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.
