Cayman Islands court leaves tax agreement in tatters

Investigators for the Australian Tax Office and their lawyers were told by a judge last year that if they travelled to the Cayman Islands they could be locked up.

A year earlier the Tax Office had suffered a setback. It lost a case in the Grand Court of the Cayman Islands. This was the first lawsuit, and apparently the only one, to test whether a Tax Information Exchange Agreement (TIEA) actually worked. It didn’t.

After years of gabfests, conferences, issues papers and symposiums, when the Australian government finally sought to uphold its rights under an international tax treaty and obtain a bit of information, thwack, it was promptly thwarted by a judge in the Caribbean.

“The Commissioner’s staff and lawyers would be exposed to risk of incarceration should any of them decide to visit the Cayman Islands,” wrote Justice Nye Perram of the Federal Court in a judgment after the Caymans defeat. The Caymans judge ordered the relevant documents, now in the hands of the Australian court, destroyed.

As G20 leaders prepare for their talkfest in Brisbane in the coming week they would do well to ponder this. Even if they were to talk day and night for a year, sally forth with a shipping container brimming with white papers, sign a slew of resolutions and an array of treaties on top, it would hardly put a scratch on the Leviathan that is global profit shifting.

The key is to stop the money from getting to the tax haven in the first place, properly enforce Australia’s existing tax laws and enact some new ones – not try to get it back from a low-lying island in the Caribbean. The G20 does not make laws, or enforce them; sovereign nations do.

The idea of a multilateral solution plays straight into the hands of the perpetrators, the multinationals, their lawyers and the big four. You can almost hear PwC, Ernst & Young, Deloitte and KPMG chuckling about the G20 from their city eyries. While solemnly pontificating to governments on tax policy, in the very next breath they go about showcasing the latest in tax avoidance fashions to the world’s premier tax cheats.

The Caymans catch

The Caymans Islands is the fifth largest banking centre in the world; its hundreds of banks and insurance companies are the stewards of trillions in the wealth of other nations. In a fiscal ring-a-ring-a-rosy, they even help prop up OECD bond markets with their surfeit of capital. The overflow has to go somewhere; why not buy government bonds in the countries where the profits originated?

Aussie companies are there in their droves, the likes of QBE, News and Macquarie. Even government instrumentality the Future Fund is there with no less than 35 entities, latterly, inexplicably, trading in distressed debt. That’s another story.

This is but one of dozens of tax havens around the world, all with their unique cultures and legal regimes. Forget the utopian extravaganza of a multilateral agreement, this case shows how tricky it is merely to exert your rights in a bilateral agreement – that between Australia and the Caymans.

Under the Tax Information Exchange Agreement (TIEA) it had struck with the Caymans, the Australian Tax Office requested information from the Cayman Islands Tax Information Authority (CITIA).

CITIA agreed to deliver the information but the taxpayer in question, Sydney man Vanda Gould, challenged the decision in the island’s courts.

The Grand Court agreed with Gould, finding that the information should not have been given to the ATO, and further that the CITIA had breached not only the Bill of Rights but the nation’s confidentiality laws to boot.

It was an outrage, fumed Gould’s barrister Ramon Alberga, QC, lashing out at the Australians during proceedings in sunny Georgetown:

“In acting as it did the Australian court has disregarded the well-known principle of international judicial comity [this bloke is a big fan of Lord Denning], which is that courtesy and recognition of the judgment of one foreign court is usually extended to such judgment by another foreign court. This is especially to be observed when the two courts belong to states which both have her majesty the Queen as their head.”

This demonstrates two immutable principals: one, that lawyers take themselves far too seriously, and two, they also tend to love themselves too much, wherever you are in the world.

By finding, however, that Cayman Islands Tax Information Authority acted unlawfully by providing the Australian Tax Office with documents about two companies registered there – despite the bilateral deal for exchange of information – it does not bode well for any such arrangement.

Tax lawyer Tony Anamourlis is doing his PhD on the efficacy of Tax Information Exchange Agreements told Fairfax Media it was questionable now whether TIEAs were “a workable tool to tackle tax evasion, fraud or criminality”.

This was the first time the agreements had been tested in court, Anamourlis said, and were the Australian government to splash more money chasing information about this one taxpayer, battling tight bank secrecy regimes in the process, it would first have to appeal to the full bench in the Caymans, thence the Privy Council in London.