Who created the “tax haven”?

Who created the "tax haven"?

Benjamin Franklin once said that there are two things in life that cannot be avoided, death and taxes. But for some rich people who already have wealth and freedom, the joy of life lies in not only investing large sums of money in pursuit of immortality, but also how to reasonably bypass the law and find a perfect way to pay less and even avoid taxes.

The “tax haven” represented by the Cayman Islands is an indispensable part of this perfect path. In this place, the government does not levy any direct taxes, and corporate profits, capital gains, and personal income are not taxed. Simply fill in the registration information to register a company without an office location or even an employee who actually stays here. These companies nominally located in the Cayman Islands can control entities thousands of miles away, thereby legally avoiding taxes. .

“What you earn is what you get” and “pay less tax = make more money”. This temptation makes the Cayman Islands the best place for company registration in the world, and the name “tax haven” follows. However, taxation has been an important source of national fiscal revenue from ancient times to the present, and it is also a weapon for adjusting the gap between the rich and the poor. When the wealth that should be used for redistribution slips along the roots of the law, who is the gate of “paradise”? open?

1. The growth history of “tax haven”

Looking back in the context of the development of offshore finance in the Cayman Islands, we can vaguely see the figure of the US dollar passing through it. It is the helpless self-help of a colony that has no autonomy under the background of the decline of Britain and the rise of the United States.

After the end of World War II, the European economy fell into a depression that lasted for several years. Most of the former industrial cities were in ruins, the unemployment rate remained high, and agricultural production stagnated. The war emptied the treasury of most countries, and even the money for the reconstruction of transportation facilities was not available. Coupled with the barrier of the Iron Curtain of the Cold War, the grain trade between East and West Europe was almost completely interrupted, and millions of refugees could only live in Temporary camps live on a little relief food.

The scenes of the United States and Europe are completely different. The excellent geographical location and the opportunity to participate in the war have limited the impact on the United States, and on the contrary, it has become more prosperous because of the war economy. In order to contain the Soviet Union and to open up new markets, the United States has decided to systematically provide economic assistance to European countries. This plan with political goals at its core and wrapped in a thick layer of sugar-coated US dollars is called the “Marshall Plan.”

The Marshall Plan caused a large amount of US dollars to flow into Western Europe, especially the United Kingdom, which received as much as 26% of the aid funds. At the same time, under the pressure of the Cold War, the US dollar foreign exchange of Eastern European countries was also transferred to the banks of Western European countries. In the 1950s, affected by the British pound crisis and the onshore financial control of the United States, a large amount of US dollars continued to flow into Europe. The “Eurodollar” began to take shape in Western Europe, and London began to vigorously develop the financial industry.

However, this cannot prevent the decline of British national strength.

In the 1960s, British colonies became independent. Jamaica, as far away as the Caribbean Sea, declared its independence in 1962. Its subsidiary Cayman Islands were directly under British jurisdiction. But the British mainland was still overwhelmed. What could it do for the Cayman Islands? In 1972, Britain decided to delegate more autonomy. In other words, let the Cayman Islands earn a living independently.

The Cayman Islands, a place with an area of ​​only 264 square kilometers, only fishery resources are available. Since Columbus discovered this uninhabited island in 1503, it has always existed as a colony. Without the support of the sovereign state, the Cayman Islands only Can rely on the sky to eat.  

In desperation, the Cayman Islands began to imitate London, trying to get a share of offshore finance. However, the Cayman Islands does not have any financial industry foundation, how can it attract the injection of transnational capital? Cayman officials racked their brains and finally thought of tax revenue. Through legislation, the Cayman Islands has created an extremely relaxed business environment. It does not levy any direct taxes on companies and individuals, and does not even need companies to actually operate in Cayman. You only need to pay a little money and leave a mailbox to register a family. Company located in Cayman. In order to compete with other offshore financial markets, the Cayman Islands has also learned from Swiss banks and established strict confidentiality measures to protect the detailed information of registered companies.

The zero-tax policy is tantamount to plating the Cayman Islands with a layer of gold. There is no need for publicity. Naturally, companies have travelled far and wide with banknotes to register. In just a few years, the Cayman Islands has attracted thousands of registered companies and trust funds, and even Citibank can’t help registering on the island.

For other countries and regions, hundreds of years of colonial history is a shame, but for this region that has never been independent since history, colonization has shaped its culture, laws and even the way of making a living-English-speaking countries, The Anglo-American system and economy rely entirely on big powers, and there is nowhere to reassure Anglo-American multinational companies.

Driven by globalization, the number of multinational companies has increased sharply, and the Cayman Islands has become a world-renowned offshore financial center. However, people prefer to call it a “tax haven” more directly than this literal economic term.

2. Who holds the “tax haven” admission ticket

On April 2, 2020, Luckin Coffee disclosed financial fraud in the U.S. Securities and Exchange Commission, amounting to RMB 2.2 billion. Luckin’s share price collapsed upon hearing this, and trading was suspended and delisted on June 29. On July 15, the Grand Court of Cayman appointed Alexander Lawson and Wing Sze Tiffany Wong as joint liquidators to facilitate Ruixing’s debt negotiations and restructuring.

Registered in Cayman, listed in the United States, and actually operated in China. This is not the first creation of Luckin Coffee, but the common choice of many Internet companies.

In 1999, Sina planned to go public overseas. However, according to the 1993 regulations prohibiting foreign businesses from intervening in telecom operations and telecom value-added services, the Ministry of Information Industry believes that foreign businesses cannot provide network information services (ICP) , but can provide technical services. This is equivalent to opening a hole to encourage companies to raise overseas. Following this line of thinking, Sina spun off the ICP business and did not participate in the listing, and reorganized the rest, and opened a holding company in the Cayman Islands as the main listing entity. In this way, Sina satisfied the laws of both China and the United States and successfully listed on the Nasdaq in 2000.

This model is called the “Sina model.”

In the following few years, Internet companies such as Netease, Sohu, Kongzhong, Shanda, Baidu, Focus Media, Tencent, Alibaba, etc., learned from Sina’s model and landed on overseas capital markets. Behind these popular Chinese concept stocks, there is a registered place for opening. Mann’s holding company. On October 10, 2003, NetEase’s stock price rose to a historic high of US$70.27, and Ding Lei became the richest man in mainland China by virtue of his stock. Only 7 months later, Shanda.com went public and surpassed the market value of South Korean online game company NCSOFT in one fell swoop, becoming the world’s most valuable online game stock. As a result, Chen Tianqiao squeezed Ding Lei and became the new richest man in China.

With the development of the Internet in China, similar wealth-making stories have emerged one after another. At the end of December 2011, the number of Chinese netizens reached 513 million, becoming the country with the largest number of netizens in the world. Soon, the mobile Internet wave was coming, and a new round of “Cayman Holdings-Overseas Listing” began to create wealth.

And these are only a very small part of the huge capital vortex rolled up by more than 100,000 registered companies in the Cayman Islands.

From the day it became an offshore financial center, the fate of the Cayman Islands has been closely related to the U.S. dollar.

According to statistics, 90% of companies registered in the Cayman Islands are closely related to the New York financial market 2,574 kilometers away- either they want to enter the capital market through the Cayman holding company, or they want to set up a Cayman subsidiary to adjust accounting statements and cleverly avoid taxes. . Of course, under the premise that the U.S. dollar is still the world currency, affecting New York’s financial market is equivalent to affecting the world.

In the 1970s, economist Milton Friedman proposed “shareholder capitalism”. He believed that when shareholders became the main body of power in a company , finding ways to increase stock prices and increase shareholder returns became the supreme goal of corporate operations. In order to achieve this goal, professional managers are often promised equity rewards and become another form of shareholder. In this way, as long as the company’s report looks good, it can forcefully push up the stock price. It is conceivable that tax avoidance is also an important means to reduce costs and increase profits.

When Friedman made this view, it happened to be the beginning of the development of the Cayman Islands and other offshore financial centers around the world. Decades later, the offshore financial boom in the Cayman Islands has become more prosperous than in the past, and his views are still being proven.

In 2018, Tesla suffered a huge loss of US$1 billion, but at the same time, as CEO, Musk received US$2.284 billion in income in the form of stock options, which is 40,668 times the average salary of Tesla employees.

Apple has always been green and environmentally friendly to shape its corporate image. However, in order to avoid corporate taxation in the United States, Apple chose to open a subsidiary in Ireland similar to the Cayman Islands and transfer all intellectual property rights to Ireland, thereby cleverly avoiding taxes through accounting operations. When it was disclosed in 2017, Apple already had up to $252 billion in offshore cash. This year, Cook received an annual salary of 145 million US dollars, which was 207 times the average annual salary of Apple employees.

Pushing up the stock price, grabbing wealth, the same game in the same world, the Cayman Islands is like a hidden button that firmly connects the global market. After all, no matter what nationality is, capital always has the most sensitive sense of smell.

3. People who live in “tax havens”

So, what are the lives of people living in this “tax haven” where global companies are flocking?

Like most tropical islands, sunny coconut groves and clear sands are standard in the Cayman Islands. On the main island of Grand Cayman, there is the most beautiful beach in the entire Caribbean-Seven Mile Beach, which used to be as long as this beach. Seven miles, but due to rising sea levels, the actual length has now been shortened to six miles.

According to the laws of the Cayman Islands, this beach is a public property, but locals know that luxury resorts and luxury hotels have long been built not far from the beach, and their area is still expanding. This seems to be a cruel metaphor: In Cayman, there is always some kind of confrontation between the public interest and the interest of foreign capital.

The statistical population of the Cayman Islands is approximately 65,700, including more than 100 ethnic groups, 90% of whom speak English. The per capita GDP is about 56,000 US dollars, ranking first in the Caribbean. Due to the huge offshore financial system, more than 100,000 companies are registered in the Cayman Islands, and the number of companies is larger than the population.

There is no physical industry, no natural resources at hand. The vast majority of registered companies are “paper companies” and cannot contribute a little income. What does the Cayman Islands rely on to support such a high GDP? 

The answer is indirect taxes. In Cayman, the reputation of “tax haven” is only for those paper companies. Although there are no direct taxes such as personal income tax, capital gains tax, and corporate income tax, they have quite high indirect taxes. For example, the Cayman Islands has almost no physical industry. Most materials depend on imports. Each product will be levied an import tax of 5% to 22%. For purely imported products such as automobiles, an import tax of up to 100% can be levied .

This is only a small part of the cost of living in the Cayman Islands. Here, dual-income families want to find a pre-get off work nursery for their children, even the cheapest kind, which costs $6,000 a year. Broadband services are indispensable in the information age, but Cayman’s broadband costs are the highest in the world, requiring US$140 per month. If you rent a house, a simple one-bedroom apartment costs $2,000 per month. Want to buy a house in Cayman? In 2020, the average house price is close to 1 million US dollars.

As of September 2020, residents of the Cayman Islands have accumulated more than US$5 million in education loans, US$70 million in auto loans and US$2.2 billion in real estate loans. Household debt accounts for 41% of the Cayman Islands’ GDP. On the surface, this number seems to be much lower than that of the United Kingdom and the United States. However, if you count the huge wealth of immigrants, the real Caymanians will have to bear much more pressure than the data shows.

After all, this is an area with a legal minimum hourly wage of US$6, while in the UK, where the cost of living is lower, the figure is £10.5 (approximately US$14.4) .

Taxes are like blood, which maintains the normal operation of a region, how can it disappear completely? The beauty of “tax haven” to foreign companies is all based on the high cost of living of local residents. Sadly, when the Cayman Islands lost British support in the 1970s, there was no second way.

All this seems to be a gift of the times, but in fact the price has already been secretly marked.

At a certain level, the Cayman Islands can be regarded as a miniature landscape of the gap between the rich and the poor in contemporary society.

A few steps away from Seven Mile Beach, the rich are enjoying the most beautiful scenery and living in the most luxurious resorts and hotels in the world. The luxury cruise ships of Microsoft co-founder Paul Allen and sports star Tiger Woods have stayed for a long time. On the coast of the Cayman Islands, Google, Apple, Procter & Gamble, Coca-Cola and other well-known companies that have changed the world have also registered companies here.

But walking to the north of Seven Mile Beach, there are locals who have endured expensive living costs for a long time. It is difficult for them to save any savings for children, cars, and houses. Malformed taxes and properties make it difficult for the Cayman Islands to fully pay for the retirement of the elderly. gold. For many Caymanians, to maintain their pre-retirement life, they have to work hard until they are 80 years old.

In the Cayman Islands, the number of new registered companies every year is more than that of the newborn population. However, these companies just use this place as a transit point or a treasure trove, and never thought of taking root here. Few people remember that this place used to be rich in sea turtles. Some people called it “Turtle Island”, and crocodiles often appeared here, so it was officially named “Cayman Island” (Cayman means crocodile) . Nowadays, the number of sea turtles and crocodiles has been greatly reduced, and Cayman has been simplified into a word full of money, which appears repeatedly in various documents of multinational corporations.

People always call the Cayman Islands and the Virgin Islands, Bermuda, Jersey and other low-tax or zero-tax regions collectively “tax havens”, but they forget that in this highly capitalized world, the door to “paradise” is never Most people drive.

source:

1. Xing Xuefeng: Research on the Performance of Chinese Internet Companies’ Overseas Listing and Financing, Fudan University Master’s Thesis

2. Xu Shuyu: Institutional Embeddedness of Cayman Offshore Financial Market, Master’s Thesis of Hainan University

3. Nicholas Sachsson: Dealing with the issue of tax havens, finance and development

4. Tax Justice Network: Corporate Tax Haven Index – 2021 Results

5. Nicholas Shaxson: Five myths about tax havens, The Washington Post

6. James Whittaker and Michael Klein: Counting the cost of living in the 7. Cayman Islands, Cayman Compass

This article comes from WeChat public account : Feng Lun Fengma Niu (ID: fengluntalk) , author: Mao Hongtao

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/who-created-the-tax-haven/
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