Nassau's tax-haven - an object lesson

[Gordon Barlow]

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I (we) lived and worked in Nassau, Bahamas, 1967-70, and left just as it was losing its reputation as a comfortable place for expats. It went through twenty bad years, after independence in 1973. I wrote the above blog-post six months ago as a warning to Cayman's politicians. Well, not just them, but also to the anti-British (pro-independence) minority of native-born Caymanians who don't understand how essential the British connection is. Nassau managed to claw its way back into favour with some tax-avoidance professionals, but it was a hard job. My post is too short to do the subject justice, but it is worth noting, and bearing in mind, that tax-havens come and go - and it doesn't take much to throw a flourishing one off the track.

[Rock Private Office]

Hi Gordon, welcome to the forum!

You make a great point. People often seek reassurance that a solution will be water tight for ever. It's simply not possible to give that guarantee.

I'd really appreciate it if you could copy and paste your blogs here, as I can't access most popular blog sites. Hopefully it will generate more traffic to your blogs too!

Cheers,
Pete

[Gordon Barlow]

Well, OK, Rock. This full-length blog-post of mine might interest some readers.

Lunching with the Stars
Among my trust company’s international clients in Nassau 1967-70 were rich and famous authors and movie stars. When they visited, they always had lunch with one or other of our top bosses, and if they were particularly boring some of us young minions had to go along and help entertain them. As Marlon Brando once said, “An actor is a guy who if you ain’t talking about him he ain’t listening.”

Thanks to their agents and tax-lawyers, the famous clients rarely earned much in their own name. Mostly, they were persuaded to commit to exclusive contracts with Bahamian companies owned by the trust company as Trustee of what were called discretionary charitable trusts. It was the companies that signed all the big-money deals with the movie-companies and book-publishers.

In exchange for diverting all his future earnings to “his” Bahamian company, each client would receive a lifetime salary. That made some sense. After all, it’s an uncertain world out there for actors and authors. In those occupations, you’re only as good as your last success, right? Damn right! The lifetime salaries were very modest, and they were taxable in the clients’ home countries. The income from the hugely rewarding contracts was tax-free in the hands of Bahamian companies.

The schemes had to be plausible enough for the tax-man to buy into, in the US or UK or wherever; and they were. That’s how tax-lawyers and tax-haven entities earn their fees. It’s how we young minions earned our salaries, and our occasional free lunches.

Each company-owning discretionary charitable trust contained a list of potential beneficiaries, who were liable to pay tax (in their home countries) on whatever distributions they received out of the trust’s income – namely, dividends received from the companies whose profit came from the fat contracts . Among those “discretionary” beneficiaries were family members of the star, as well as a regular charity, and sometimes the President of the USA or the British Prime Minister.

The companies did pay occasional dividends to their related trusts. But the only distributions ever paid out by the trusts – at the discretion of the trustees – were to the designated charities, and charities don’t normally pay tax. The President and Prime Minister were only ever there as a blind. Hey, Mister Tax Man! If you try to tax any of the named potential beneficiaries, we will distribute some money to those officials. Good luck trying to tax them. (I recall one trust that went so far as to name the Director of the IRS. Heavy manners, as we say here!)

It was a cunning plan, and was probably designed by former Internal Revenue collectors in collusion with domestic tax-lawyers. Trust companies, generally set up and owned by international banks, merely administered the entities in tax-free jurisdictions.

This is all ancient history, now, which is mentioned only to give a taste of what Offshore tax-havens do, for those readers who don't know. I’ve no idea whether discretionary charitable trusts are still used as tax-avoidance vehicles. Linda and I left Nassau in 1970, just ahead of the run-up to the political independence that killed the tax-haven for a generation. I worked in two tax-havens after that, but Nassau was the innovative Daddy of them all.

There were several other standard schemes, which may or may not still be used; the charitable trusts were always my favourite. It wouldn’t surprise me to learn that there are still mansions in Hollywood that are owned by Bahamian companies, and rented out cheaply to rich and famous movie stars. Maybe I even had lunch with one or two of them, back in the day.

[Rock Private Office]

Great blog Gordon! Thanks for posting it here. Please add more when you can

[Il Duce]

Hi Gordon, welcome to the forum and thanks for contributing.

Could you please add a few words about yourself in the Introductions forum.

[Gordon Barlow]

This blog-post of mine from January this year was written as a warning for Cayman's tax-haven. It should be of interest to everybody who follows the ups and downs of "Offshore" havens.

A recent post of mine (Lunching with the Stars) harked back to The Good Old Days of the tax-haven in Nassau, Bahamas, and my youthful part in its goings-on in the late 1960s. We lived in Nassau from April 1967 to September 1970, and they were the happiest days of our lives. Plenty of things to do and places to visit, and money to burn.

Paradise on earth. Linda taught Home Economics at the JFK Secondary School, until the kids fell under the influence of the local Black Power movement and began harassing the white teachers. Then, she took the Sylvia Gill secretarial course and worked in a law firm. I spent the whole of our time in Nassau with a major trust-company owned by a consortium of British and Canadian banks.

Early on, we invested 90% of our Canadian savings in a little sports-car – the only new car we have ever owned. We flew off the Island every ten weeks on average, during our whole time; that was a more sensible use of our wages than wasting the money at restaurants and bars. We were so scandalously overpaid that we quit work and headed for the caves of Crete, via Perth, Australia. (My Zorba the Greek post of January 2012 reported how that dream ended.)

The tax-haven began collapsing soon after we left. The long-existing tensions between the black and white native-Bahamian communities were one major factor, the drive for political independence from Britain another. Young white expats tended to be sympathetic to the civil-rights cause of the local blacks, and indeed many of them (the expats) had helped the all-black PLP political party to a wafer-thin victory in the watershed elections of January 1967.

Unfortunately, it suited the strategy of the PLP of the time to foster the notion that the white expats could not be trusted to maintain their support. The Party was probably right in that belief. We all reckoned that the drive for independence would cost the Islands their prosperity. And so it proved.

Expats in the tax-haven sector were pushed out of their comfort zone, and packed up and left. The banks and trust companies set up subsidiaries in the Cayman Islands. Some of their Offshore clients followed, one by one, and new clients were diverted to Cayman by their domestic tax-advisors. Public Revenue dropped alarmingly, and government finances found themselves in a downward spiral. The country’s loss was Cayman’s gain, down to the last penny.

In view of our Caymanian politicians’ increasingly vocal loss of confidence in our British connection, more and more of us expats here fear that our tax-haven may be sacrificed on the same altar of populist foolishness that killed Nassau’s. The omens are very much the same. We don’t have the black-white racism, but the perpetual fostering of native Caymanians’ resentment and mistrust of expats exactly mirrors the Bahamian experience of forty-odd years ago.

If Britain were to pull the plug on Cayman (read Trouble in Paradise, December), where would the clients go? To the new and revitalised Nassau? Or to the BVI – that long-patient bridesmaid-in-waiting? Offshore types have been sniffing around BVI for years now, and don’t like what they see. It’s not developed enough! It doesn’t have the infrastructure! But most of the sniffers are too young to know how woefully undeveloped Cayman was, at the time of the Nassau exodus in the 1970s.

Linda and I spent a weekend here in 1968, a bit before the Bahamian banks started shifting their business here. Unpaved roads, mosquitoes, four or five scruffy tax-haven professionals, and more mosquitoes. BVI today is infinitely better prepared to take our business than Cayman was to take Nassau’s back then. It would be stupid to dismiss it as a suitable successor.

I wish I could say that neither the FCO [Britain's Foreign & Commonwealth Office, Cayman's colonial masters] nor the C I Government were stupid enough to shrug off the danger. Regrettably, I can’t. I know they are.

[Rock Private Office]

Great insight Gordon, thanks.

What do you think are the key ingredients that make for an ideal offshore location? Do you think there is a future for the offshore financial industry, given the recent witch hunt?

[Gordon Barlow]

Yes I do think there is a future for the offshore industry. I'll post something on this soon.

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