Senate Proposals and GAO Report Focus on Taxation of Cayman Islands Accounts

On the heels of continued congressional concern about tax evasion among offshore accounts, including offshore hedge funds, a spokesman for the Senate Finance Committee told the Hedge Fund Law Report that lawmakers will attempt to “move legislation this year” addressing the issue. At a recent hearing on Cayman Islands accounts, Sen. Max Baucus, chairman of the Finance Committee, outlined a series of proposals centering on strengthening rules relating to Reports of Foreign Bank and Financial Accounts. The Finance Committee hearing focused on a recent Government Accountability Office report titled “Cayman Islands: Business and Tax Advantages Attract U.S. Persons and Enforcement Challenges Exist.” The GAO report found that for many hedge funds, a primary purpose of establishing a Cayman Islands domicile is tax minimization. The GAO report noted that efforts to prevent illegal tax avoidance are hindered by the IRS’s “lack of jurisdictional authority to pursue information, difficulty in identifying beneficial owners due to the complexity of offshore financial transactions and relationships among entities,” and other factors. Cayman attorneys, however, remain confident in the robust legal and regulatory structure in the Cayman Islands and, in fact, read the GAO report as complimentary of the Cayman system.

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