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November 30 2003
Caymans faces UK ultimatum over EU directive
By Andrew Parker in London and John Burton in Singapore
The UK will on Monday demand that the Cayman Islands, the leading tax haven, drop its fierce opposition to implementing the European Union's savings directorate and comply with the EU crackdown on tax
evasion.
The Caymans fears significant parts of its financial services industry could move elsewhere because of the EU directive, which seeks to tax cross-border interest payments to EU residents from 2005.
Singapore is expected to be a big winner from the directive and is welcoming European private banks that want to develop their wealth management operations.
The bruising confrontation between the UK
and one of its dependent Caribbean territories is threatening the EU offensive against tax cheats because the initiative cannot start without the Caymans' participation.
Dawn Primarolo, UK treasury minister,
is due to say on Monday that the UK is willing to provide certain tax concessions to the Caymans if it gives a commitment to implement the EU directive.
But she will warn the islands' ministers at a meeting
in London that UK will legislate to enforce compliance with the EU directive.
The Caymans' banking sector is the fifth-largest in the world and is a leading centre for hedge funds.
But a study by Sir
James Mirrlees of Cambridge University suggests the EU directive could prompt European investors to snub the Caymans, leading to bank closures.
The Caymans' fund administrators association believes one in
five of the hedge funds administered from the islands could be caught by the EU directive's provisions, and also fears some may leave the territory in response.
McKeeva Bush, the Caymans' chief minister, told
the Financial Times: "We believe we could lose business. This industry employs a large proportion of our workforce and losing revenue means our people are going to be hurt."
Mr Bush condemned the UK
government's threat to legislate if the Caymans refuses to implement the EU directive voluntarily, and accused Britain of treating its dependent territory like slaves.
But Mr Bush signalled he wanted a
face-saving compromise with the UK government by calling for better access for the Caymans' financial products to EU markets and an elevated status for its stock exchange.
The UK government is willing to give
official recognition to the Cayman stock exchange, which would provide tax relief on shares held by UK investors, but a British official said improved access to EU markets may be difficult.
All five of the
UK's dependent territories in the Caribbean are supposed to comply with the EU directive. The Cayman Islands is the only territory that has not given a commitment to do so.
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