First results from Japan, Cayman Islands information exchange

October 1, 2010  |  Developments, News

News, information

The Asahi Newspaper reported on 30 September 2010 that, by 29 September 2010, the Japanese tax authorities had received responses to many of their requests for information from the Cayman Island tax authorities.

This is the first time that the Japanese tax authorities have received information on financial transactions from a tax haven.  This article discusses Japan’s network of information exchange agreements.

The authorities expect this information to present an excellent opportunity to strengthen its scrutiny of tax evasion through its new co-operative relationships with tax haven countries.

The reported noted that in 2009 the Cayman Islands received the third highest amount of foreign investment from Japan, after the US and the Netherlands.

According to persons related to the tax authorities, they were concerned about cases involving Japanese individuals who had established investment funds in the Cayman Islands that had invested in Japanese financial products and real estate without reporting gains from their investments on their tax returns.

Tax audits had previously been very difficult to progress given the lack of any information disclosure from tax havens.  Notwithstanding these difficulties, a number of cases involving significant under-reporting of income had been identified.  Asset management companies that had been established by Japanese business people issued bonds underwritten by Cayman Island companies that had received significant amounts in interest from the Japanese companies.  However, tax audits had found that the profit earned by the Cayman companies had been used to pay the [undeclared] compensation of the business people concerned.  In the five years until 2002 the authorities had identified approximately USD150m of unreported income of this nature.  These cases had been identified through the testimony of persons with knowledge of the matter in Japan, but identification through that route was very rare.

The article went on to report how in May 2010, when it became possible to issue information requests to the Cayman Islands, the authorities had requested information about the state of the business and financial transactions of Cayman Island funds and special purpose companies.  The authorities are suspicious that the information may include details about Japanese capital that had been attempting to avoid taxation.  The Cayman authorities had responded with information on many of these queries.

The Asahi article also reviewed the recent history of the OECDs initiative to encourage information disclosure by tax havens and the Japanese authorities recent work on extending the scope of its network of information exchange agreements.

Comments

Contrary to popular belief, multinational companies that maintain any reasonable corporate governance standards would not typically use Cayman Island companies for the purposes of tax evasion or avoidance, especially given anti-avoidance rules such as CFC rules and similar legislation.

Rather, the advantage of the Cayman Islands was political stability together with the advanced legal system it offered, based in UK law, supported by professional law firms on the Island such as Maples and Calder.

The Asahi article implies however that the authorities are concerned about tax evasion from individual entrepreneurs or other rich individuals, who were probably not expecting the Japanese authorities to pursue international tax evasion as thoroughly as they are doing so today.


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