Every hedge fund is registered in some obscure offshore location. Don't confuse that with where it's managed from.
The reason is tax related. The investors don't want a tax bill dependent on some complicated local regime, and you want investors from different countries. That doesn't mean there's never any tax paid, it the company that "advises" or manages the fund will still be based in a well known financial centre like NYC or London, and will pay all the same corporate and employment related taxes that any other firm pays. The 2/20 fee goes to this management firm. And when the investors bring their money back into their jurisdiction, they pay according to whatever the capital gains regime that's relevant.
The fund vehicle is in the Caymans / Bermuda / IoM etc.
https://www.quora.com/How-are-hedge-funds-structured-so-that...
https://panamapapers.icij.org/
http://www.alternet.org/story/150904/7_ways_hedge_funds_lie%...
There's nothing in your links that contributes to this discussion.
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.
He already wrote that (that's why the sarcasm).
> 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.
They are exploiting a loop hole.
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.
Awesome I am Automatic made dead
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.
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.
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 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 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.
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)"
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.
So why is the fund getting a pass?
Fine. When will you start paying taxes to Greece and Italy for essentially inventing the core civilizational structure the West is based on?
Haha, the EU is paying them more than enough already.
So, have you been paying your taxes to Germany, Canada, the UK, and the rest of the world?
You said the fund should pay taxes to the US because it "indirectly benefits from the US social structure".
By that logic, you should be paying taxes to all the countries whose "social structure" you indirectly benefit from.
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?
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 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 are you assuming that I condone that?
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.
The question is: why is the US entitled to these taxes, such that avoiding them becomes unethical?
False equivalence. You can deduce anything that's used to generate the profit. This makes sense.
> The question is: why is the US entitled to these taxes, such that avoiding them becomes unethical?
The answer to this question is the same as the answer to the question "why is the US entitled to taxes".
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.
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.
You seem to have a very US-centered view of the world. To those of us who don't live in the US, it comes across as bizarre.
"Takes advantage of the US social structure" is so vague as to be practically meaningless, and could be extended to almost any developed economy.
Not all of us owe Uncle Sam, you know.
The fund being in the Cayman islands in it's own isn't a tax loophole.
Can't be dealing with all those pesky "laws"!
Probably because of the beaches, pina coladas and what not, riteguise?