December 1, 2003

Caymans defiant in dispute over tax status

By Christopher Adams, Political Correspondent

The Treasury has failed to extract an explicit commitment from the Cayman Islands to comply with a European Union crackdown on tax evasion, but will hold further talks to try to resolve the dispute.

A meeting on Monday between Dawn Primarolo, paymaster-general, and representatives of the Caymans - the fifth largest banking sector and a UK dependent territory - was described by both sides as "constructive".

The Treasury had hoped to secure a voluntary commitment from the islands' authorities to drop their opposition to implementing the EU's savings directive, which seeks to tax cross- border interest payments to EU residents from 2005.

But, despite the government's offer of certain tax concessions to encourage compliance, no agreement was reached.

A Treasury official said: "Discussions will be ongoing. We want it to carry on and we want it to succeed." A spokesman for the Caymans' representatives in the UK made a similar statement.

The Caymans authority fears significant parts of its financial services industry could move elsewhere because of the EU directive.

The confrontation between the UK and one of its dependent Caribbean territories is threatening the EU's offensive against tax cheats because the initiative cannot start without the Caymans' participation. Ms Primarolo warned the islands' ministers at the London meeting that the UK would enforce compliance with the EU directive.

The Caymans is a leading centre for hedge funds. The islands' fund administrators association believes one in five hedge funds administered from the islands could be caught by the directive's provisions and fears some may leave the territory in response. Singapore is expected to be a big winner from the directive.

Banking laws in the Caymans guard the confidentiality of information on deposits in its offshore financial companies in most circumstances. It does not collect taxes on deposits and officials there say the EU measures would force their government to disclose information on investors or pay a withholding tax on interest earnings.

Britain is willing to give official recognition to the Cayman stock exchange, which would provide tax relief on shares held by UK investors. However, this falls short of the Caymans' demands, which include better access for their financial products to EU markets.

All five of the UK's dependent territories in the Caribbean are supposed to comply with the EU directive. The Caymans is the only territory that has not given a commitment to do so.

Without the participation of jurisdictions such as the Caymans, the EU initiative to combat tax evasion could fall apart.

The risk to business is not the only reason the Caymans are reluctant to sign up to the directive. Relations with the UK were badly strained in January when it emerged that MI6, the British intelligence service, had an agent there apparently monitoring suspicious transactions. A subsequent money-laundering trial collapsed.
 
 

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