Tax haven transparency casts shadow over hedge funds

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.