Introduction
Over the past half-century, the Cayman Islands (collectively known locally as "Cayman") has become a leading global financial hub. Beginning with a common law-based legal system that offers exceptional protection to investors, the Cayman government adopted specialised, proportionate, internationally compliant regulatory systems governing collective investment vehicles, insurance captives, and other financial entities. Over time, local and international law and accounting firms grew and attracted talent, creating a self-reinforcing cluster of expertise and investment.
Unfortunately, Cayman's role as a hub for international finance has been broadly misconstrued by the media and policymakers in many other jurisdictions. As a result, Cayman now faces intense scrutiny and is being pressured to change its systems. In the wake of the economic devastation wrought by COVID[1]19, nations around the world are looking for ways to address massive budget deficits, so there is likely to be further pressure to raise taxes and address perceived threats to existing fiscal revenue streams.
This paper sets out to explain in a clear and straightforward way why entities, and in particular collective investment vehicles (CIVs) and multinational enterprises (MNEs), choose to domicile in Cayman, what advantages this generates to the EU and other jurisdictions, while preserving other jurisdictions' taxing rights, and why it would not be in the interests of those jurisdictions to try to force Cayman to change its systems radically.
The paper is organised as follows:
Section 1 discusses how Cayman became a domicile of choice for CIVs and MNEs. It emphasises the role of Cayman's excellent governance, legal system based on English common law, specialized legislation and courts, global expertise, true tax neutrality, effective infrastructure, and proximity to the U.S. It concludes by observing that in combination these factors make Cayman a global financial hub that is a cost-effective jurisdiction in which to establish entities, including CIVs and MNEs.
Section 2 describes the types and number of CIVs operating in Cayman, the legislation governing them and the benefits they offer to onshore jurisdictions. It also discusses, as an example of such a CIV, a multi-billion dollar fund domiciled in Cayman that pools capital from numerous jurisdictions in order to invest in infrastructure around the world, including major investments in ports, toll roads, airports and water in the EU.
Section 3 asks whether Cayman facilitates tax avoidance by MNEs operating in Cayman and discusses the rules established to deter profit and debt shifting. Specifically, it discusses rules relating to controlled foreign corporations, related-party debt structures, transfer pricing, and corporate redomiciling.
Section 4 considers the reasons MNEs establish Cayman-resident entities and discusses the implications for other jurisdictions. It challenges the preconception that MNEs use Cayman-resident entities for tax avoidance, highlighting several examples of companies that have been accused of such behaviour and pointing out that those companies actually pay significant amounts of tax in the countries in which they operate.
Section 5 assesses the broader effects of Cayman-domiciled MNEs on tax receipts in the EU and other OECD jurisdictions. It uses data and evidence from scholarly studies to show that, contrary to the conventional wisdom, there is no evidence that Cayman-domiciled MNEs adversely affect EU tax receipts.
Section 6 compares mechanisms for achieving tax neutrality in the EU and Cayman. Drawing on evidence from a recent study by Oxford Economics, it shows that whereas Cayman facilitates true tax neutrality for all entities at minimal cost, EU jurisdictions are at best able only to facilitate a facsimile of tax neutrality through the use of special structures and double taxation treaties; moreover, these special structures are highly limiting and come with additional costs.
Section 7 assesses the effects of investments made in less-developed countries using Cayman-resident entities. Drawing on studies from the Overseas Development Institute and UNCTAD, among others, it shows that Cayman and other tax-neutral financial centres facilitate trillions of dollars of investment in less developed countries, thereby contributing to economic growth and additional tax receipts in those countries.
Section 8 discusses what the effect would be of limiting the ability of investors to make investments through Cayman-based entities and offers some concluding remarks.
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