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When taxes become the subject of debate at the dinner table, there is usually a political or macroeconomic issue beneath the surface. Today’s conversations on international taxation are no exception. Since the financial crisis, governments around the world have explored ways to shore up their revenues, and for many, cracking down on cross-border activity by businesses and investors seems the obvious path to healthier budgets. The media actions mainly involve global multinationals like Apple, Google and McDonald’s, which are criticized for setting up operations outside the United States in a bid to pay no or very little income tax.
Investment flows through offshore financial centers may get less headline news. But tax-neutral domiciles like the Cayman Islands are coming under increasing scrutiny, some of it politically motivated. Apparently, by helping investors minimize taxes on capital returns, offshore financial centers deprive investors’ home countries of needed revenue.
Tax neutrality is the key to efficient financial flows. If the citizens of country A had to pay taxes twice when they made an investment in country B, they would probably keep their assets at home.
Are these allegations founded? Find out, Find out, Cayman Finance has commissioned Oxford Economics and the International Tax and Investment Center to take a close look at tax rates in the EU, with the aim of determining whether its member states are losing significant revenue when their investors use Cayman-domiciled funds. Our research shows that treaties and national rules made in the European Union effectively reduce taxes on cross-border investments well below official published rates.
Additionally, while offshore jurisdictions like Cayman offer a path to tax neutrality, it is by no means the only path. EU member governments have developed complex – and often considerably less transparent – mechanisms to achieve the same goal. In fact, the EU is increasingly concerned about these complex maneuvers, as evidenced by its Council Directive 2011/16, known as DAC6. The Directive requires detailed reporting of cross-border tax arrangements, with the aim of ensuring transparency of complex structures facilitated by tax treaties.
Fiscal neutrality is a fundamental principle of freedommarket economy. Essentially, he’s saying investors shouldn’t make decisions based solely on tax consequences. It is easy to see how letting tax pressure shake the economic dog can lead to market distortions, for example, an unnatural concentration of capital in jurisdictions whose only merit is low tax rates, or the flight of capital from an economically robust but high-tax location. Thus, tax neutrality is essential to the efficiency of financial flows around the world, and it underpins the vast global network of tax treaties: if the citizens of country A had to pay taxes twice when they invested in country B, they would probably keep their assets at home.
For fund investors, tax neutrality means that the country where a fund is registered does not add a third layer of taxes to those already imposed in the investor’s home country and in the countries where the fund invests its assets. Tax neutral does not mean tax exempt. In fact, it is arguably more difficult to avoid taxes in a tax-neutral jurisdiction like Cayman, which does not participate in tax treaties and therefore does not affect the taxing rights of other countries, than in the system often opaque national and international onshore rules. governing double taxation.
Offshore investment centers like Cayman play an important role in helping global investors pool and access funds, one of the hallmark goals of capitalism.
Efficient capital allocation is the cornerstone of economic health, and international tax policy can help support it. But for most governments, achieving fair and sustainable fiscal policy that balances raising revenue and encouraging investment is a struggle. On the one hand, a national government must protect its national tax base; on the other hand, it cannot risk alienating foreign investors. No wonder this balancing act can be politicized.
We hope that by shedding light on the taxes actually paid when money moves from one jurisdiction to another, our study will enable policymakers to make objective, data-driven comparisons between tax regimes. When they do, they will likely conclude that tax-neutral offshore investment centers like Cayman play a unique and important role in helping global investors aggregate and access funds, one of the hallmark goals of capitalism.
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Posted: July 14, 2021
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