Cayman Islands defiant over tax dispute with UK

Tuesday, December 2, 2003

LONDON, England: The British government has failed to extract an explicit commitment from the Cayman Islands, a UK dependent territory, to comply with a European Union crackdown on tax evasion, but will hold further talks to try to resolve the dispute.

According to the Financial Times a meeting on Monday between Ms Dawn Primarolo, the British Paymaster-General, and representatives of the Cayman Islands government was described by both sides as "constructive".

The British government had hoped to secure a voluntary commitment from the Cayman Islands government 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 a British offer of certain tax concessions to encourage compliance, no agreement was reached.

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

The Cayman government 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 evasion because the initiative cannot start without Cayman's participation. Ms Primarolo is understood to have reiterated at the London meeting an earlier warning that the UK would enforce compliance with the EU directive by direct legislation if necessary.

The Cayman Islands are a leading centre for hedge funds. The Cayman 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 Cayman Islands guard the confidentiality of information about account holders 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 Cayman Islands' 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 Cayman Islands is the only territory that has not given a commitment to do so.

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

The risk to business is not the only reason the Cayman Islands 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, forcing the resignation of the British government-appointed Attorney General.

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