The OECD Initiative

The OECD initiative seeks to identify what are considered to be harmful tax havens.  Under the OECD plan, countries blacklisted will have one year to bring themselves into compliance with requirements or risk being subject to sanctions that have not yet been specified.  A United States Treasury Official has stated that sanctions that could be imposed might include applying a withholding tax on all interest payments made to rogue jurisdictions and adding additional reporting requirements to U.S. citizens who keep accounts in such places.

Compliance that will be required by the OECD will mean eliminating excessive bank secrecy and ending two-tiered tax regimes that give favourable treatment to capital from abroad.

The Black List

The OECD named 35 tax havens in its black list, being Anguilla, Andorra, Antigua, Aruba, Bahamas, Bahrain, Barbados, Belize, British Virgin Islands, Cook Islands, Dominica, Gibralter, Granada, Guernsey/Sark/Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Maldives, Marshall Islands, Monaco, Monserrat, Nauru, Netherlands Antilles, Niue, Panama, St. Kitts and Nevis, St. Lucia, St. Vincent, Seychelles, Tonga, Turks and Caicos, US Virgin Islands, Vanuatu and Western Samoa.

The OECD claims that the blacklisted tax havens are harming world trade and investment by giving a shelter to tax dodgers, and that they distort competition by attracting money from companies and individuals seeking to avoid tax in their own countries.

The Cayman Islands was one of six jurisdictions, also including Bermuda, Cyprus, Malta, Mauritius and San Marino, to reach agreement with the OECD and stay off of the blacklist.  By staying off the blacklist, the Cayman Islands will avoid the future sanctions to be imposed on members of the blacklist.

Letter of Commitment

The Cayman Islands government has stressed that the approximately 580 banks in the Cayman Islands do not rely on tax dodgers to do business, and note that the vast majority of clients for the banks are large firms engaged in institutional business.

In order to avoid being blacklisted as a harmful tax haven, the Cayman Islands have made a letter of commitment to the OECD relating to harmful tax competition.  Under the letter of commitment, the Cayman Islands government will implement a plan to share bank account information with foreign governments conducting criminal tax evasion investigations for the first tax year after December 31, 2003, and on civil and administrative tax matters for the first tax year after December 31, 2005.  This information will be shared under bi-lateral agreements to be negotiated.

This exchange of information will not be allowed as a part of a “fishing expedition”.  The Cayman Islands Financial Secretary Mr. George McCarthy has emphasised that the bank account information will only be shared with foreign governments after the foreign government has proved that there is good reason to believe that tax evasion has taken place.

Substantial changes to Laws anticipated

The government has indicated its view that the implementation of the commitment will provide an effective means of disclosure of information while at the same time recognising the legitimacy of bank secrecy in protecting the confidentiality of financial affairs.  Implementation will include confidentiality provisions to ensure that information exchanged is adequately protected from unauthorised disclosure.

With regard to the issue of transparency, the letter of commitment promises that bearer shares will be abolished or the identity of the beneficial owners of the shares will be available for permitted disclosure purposes.

It is contemplated that some of the provisions of the existing Code of Practice under the Proceeds of Criminal Conduct Law 1996 may be made mandatory by appropriate regulations.  The Code of Practice emphasises the Know Your Customer Principle, and is presently voluntary.

The commitment will also amend laws relating to companies, partnerships and trusts to apply equally to residents and non-residents so as to remove preferential treatment to non-residents that may exist under current laws.  This preferential treatment is called ‘ring fencing’ by the OECD.  Local immigration and business licencing requirements (including the local companies control law) will not be interfered with.

The Cayman Islands will issue a policy directive advising financial service providers against the use of aggressive marketing policies based exclusively or primarily on confidentiality or secrecy.

In sum, the Cayman Islands is committed to making important changes in its laws and regulations, and that commitment has allowed the jurisdiction to avoid being named on the OECD blacklist.  What will remain the same is that the Cayman Islands will still be free of income tax, corporation tax,  capital gains tax, estate duty, inheritance tax or gift tax.

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Solomon HarrisAttorneys-at-Law
P.O. Box 1990 , 
Barclays House
George Town, 
Grand Cayman, 
Cayman Islands 

Phone:  345 949 0488 
Fax:  345 949 0364 
E-mail: solomonharris@candw.ky
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