Probably because of the favourable taxation jurisdiction. Capital is very mobile and not there's usually not a strong reason to keep it in high tax jurisdictions if it's possible to move it out.
Of course, it should have been taxed when it was earned by investors. And it will be taxed again when investors receive and domesticate any dividends. That part is the dodgy tax dodging issue. Not the issue of where the fund is based.
From the perspective of taxpayers, having nations compete for the lowest taxes and most friendly regulatory environment is beneficial. If there were a global territorial monopoly on the production of security and rule of law, you would likely find yourself with a lower quality of life.
>From the perspective of taxpayers, having nations compete for the lowest taxes and most friendly regulatory environment is beneficial.
If the gains in lower taxes are done by playing states off each other (see Google in Ireland) or the regulatory gains are done by allowing dirtier production of the same goods elsewhere (usual China vs the West discussion) then for the vast majority of tax payers it is a loss. The taxes and regulations that apply to them individually don't change while their states have less tax revenue to provide services and the environment they live in is worse off.
>If there were a global territorial monopoly on the production of security and rule of law, you would likely find yourself with a lower quality of life.
I'd bet the opposite would be true. All those lawyers and accountants that Google employs to shift their tax burden between countries could be reallocated to doing something productive. The pressure to lower taxes is already high enough within a single state that the loss in pressure from lack of competition between states would probably be irrelevant.
Oh for sure, all those lawyers would probably instead be lobbyists meeting with officials from the one world government for beneficial policies -- a clearly uncorruptible and very noble situation which would be highly sensitive to my one vote as a global citizen.
Heavily disagree. Having nations compete for the lowest taxes allows only the wealthiest (because middle class people, or just generally those receiving a wage, cannot just choose to make their money in a tax haven) to evade taxes while enjoying all the social institutions and political settings from the original country they come from.
I'm not advocating capital controls, but it doesn't make sense for us to allow people that by all means actually live and work in the US to set up a business elsewhere to avoid taxes. Because if tax havens were not allowed to exist, they would still set up in the US/UK/whatever, but would actually pay fair amounts of taxes.
Read the comment up thread about how these are structured. The country that the investor is based in still taxes the money coming out of the fund. The fund operations still pay US taxes on all of the management fees that come from the fund.
Putting the fund in the islands just avoids having to deal with all of the work of getting exemptions for the money going to the foreign investors.
I suggest that you spend some time actually researching why these things are done before commenting based on a preconceived notion learned from popular media.
Avoid, not evade. Big difference. And generally those structures only allow you to defer tax, not avoid all tax. Yes, having $10m sitting in a bank account of some corporate structure is obviously better than not having any money at all, but it's still money that has restrictions attached to it -- can't just go and spend it all.
Generally, if you want to bring that back, you will at least have to pay some sort of capital gains or dividend tax on that.
Second, pure tax havens (such as Jersey and the Cayman Islands) are one thing. But pretty much every developed nation has special tax incentives that exist in their tax code to attract investment. And it is obvious why they do it.
If we use Luxembourg as an example, which is generally a favourable holding and fund location, what can they offer? They are a small country with no natural resources. Smaller nations need to live off of intellectual capacity, meaning: outsmarting others.
There are various approaches (Singapore, Channel Islands, Luxembourg) to that, but ultimately, if you want to attract investment and tax revenue, offering an attracting tax system seems like a great way to do it.
I don't see the world introducing a globalised 20% corporate tax rate any time soon, for example.
The problem is that I (and possibly you idk) can't decide to start paying taxes in Cayman islands while still residing in the US. Why should a hedge fund be allowed to do that? Why should a hedge fund that takes advantage of the US social structure (funded by taxes) be allowed to not pay taxes in the US?
The fund doesn't benefit from the US social structure. The fund is just a legal fence around a bunch of assets.
The investors in the fund are obliged to pay taxes on their income/gains in their relevant taxation jurisdiction, which will be the US for US investors and elsewhere for non-US investors.
>The fund doesn't benefit from the US social structure. The fund is just a legal fence around a bunch of assets.
The recent SEC decision on Ethereum ICO's made it clear at least the legal part of the social structure still applies. The normal tax setup isn't really setup to do this though as the same also applies to all the other countries the fund would want to sell to. A tax on the fund transactions with citizens of each country would probably be a better way to pay for the SEC and other regulatory and legal services in each country.
>A tax on the fund transactions with citizens of each country would probably be a better way to pay for the SEC and other regulatory and legal services in each country
This is effectively how things already work. Sale of investment products is generally highly regulated in most countries by a domestic regulator and most of those also implement transaction taxes[1].
In effect, the taxation to fund regulation is done at the destination, not the source, which makes sense given that the regulator is typically protecting the investors located in the same jurisdiction.
In the US for example (since this discussion seems to be about the US despite the fact that fund being discussed appears to have nothing to do with the US):
Currently, the US imposes a $0.0042 round-trip transaction tax on security futures transactions and $21.80 per million dollars for securities transactions.[63] The tax, known as Section 31 fee, is used to support the operation costs of the Securities and Exchange Commission (SEC)"
It's benefiting from the US structure indirectly. Investors into the fund are definitely benefiting from the US social structure and hence the fund is also benefiting.
I can also imagine that the fund has some US legal protection (don't quote me on that).
> The investors in the fund are obliged to pay taxes on their income/gains in their relevant taxation jurisdiction, which will be the US for US investors and elsewhere for non-US investors.
"It's benefiting from the US structure indirectly. Investors into the fund are definitely benefiting from the US social structure and hence the fund is also benefiting."
So, have you been paying your taxes to Germany, Canada, the UK, and the rest of the world?
>the fund has a choice of being established in US or Cayman Islands. Not, Germany, Canada, UK.
Why? As far as I can see, two people who are neither US citizens nor US residents are setting up a Cayman fund. What exactly does this have to do with the US?
The fund could be funded by wealthy families in, say, Monaco and Saudi Arabia. The investors shouldn't have to pay US taxes just because the fund manager is US based. It makes sense they pay local taxes (even if they are nil) on their gains. The fund manager, however, probably should pay US tax (on any of his profits).
> The employees of the fund, who reside in the US presumably, will be taxed on the income they earn from the fund. Why should they be taxed twice?
Why should it be the employees getting taxed and not the corporation? I might get taxed more than twice. Federal income tax, state income tax, sales tax, capital income tax, why should a corporation get a pass? I also don't think that it's getting taxed twice as they are different taxes.
> Google & Apple, etc play the same jurisdictional tricks, as do pretty much all multinational firms.
>Why should it be the employees getting taxed and not the corporation?
I think you are confusing the fund with the mangement company.
An asset manager is a company that manages assets for investors and charges fees. They have employees and offices and profits and pay taxes. Fidelity's parent for example is a US based LLC.
An asset manger like this runs many funds on behalf of investors. For each investment fund, they setup a fund to legally ring fence the assets for that particular fund, which they manage on behalf of the fund's investors. This protects the investors and maintains separations of the assets. If the management company went bankrupt, the funds themselves are unaffected (aside from needing a new manager).
The fund itself has no employees, it's just a method of legally separating out those assets.
I would also point out that this particular case has nothing to do with the US. The manager in question is not a US citizen or resident and I would be extremely surprised if the management company was being setup there.
You can generally also deduct charity payments to your own "land conservation" charity, which can then go ahead and buy 50 acres of land around your recently built mansion.
Pretty sure you wouldn't consider that one one that makes sense.
Plenty of deductions exist for a reason, and generating profits isn't always one of them.
"That's the end of it" isn't really a solid argument.
Various reasons: 1) to segregate assets, 2) because certain regulators will apply restrictions on certain security actions (one example: it seems the Belgian regulator has barred investors from borrowing against their stock holdings for most purposes, but this is possible with a US broker, even for Belgians, without restriction), 3) to stop double taxation which would be bad for global investment (e.g. some pension funds are tax exempt under local law), and 4) because investor A living in country B doesn't want to pay taxes in country C, he wants to pay taxes in country B under the laws he knows and understands.
Imagine living in Greece, and then having to figure out the entire tax system of Spain. In a foreign language. It would probably be too complex to bother (and thus you wouldn't invest) or it would be an expensive undertaking (lawyers etc) eating into your returns.
Investing in a CaymanCo is generally easy -- you don't pay tax at the entity level, you pay tax in your personal entity. Clean, easy, and you can ride off on your boat into the sunset.
There are other reasons to do so (unethical but who is to say it's not part of the thinking ...). Foreign assets are also significantly harder to apply many kinds of financial regulations to from other countries. If this fund is a Ponzi scheme for example, then the foreign transaction boundaries can prevent (or severely complicate) federal jurisdictions from clawing back profits (for the early investors who might have net profit). Normally - any investor with profitable returns from a Ponzi scheme will have their gains clawed back to pay restitution for the losses of investors who got scammed.
You are being deliberately obtuse though. As others have explained, the fund entity is setup in the Caymans to provide tax neutral position on the funds under management (and legal separation from the management entity). The management entity will pay tax in the jurisdiction its a tax resident, as will investors in the fund when any dividends are distributed/capital gain is realised.
Someone might exploit a loophole but it's not based on where the rows in the database are legally claimed to reside. The tax dodging has two main flavours afact: refusing to domesticate profits so it's stuck in limbo (this is what apple is doing in Ireland) and moving money into structures where people pretend they don't own it (owning offshore companies who own London property (UK MPs do this) or having a subsidiary 'pay' for use of a corporate brand so it's marked as an expense in a high tax jurisdiction and the tax is paid (maybe) in a low tax jurisdiction (Starbucks does this)).
The fund being in the Cayman islands in it's own isn't a tax loophole.
More likely because, when you are raising capital from various sources across the world (e.g. a pension fund in the US, a wealthy entrepreneur from London and a family office from Monaco) you don't want to impose unnecessary US taxes on them, just because the fund manager lives in the US. They will pay their tax in their own holding structure, where (and if) it is due.
Of course, it should have been taxed when it was earned by investors. And it will be taxed again when investors receive and domesticate any dividends. That part is the dodgy tax dodging issue. Not the issue of where the fund is based.