The Cayman Islands Consider a Heretical Idea, Collecting Taxes

[R.A. Hettinga]

See also: <http://corruptionfreeanguilla.blogspot.com/>. In
particular, see:
<http://corruptionfreeanguilla.blogspot.com/2009/09/income-tax.html
 >

"Game over, man!", as the overrun Marine said in "Aliens"...

Cheers,
RAH
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<http://www.nytimes.com/2009/10/04/business/global/04cayman.html?th=&emc=th&p
agewanted=print
 >

The New York Times

October 4, 2009

Offshore Haven Considers a Heresy: Taxation
By LANDON THOMAS, Jr.

GEORGE TOWN, Cayman Islands  What happens to a tax haven when it has
to raise taxes? The Cayman Islands may soon find out.

Caught in a vise of shrinking revenue and stubbornly high public
spending, the Caymans averted a fiscal crisis this week by securing a
$60 million overseas loan.

But the Foreign and Commonwealth office in Britain, which oversees the
Caymans and can veto foreign lending requests, has delivered an
ultimatum: The rest of the $284 million the Cayman government says it
needs will not be forthcoming until this offshore financial center
imposes spending cuts and considers some form of direct taxation on
businesses here and its 57,000 residents.

For a tropical paradise that has never taxed income, property,
corporate earnings, retail sales or capital gains, such a suggestion
borders on heresy.

The Caymans have built their prosperity less on tourism, like most
other Caribbean islands, and more on serving as a tax-free home for
9,253 hedge funds and many more banks and companies that pay small
fees to establish the Caymans as their official domicile while
operating mostly elsewhere around the world.

With the explosion of global finance, the Cayman model flourished, and
fees from financial institutions, together with tourism, made up as
much as half of government revenue. Duties on imported goods accounted
for the other half.

In June, the full effect of the financial crisis touched shore with
the effect of a hurricane. A drop in financial and tourism revenue
transformed a projected surplus into a deficit of about $100 million 
a huge gap for an annual budget of some $800 million  and the leader
of the Cayman government, W. McKeeva Bush, warned of a fiscal crisis.

Mr. Bush is desperately trying to find a way out of his quandary,
caught between the demands of local business leaders to keep things
the way they are and insistence from London that the economic model of
the Cayman Islands must change.

The U.K. has to be practical, he said, warning that too bold a new
tax program could prompt Cayman-based financial firms to leave. They
dont want me to go belly up.

Perhaps not, but there is no getting around the fact that the balmy
days for exotic offshore financial centers like the Caymans could be
coming to an end.

With pressure building in Europe and the United States for a
systemwide crackdown on offshore tax havens  the Caymans prefer to
call themselves a tax-neutral portal  Britain appears determined to
make an example of a place that has become a symbol of secrecy and
intrigue.

Parts of The Firm, the John Grisham thriller about offshore
skullduggery, were set in the Caymans, and during his campaign,
President Obama referred to Ugland House in George Town, where about
19,000 companies are registered, as the biggest tax scam on record.

It is an image Mr. Bush, 54, is fighting hard to counter. He talks of
a new transparency and points to the fact that the Caymans are now on
the list of tax-neutral jurisdictions approved by the Organization of
Economic Cooperation and Development and has tax information accords
with 12 countries.

A wealthy businessman who made his fortune in real estate, he credits
the tax-free policy for transforming the islands. A native of the
Caymans, Mr. Bush recalls growing up in poverty and walking to school
through a fog of mosquitoes so thick he could barely see. As a
teenager, he worked on the construction crew that put up the building
for Barclays in the 1960s, one of the first financial companies to
arrive.

There were no cars, no electricity  there will be no going back to
living under the coconut tree, he said in an interview in his
government office in George Town, where his desk faces a portrait of
Queen Elizabeth. The people have prospered  this country was built
on this model.

Now, he is fighting for it.

For five hours one day last week, he holed up in a hotel conference
room just off a silky white stretch of beach. Fifty or so of the
Caymans business leaders told him that not only would they not accept
any form of direct tax, but that they would also be unwilling to
increase their fees unless Mr. Bush made sharp cuts to the well-paid
civil service sector.

Forced to step out of the meeting to take a call from an increasingly
impatient British government, Mr. Bush held firm.

We have not agreed to any direct taxation, he said, his voice worn
from negotiations that now consume his 14-hour workdays.

But he acknowledged the pickle he is in. It is a question of how much
pain the people of Cayman and the business community will accept, he
said.

He does little to hide his frustration at having to take lectures from
a pushy British government, which itself faces a debt burden
approaching 80 percent of its economic output, on how to run the
islands finances.

But the situation in the Caymans is indeed dire: over the last four
years, its debt has doubled to $600 million as previous governments
embarked on a series of expensive education projects.

Already, the Caymans difficulties are taking a toll. A construction
company recently stopped work on a school, saying payments had been
delayed (the government claims that bills have been paid), and rumors
are rife that public employees will be forced to take a pay cut.

Face it, this place is broke, and it is because the model is wrong,
said Desmond Seales, the publisher of The Cayman Net News, a local
newspaper. He cites as proof the fact that the government owes him
$50,000 in advertising and printing costs.

But Mr. Seales is a lonely voice calling for the financial sector to
pull more of its own weight.

He points to the low $3,000 annual fee that multibillion-dollar hedge
funds pay to register here (even Mr. Bush calls this figure
ridiculously low), and proposes a tiny tax on the trillions of
dollars that he says flow in and out of the island on a daily basis.

But wouldnt that cause wealthy people to move their money elsewhere?

Where the hell they going? he snorted. Yes, a recent upswing in
crime is a problem, but people can still walk around with their
jewelry. That is what brings all these hedge funds and offshore
partnerships. They like to visit their money.