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Cayman, Liechtenstein Tax Haven Status Fades

Cayman Islands and Liechtenstein are tightening tax shelter rules with treaties that breach the traditional wall of financial secrecy.

Cash-strapped governments around the world may be in line for a boost from two unlikely sources: the Cayman Islands and Liechtenstein. Both countries, deemed big-time tax shelters, are tightening rules in a move that could prompt companies to stay home and pay taxes rather than lay down roots in cheaper offshore locales.

The U.S. alone reportedly loses $100 billion a year in tax revenue to shell companies and bank accounts registered in far-flung tax havens. The financial world, on the other hand, reaps enormous benefits: Three quarters of the world’s 8,000 biggest hedge funds are domiciled in the Cayman Islands, for example, helping to make that territory of 49,000 souls a top-ten global banking center.

During its April meeting in London, the Group of 20 called for unspecified sanctions against what it labeled tax havens as part of its world financial rescue package. Many people in London and New York quickly forgot that threat amid sexier disputes on leverage limits and bankers’ bonuses — but the offshore zones did not. Since April the Cayman Islands has hammered out 25 bilateral Tax Information and Exchange Agreements, treaties that breach the traditional wall of financial secrecy by sharing more tax-related information with higher-tax countries, says George McCarthy, head of the Cayman Islands Monetary Authority. Liechtenstein tops that, with 100 TIEAs inked over the past 18 months, notes Fritz Kaiser, a private banker who advises the principality’s government on financial regulation.

"Over the next ten years, the distinctions between offshore and onshore finance will fade," says McCarthy from the Cayman capital of George Town.

Still, G-20 member states aren’t leaving it to chance. Last month the French Banking Federation said members will pull out of all countries deemed tax havens by next March, and Italian tax police launched a wave of surprise inspections at branches of Swiss banks.

The pressure is producing results. The Organization for Economic Cooperation and Development in August upgraded the Cayman Islands from its so-called gray list to the ranks of nations that have "substantially agreed to implement the internationally agreed tax standard." A half dozen other offshores have also been elevated. "Enabling investors to avoid excessive foreign taxes" offers former havens a competitive advantage, says McCarthy. For example, a Peruvian or Latvian capitalist can invest in a Greenwich, Connecticut–managed but Caymans-domiciled hedge fund without capital gains levies to the U.S. Treasury.

Not everyone is convinced. "The OECD has gotten more pieces of paper signed in the past six months than the previous ten years, but that is starting from a very low base and shooting for a very weak target," contends John Christensen, director of London-based NGO Tax Justice Network. In practice it remains "nearly impossible for U.S. authorities to gain access to needed information" from offshore zones on the OECD "white list," Michigan Senator Carl Levin complained when introducing his Stop Tax Haven Abuse Act earlier this year.

McCarthy and his Cayman colleagues would differ, of course. But now they are paying attention.

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