Former AUC-owners maintain they have a binding tax-agreement, but others disagree: “The robbery of the century”

POSTED: 09/17/13 2:27 PM
AUC-founder Paul Tien. Photo Montserrat Reporter.

AUC-founder Paul Tien. Photo Montserrat Reporter.

St. Maarten / By Hilbert Haar – “Paul Tien was always one step ahead of the law. When things got too hot, he was always on to something else. You think that what he did in Cincinatti was legal? Not a chance.”

To say that the people who worked for him and knew him on a certain level have kept warm feelings about the founder of the American University of the Caribbean in Cupecoy is a stretch, as the quote above shows.

This newspaper investigated the fiscal deal the American Associated Group (formerly the American University of the Caribbean NV) – the entity that owned the university – made with the tax inspectorate. In doing so, we met with several people who were willing to talk but only under guarantee of anonymity. Statements in this story have been cross-referenced among these sources to get a feel for their authenticity.

Paul Shu-Pei Tien was born in Tianjin in China but he grew up in Taiwan. He studied electrical engineering in the United States and became a professor in this field in Ohio, before he established the American University of the Caribbean in 1978.

Now what was that again in Cincinatti? In 1978, while the AUC’s first campus was under construction on the island of Montserrat, Tien organized his first classes on the campus of the College of Mount St. Joseph in, indeed, Cincinnati, Ohio. On August 14 of that year, 107 students began their studies there. Tien operated within the United States under his Montserrat charter – and our sources now seriously question whether this was legal.

In 1980, the campus in Montserrat opened for business on a 25-acre terrain granted by the local government. Nine years later, on September 17, 1989 Hurricane Hugo destroyed the campus and the AUC temporarily moved to Plainview in Texas. In 1990 AUC was back in Montserrat, but when the Soufriere Hills volcano erupted on July 18, 1995, burying the campus under volcanic ashes, the university’s stay on the island had run its course.

In September 1995, AUC opened two locations: one in Belize for 250 students and one in St. Maarten for 280 students. Hurricane Luis cause some delay, but by September 1996 all students and faculty moved to St. Maarten, where the permanent campus in Cupecoy opened on May 1, 1998.

In yesterday’s article we already referred to the close ties founder Paul Tien maintained with local politicians by routinely giving them $5,000 campaign donations. One of our sources brought up how Tien hired Kim Choe as the university’s human resources manager. “She does not speak a word of English – even though she lives in Chicago – and she does not write it either, but she remained in her position until 2011, when Devry bought the university.”

Kim Choe got the job, because she happened to be married to Jae Choe, who is close with Paul Tien. Initially, the lady was removed from the island because she did not have any qualifications for the job, our sources claim. One week later however, she was back. At the time MP Louie Laveist was the commissioner in the Executive Council charged with Labor Affairs.

The Kim Choe appointment is just one example of how the owners of the AUC managed to get their way with the local government.

How did Tien set it all up? Under his reign, the university was owned by three foreign companies. Documents submitted to the Third District Court of Appeal in Florida show that Tien formed the American University of the Caribbean as a Cayman Islands Company in 1982; in 1999 he established the American University of the Caribbean School of Medicine, also a Cayman Islands company; and in 1996 Tien established the American University of the Caribbean N.V. – a Netherlands Antilles company. There is a fourth entity involved: Medical Information Office Inc., a Florida corporation formed to perform certain administrative services relating to the university. Paul Tien owned all or at least a majority of stock in the three AUC-companies, while his adult sons owned the stock in the Florida-company.

The information submitted to the Appeals Court in Florida is linked to the divorce between Paul Tien and his wife Ming. The two married in 1952 in Taiwan. More than half a century later, in 2006, Tien filed for divorce.

The divorce papers show how well the university did in St. Maarten: “The AUC companies ultimately deposited tens of millions of dollars in bank accounts in Miami. Nearly $70 million in AUC-funds were transferred by one of Tien’s sons without authorization to Miami bank accounts in the name of a Turks & Caicos Islands company.”

There was, so it appears, plenty of money going around in the for-profit medical university business, but St. Maarten did not receive its fair share of it. On the contrary, sometime before Tien sold the institution to Devry Inc., he made a deal with the tax inspectorate to settle all his fiscal liabilities. The state now regrets that deal and there is an ongoing court case in which the country challenges the validity of this agreement.

The bottom line: the American Associated Group NV paid $7.2 million in taxes prior to the sale. This way, the tax inspectorate remained unaware of the true value of the university. Independent from each other sources have confirmed that this amount included $1.5 million in outstanding taxes and $1.2 million in transfer tax for the real estate in Cupecoy – valued at $35 million.

The catch: Devry Inc. paid $200 million for the university’s goodwill and over that amount Tien should normally have had to pay 25 percent in profit taxes (so-called “stakingswinst”). But instead, the tax man collected just $4.5 million- or 2.25 percent.  Some sources have called this “the robbery of the century.”

In a press release AAG issued after former Finance Minister Roland Tuitt revealed details about the deal in a press conference in August, the former owners say that settling their fiscal liabilities with the tax inspectorate was a condition for Devry to close the purchase. Understandable, the new owner did not want to fund any skeletons in the university’s cupboards.

The last sentence of the press release reads: “Had the tax authorities not entered into a tax settlement agreement, the transaction (with Devry – ed.) would have been renegotiated in a different form which would have completely and legally exempted the sale from profit tax.”

This is where, according to our sources, the tax inspectorate has been led astray. Already, our sources say, the former AUC-owners somehow moved 95 percent of the profits they made in St. Maarten to their entity in the Cayman Islands. But renegotiating the transaction with Devry in a way that would have exempted the deal from profit tax could only have been done with a share-transfer.

“If the tax inspectorate had done its work properly, it would have asked the previous owners for a statement from the buyer that it was prepared to do a share-transfer,” one source said.

Had that question been asked, there would have been no proper answer, because Devry simple was not prepared to do this for one simple reason: a share-transfer would make the new owner vulnerable to hidden fiscal liabilities. As a company that is quoted on the stock exchange, Devry would never take such a risk. “Devry cannot afford to issue false statements. That carries a prison sentence in the United States,” one source said.

Wim van Sambeek, a civil law attorney who worked until last year in St. Maarten, says that the failure by the tax inspectorate to ask the right questions “is probably politically motivated. It also refused to undertake any collection measures regarding the wage taxes. I was surprised to learn that the suggestion of wage tax fraud during the case of the dismissal of an AUC-employee apparently did not lead to any research by the tax authorities while it is an often heard complaint that tax compliance could improve.”

What is also bitter for St. Maarten: if the American associated Group took its profit to its Cayman Islands entity, it would be liable for taxation by the American tax authorities.

And then there is of course the claim that Paul Tien always manages to stay one step ahead of the law. Our sources tell us, though this has not been confirmed, that Tien has left the United States and that he now resides in Singapore. And when meeting the demand that he put $62 million of the purchase price Devry paid in escrow for a year, he was afraid to put it in an American bank account – so he chose a Canadian bank for it.

To be fair to the American Associated Group: it is currently in court. The company maintains that is has a legally binding tax settlement agreement. “We are disappointed with the position taken by the present tax authorities, but we fully expect that the tax court will confirm the validity of our tax settlement agreement and that the taxes paid by us satisfied all of our tax obligations to the government of St. Maarten.”

Tomorrow: American authorities are getting weary of for-profit medical schools in the Caribbean.

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Former AUC-owners maintain they have a binding tax-agreement, but others disagree: “The robbery of the century” by

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