How do the Cayman Islands assist in avoiding taxes?

Discussion in 'Economics' started by wilburbear, Feb 13, 2009.

  1. So much for the clever people, including on ET, who thought this was a way to cut their taxes. In a few years, the clever person may find themselves doing prison time...

    Elmer's disclosures follow the emergence of similar whistleblowers. One recently testified in the United States against the Swiss bank UBS, and another sold British and European authorities the contents of computer files from Liechtenstein bank LGT.
  2. LeeD


    Cayman Islands do NOT assist in avoiding taxes because if they are directly asked by local authorities they'll give direct answer. Cayman Islands is the prime location for hedge funds as local cuorts tend to favour fund management over investors.
  3. There is tax evasion (illegal) and tax avoidance (legal, but disliked by IRS), these two are completely different things. I will attempt to talk only about tax avoidance here, not outright tax evasion.

    First of all, any foreign entity (let's say for a moment that it is strictly owned by non US citizens) and foreign nationals, do not pay US taxes. This is obvious.

    Two, US is the *only* country in the world, where its citizens are subject to income tax, regardless of where they reside. Any other country in the world (Canada, UK, Germany, etc), as long as you declare yourself a "non-resident" of the country, your income (outside of that country) will not be subject to income tax.

    Therefore, you see all these British nationals, move themselves to Monaco, Gibraltar, Dubai, etc, often the lower taxes in those places is one of the reasons.

    Now let's talk about off-shore companies. A standard way for hedge fund managers to manage non-US citizen's investments, is to create a fund (the "investment vehicle") outside of US, so the non US citizens' income will not even be subject to US tax code (which is, of course, legal). Then the fund managers themselves, would form a "management company", that acts as "advisor" to the off-shore fund. Hence, only the Manager's fees (to themselves) are essentially "flowed on-shore", and therefore subject to US capital gains and income taxes (for the managers only, not the investors). There is nothing illegal here, right?

    Now, here comes the complication. Since often a lot of the hedge manager's own income comes as a slice of the fund itself, so what happens to taxes? Enron (hehe), lead a group of fund advisors (which Enron often sees itself as one), convinced the US congress to pass a law (I believe attached to the Derivatives Modernization Act, aka, Jesse Helm's deregulation act), that indicates that fund advisors can *defer* their gains in the fund itself, for up to 10 years, and is only subject to income tax after or once the income is "cashed out", and taken on-shore. This is *huge* for hedge fund managers. Since they can effectively defer the capital gains up to 10 years into the future.

    Looking through that list of investors for Carlye, I don't get what the big deal is. Most of the investors are non-US citizens or entities anyways, so they shouldn't be subject to US income taxes. It really is as simple as that.

    Take myself as an example. I lived in the US for 12+ yrs, and I have always resisted getting a green card, for the express purposes of future (well current) tax planning. I know of a few couples, where one of the spouses would never get US citizenship for the same reason (and he / she would hold most of the assets), not to mention the almost 1000 person who gives up US citizenship annually. US really have one of the most backward tax code in the world. Sometimes I consider becoming a US citizen make you disadvantaged in wealth creation, even more than ppl from traditionally "socialist enclaves" like Sweden or the UK. And Yes, there is a reason why a lot of ppl go live in Switzerland, but that's another long (and strange) story altogether.
  4. LeeD


    Given rufus_4000's excellent post I don't think it's actually "avoiding" taxes
  5. Cayman Islands do not help evading taxes. <a href="">Offshore banking</a> centers do not have tax evasion punishments, since they have no taxes and nothing to punish for.
  6. I clicked your link and it tried to install spyware on my machine.

    Fuck you scumbag.
  7. Daal


    Cayman Islands is just a jurisdiction that has low taxes and easy incorporation process. Its very important to have these around because they keep global tax rates lower than otherwise and dimish the ability of governments to expand.
  8. Pekelo


    I think there is maybe a simpler way instead of going offshore.

    Make a corporation, hire yourself as the mastertrader and pay yourself just 10% of the profits, so your taxable income is going to be way less. The corporation pays different (but less) taxes or no taxes. Anything you buy (cars, houses) you buy it in the corporation's name but you get to use it. You can deduct those assets as company expense, etc. You can make the company easily non-profitable, just spend the profits on assets, or hire relatives, so the money goes to your relatives or into assets used by you, instead of to the IRS.

    Another advantage I think if you get sued for some reason because those things belong to the corporation not you.

  9. Did you notice that his post with the spyware link was his very first post on ET?
    #10     Feb 14, 2009