
Offshore banking legislation changes
New legislation includes the International Tax Co-operation (Economic Substance) Bill as well as alterations to current company laws. All three legal changes must be debated and passed before the end of 2018 and will lead to a major shake-up in the offshore sector.
The changes will mean that offshore companies incorporated in the Cayman Islands will have to prove that they are carrying out tangible work there. If they can’t prove this or that they have some form of solid, economic presence, then they won’t be able to “satisfy the economic substance test in relation to any relevant activity carried on by that relevant entity”, as stated in the new bill.
Officials from the financial services ministry say that an “in-depth consultation” went ahead with commerce regulators and stakeholders, the Cayman Island’s financial industry, the European Union and the global Organisation for Economic Co-operation and Development (OECD) before the laws were completed. They say: “Since January 2018, many representatives from more than 15 financial services and commerce associations, as well as government stakeholders outside of the Ministry of Financial Services, have participated in the consultation. This breadth allowed government to ensure that our legislation is appropriate for both financial services, and local business.”
International financial centre
Offshore centres operate as global financial centres, which inevitably means that legislative changes take a lot of tine to be published. The new laws, and changes to current laws, are built on the Forum on Harmful Tax Practices (FHTP) by the OECD. This comes under the Base Erosion and Profit Shifting (BEPS) Inclusive Framework, that was joined by the Cayman Islands in 2017.
This framework outlines the global standards for tax structures developed to attract profit in jurisdictions where they don’t conduct real economic activities. The forum in turn supports the framework, by reviewing regimes that give better tax rates to these structures, as this can negatively affect tax collection in other jurisdictions.
European Union blacklisting
The EU also use the framework to identify harmful tax practices within jurisdictions it considers ‘non-cooperative’. As the Cayman Islands intend to implement the new laws by the deadline of 31 December, they will avoid being blacklisted by the EU.
Cayman has never been on the EU’s list of ‘non-compliant’ jurisdictions, however it is on a watchlist in terms of addressing economic substance. Officials say that the EU’s concerns “need to be addressed in order to correct the perception that our tax system provides an unfair tax advantage to any company operating in our jurisdiction.”
James Turner, Managing Director of Turner Little Limited says: “These kinds of legal changes will effectively usher in a new chapter for the offshore sector. Exempt companies will be allowed to do business locally but will have to follow the same rules as local businesses do. This will eliminate mailbox companies, who have just used the address in order to gain tax exemptions.
“The FHTP now covers more than 120 countries within its range, with the ultimate aim of making tax issues globally compliant. We are witnessing a real evolution of global standards within financial services. The changes for the Cayman Islands will be seen next year, as currently there are more than 106,000 exempt companies with barely any economic presence in the jurisdiction. It will be interesting to see how this change will affect the offshore sector and the wider economic impact it will have as we move towards a true global standard.”
About Turner Little
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