One of the best known international tax havens — the Cayman Islands — is being forced to consider something that would have been unthinkable only a couple years ago: raising taxes. This may be yet another blow to Americans who hold assets in offshore accounts. As reported in a recent New York Times article by Landon Thomas, Jr., there is “no getting around the fact that the balmy days for exotic offshore financial centers like the Caymans could be coming to an end.”
The Cayman Islands appear to be considering raising the $3,000 annual fee that hedge funds pay to register in this jurisdiction. The New York Times also reports that the Caymans are considering a small tax on the trillions of dollars that flow in and out of the island on a daily basis. Many financial firms (particularly hedge funds) are registered in the Cayman Islands because of favorable tax treatment.
I personally doubt that the Cayman Islands will suddenly cease to be a tax haven. But as noted in The New York Times article, there is a clear trend of greater scrutiny of offshore jurisdictions like the Cayman Islands. During his campaign, President Obama referred to Ugland House in George Town (where about 19,000 companies are registered) as “the biggest tax scam on record”. Statements like this inevitably bring higher scrutiny.
Assets may be held by U.S. citizens and entities in offshore jurisdictions for a variety of reasons. Some jurisdictions provide asset protection advantages; some (like the Cayman Islands) provide tax advantages; some have simply provided stable financial banking and financial services; and some (including Switzerland) have provided varying degrees of confidentiality.
As I have mentioned before, there is nothing inherently wrong with U.S. citizens or entities holding assets outside of the United States. Almost all major U.S. corporations now operate internationally in one way or another, and they generally have some portion of their assets outside of the United States. But assets held outside of the U.S. are sometimes used as part of a scheme to unlawfully evade U.S. taxes. There is clearly an increased interest by U.S. authorities in reducing tax advantages for U.S. corporations and individuals who hold assets outside the United States.