Cayman Budget Increases Fees And Taxes

by Phillip Morton, Investors Offshore.com

07 October 2009

Cayman Islands’ Financial Secretary, Kenneth Jefferson on October 2 tabled an austerity budget designed to tackle the significant challenges the jurisdiction is facing as a result of the financial crisis, which has left the government little choice but to increase a multitude of taxes and fees.

Facing a 5.7% contraction this year, rising expenditure and lacklustre revenues, the Cayman Islands has been forced to reevaluate its tax system to provide an additional KYD126.4m (USD156m) over the next twelve months, KYD94.9m (USD117.2m) of which will be realized in the fiscal year 2009/10, alongside retrenchment in public sector services.

Concerned about the Caymans' KYD81.1m budget deficit in 2008/09, following a KYD40.8m decline in revenues year-on-year and an expenditure increase of KYD56.2m over the same period, the UK government turned down the territory’s request to increase borrowing last month and requested that it expand its tax base to ensure that the jurisdiction does not post another significant budget deficit in 2009/10.

In response, the Cayman Islands has rejected the UK’s call for the introduction of direct taxes and has instead decided upon broad increases in levies on international trade and transactions and domestic levies on goods and services, comprising mainly of increases in import duties, bank, trust and company licence fees and work permit fees.

The revenue measures that the government intends to implement during the 2009/10 financial year will garner KYD94.9m in 2009/10 and KYD126.4m when they are in effect for a full 12-month period and are as follows:

• Annual Company Fees - Annual company fees for resident, non-resident, exempt and foreign companies are proposed to increase between KYD150 and KYD500. It is assumed that there will be a 10% reduction in the number of Foreign, Exempt and Non-resident companies and a 5% reduction in the number of Resident companies as a result of the announced increase in annual fees. Currently there are 94,221 companies at the General Registry. It is expected that the government will earn additional revenue of KYD17.0m for a full 12-month period with the majority of the KYD17.0m being collected in 2009/10 since company fees are due and paid between January and March of each year.
• General Registry Fees - These include various increases in certificates, certifications, express filings, new company registrations, filings, name reservations and new company registrations, which were increased to the value of the associated annual fees. The government expects to earn additional revenue of KYD7.2m per year with KYD4.7m being collected in the 2009/10 year.
• Mutual Funds - Mutual funds annual licence fees are proposed to increase by KYD500. Although there are currently 9,825 funds, it is assumed that there will be a 10% reduction in the number of registered mutual funds. The government expects to earn additional revenue of KYD4.4m per year with the majority of the KYD4.4m being collected in January 2010 as these fees are due in January of each year.
• Banks and Trust Licences - The increases in these fees will see Bank/Trust Class 'A' - retail banking licences moving from KYD400,000 to KYD600,000 and Class 'A' (non retail) licences moving from KYD130,000 to KYD136,500 and Bank/Trust Class 'B' licences increasing from KYD57,000 to KYD60,000. The government expects to earn an additional KYD2.2m per year with the majority thereof to be collected in the 2009/10 year as the fees are due in January of each year.
• Insurance Licences - The increases in these fees will see Insurance Class 'A' (locally incorporated) licences moving from KYD30,000 to KYD50,000, Class 'A' (approved external) moving from KYD40,000 to KYD50,000 Class 'B' (unrestricted) increasing from KYD7,500 to KYD8,500 and Class 'B' (unrelated) increasing from KYD7,500 to KYD8,500. The government expects to earn additional revenue of KYD1.2m for an entire year with the majority of the fees being collected in 2009/10 as these fees are due in January of each year.
• Security Investment Business Fee - Persons who operate a security investment business will see fees increasing by KYD2,500. Although there are currently 2,270 licences it is assumed that there will be a 25% to 30% decrease. It is expected that the government will earn additional revenue of KYD7.9m in a full year. The additional revenue expected to be earned in the 2009/10 year from this item is KYD5.0m.
• Fees on Transfers through Money Remittance Companies - This new fee of 2% will be charged on all remittances leaving the Cayman Islands via money transfer entities. The additional revenues to be earned from this proposed fee was calculated on the basis of the KYD230.0m that was transferred at the end of 2008. The government estimates that it will earn KYD4.6m per year with KYD3.0m being collected in the last 8 months of the 2009/10 year.
• Business Premises Fee - This new fee will be an annual amount payable by the tenants of commercial properties. It is estimated that the rental income from commercial property is KYD65.0m. At 10%, the government estimates to earn an additional KYD6.5m per year with KYD1.6m being collected in the 2009/10 year.
• Exempted Limited Partnerships - It is estimated that by the end of the 2009 calendar year, there will be approximately 9,000 exempted limited partnerships within the Cayman Islands. With an increase of KYD250 per annum, the government will earn an additional KYD2.1m per year with the majority of the KYD2.1m being collected during 2009/10 due to the fees becoming due in January of each year.
• Tax and Trust Undertaking Fees - Tax exemption certificates guarantees that certain entities will not be subject to taxation within the Cayman Islands for 20 to 50 year periods. The fees are currently at KYD500 per certificate and are proposed to be increased to KYD1,500. The government expects to earn an additional KYD8.9m in a full year with an estimated KYD5.9m being earned in 2009/10.
• Tax and Trust Undertakings (Annual Renewal Fee) - A new KYD200 annual renewal fee will be introduced on exempted companies, exempted trust and exempted limited partnerships which currently have a tax undertaking certificate. This fee will be paid to General Registry in January of each year when renewing company fees. The government expects to earn an additional KYD15.0m in a full year from this new fee.
• Environmental Impact Fee for Used Vehicles - This new fee will be charged on all used vehicles imported that have a maximum Cost, Insurance and Freight (CIF) value of KYD12,000. A flat fee of KYD1,000 is proposed to be paid in addition to the rate of duty on vehicles. The government expects to earn an additional KYD1.8m per year with KYD1.2m being collected in the 2009/10 year.
• Import Duties - There is proposed to be a 2% increase on all imports with CIF values except those imports that are presently duty free. As an example rates that are at 20% will become 22%, and motor vehicles at 27.5 % will now be 29.5%. These increases will result in additional revenues of KYD16.5m per year with KYD10.9m being collected in the 2009/10 year.
• Miscellaneous Outdated Fees - There are various tariffs and miscellaneous fees that have not been updated for many years - in some cases not since 1986, and will therefore be increased. These miscellaneous fees include stamp duty, limited and general admissions for attorneys, passport fees, planning fees and building permit fees in areas A and B, importation of plants, and applications for planning development. The government expects that it will earn an additional KYD4.4m per year with KYD2.9m being collected in the 2009/10 year.
• Patents and Trade Marks - These fees will increase from KYD100 to KYD200 per year. The government expects to earn an additional KYD0.4m per year with KYD0.3m being collected in the 2009/10 year.
• Cayman Islands Monetary Authority (CIMA) Transactional Fees - There will be increases in the various miscellaneous fees at CIMA with the majority moving from KYD200 to KYD400. The government expects to earn an additional KYD1.6m per year with KYD1.1m being collected in the 2009/10 year.
• Work Permit Fees – It is proposed that work permit fees be increased across all categories, except domestic workers. Work permit fees for permanent residents and key employee applications are also proposed to be increased. It is expected that the government will earn additional revenue of KYD22.5m for a full 12-month period with KYD15.0m being collected in the last 8 months of 2009/10.

On the expenditure side, the government has identified various ways in which it could curtail operating expenditure. A rigorous and detailed expenditure review and expenditure-cutting exercise was conducted in order to bring expenditure levels back down to those of 2008/9 and included cost-cutting measures.

Taking into account measures within the 2009/10 budget, the total forecast operating revenue for the 2009/10 year is KYD562.2m. Subtracting the total forecast operating expenses of KYD531.9m which includes the forecast net deficit of Public Authorities (of KYD6.7m) and financing expenses of KYD20.8m results in a forecast operating surplus for core government of KYD9.5m.

As previously announced, during this fiscal year the government will borrow up to KYD275.0m primarily to fund existing capital projects such as the continuation of the two high schools and the Government Administration Building.
Addressing the legislative assembly, Jefferson said:

“The government has had to make the tough decision of imposing revenue measures during a difficult economic period. Madam Speaker, the 2009/10 Budget is a "bare bones" budget. It provides for the basic operational and capital needs of the government, the 2009/10 Budget demonstrates that the government is committed to bringing the islands back to prosperity and navigating us back to calmer waters for a better way forward.”

“Although the government is combating the worst global recession of the century, it is focused and committed on rebounding from these difficult economic times through: strengthening the economy of the islands; practising responsible financial management that will bring the citizens of the islands back to prosperity; and navigating the islands to calmer waters for a better way forward.”

The Cayman Islands’ economy is expected to contract by 3.3% of GDP during the 2009/10 fiscal year, recovering to growth of 3% and 6.5% of GDP in 2010/11 and 2011/12, respectively.

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