Tax haven transparency casts shadow over hedge funds

Date: Thursday, June 25, 2009
Author: Judith Tydd,

Fears that the Cayman Islands won't continue to be a welcoming home for hedge funds rise as the islands last week signed a tax information exchange agreement (TIEA) with the UK government.

Hedge funds have not had a very happy time of late. The credit crunch has prompted investors to withdraw their money and regulators want to make them more transparent.

But at least they could always rely on places like the Cayman Islands to provide a safe haven, or can they?

The Cayman Islands last week signed a tax information exchange agreement (TIEA) with the UK government causing many to argue whether the islands will continue to be a welcoming home for hedge funds.

It is estimated between 75% and 80% of the world’s hedge funds are registered in the Cayman Islands because of its attitude towards light-touch regulation and the absence of any corporation tax.

But on the face of it, the TIEA appears to make it a less attractive place to be. Not so, say the experts.

According to Stephen Herring, senior tax partner at BDO Stoy Hayward, while the majority of hedge fund investors will be unfazed by the rise in TIEAs themselves, such treaties have the potential to cause concern only if it is part of a broader campaign to drive additional layers of tax, such as withholding tax.

‘If a withholding tax was put on the country paying the money out it could became a real tax cost for the fund. Most investors aren’t worried about TIEAs because they’re not dependent on lack of disclosure ­ it’s the actual real cost of tax that investors are looking at. Cross-border funds are a very big part of the global economy,’ he said.

Herring said that despite the predicted closure of some offshore hedge funds, they will continue to attract international investors for reasons other than tax.

However, the heat is not off hedge funds yet. There is likely to be more regulation and even fraud investigators are taking an interest. The Serious Fraud Office has put hedge funds on notice that it is taking a close look at their activities.

The tax may not be taxing now, but the spotlight being shone on activities undertaken in low-tax jurisdictions is unlikely to be dimmed anytime soon.