With the Dec. 31, 2018 deadline fast approaching, a degree of uncertainty remains as to how the Cayman Islands’ Government will prevent the jurisdiction from becoming ‘blacklisted’ by the European Union. As was to be expected since the deadline was announced last year, there is a growing list of offshore jurisdictions publicly demonstrating their efforts to show their compliance, by drafting, proposing and implementing applicable legislation. The Cayman Islands has issued regular press releases on the subject but, at the time of writing, is conspicuous by its absence from this list. And the clock is ticking.
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 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 measures.
The letter to the Cayman Islands’ Government focused on the second criteria (specifically the lack of substance of entities carrying out business in or through the jurisdiction), assessing the Cayman Islands’ tax system as ‘harmful’. Together with Bermuda, Guernsey, Jersey, Isle of Man and Vanuatu, the Cayman Islands made a high-level commitment to address the identified deficiencies by Dec. 31, 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?
Certain EU funding has been linked to the list, but this would affect other countries far worse than the Cayman Islands. The EU Commission claimed other legislative proposals will reference the list, perhaps leading to stricter reporting requirements, but this is still hypothetical. On paper, therefore, it may not have been disastrous had the Cayman Islands been included, with various EU critics at the time calling 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 the Cayman Islands certainly does not want to be seen on the wrong side of such measures. As a jurisdiction, it takes pride in being on the OECD white list, and it is in the process of implementing both enhanced AML measures and a beneficial ownership register regime.
CURRENT PROGRESS?
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 remains confidential. Therefore, it is difficult for the public to ascertain what meaningful steps have been taken by the Cayman Islands’ Government behind the scenes to ensure the Dec. 31 deadline is met.
As it stands, it appears that no remedial bills have yet been proposed, in marked contrast with Jersey, Guernsey and Isle of Man which have worked closely together on a public consultation, following which Jersey has 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.
SO, WHAT IS THE FORECAST?
On the face of it, Cayman’s compliance is lagging and we wait to see how it could at this stage avoid inclusion on the blacklist. It is important, however, to remember the blacklist was always intended as a last resort, for jurisdictions that ‘refuse to engage with the EU or to address tax good governance shortcomings’. Whilst the Cayman Islands’ Government has not been publicly forthcoming, the initial commitment letter sufficiently satisfied 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, 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. For the time being, we can only sit tight, wait for the promised public consultation and draft legislation and be ready to assess the impact any proposed changes will have on Cayman’s regulatory and administrative landscape.
