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Cayman Dumps Expat Levy Proposals

by Phillip Morton, Investors

10 August 2012

The Premier of the Cayman Islands, McKeeva Bush, has backed down on proposals to introduce the islands' first direct tax.

The 'Community Enhancement Levy' was to involve a 10% levy on expatriate workers' income above a prescribed threshold, but the measure has been dumped following an outcry from the islands' financial services professionals, who have underscored that the tax-free environment the Cayman Isles have historically offered is critical to the territory maintaining its position as a world-leading international financial centre.

The measure, announced on July 25, 2012, along with a further levy of 5%, payable by employers, in respect of non-resident employees engaged in certain categories of work, was aimed at rapidly consolidating the nation's deficit following confirmation from the United Kingdom's Foreign and Commonwealth Office (FCO) in July 2012 that the territory would no longer be permitted to increase borrowing to service recurring budgetary deficits.

In announcing the measures, Premier McKeeva Bush admitted the trade-off would allow the government to protect 500-700 civil servants from redundancy. The combination of measures would have achieved a fiscal surplus of USD84m in the fiscal year 2012/13, making available USD29m to service the territory's debt, and allowing the government to make payments towards outstanding pension contribution liability - consistent with the legal obligations agreed with the FCO.

The expatriate tax was touted by Bush in July as a less draconian tax than other potential revenue sources such as income tax, a sales tax, or a property tax. In announcing that the 'Community Enhancement Levy' was no longer being considered, and 'off the table', Bush did not indicate what replacement measures would be introduced to combat the revenue shortfall, or indeed whether the government will instead revisit industry calls for the adjustment to come from public sector retrenchment.

In a statement arguing for the repeal of the levy, the Cayman Islands Council of Associations - comprising ten of the Cayman's main industry bodies, warned of the impact a direct tax could have on the competitiveness of the jurisdiction. It rebuffed the levy, stating: "The Associations regard the Community Enhancement Fee in its current form to be discriminatory, divisive to society and inequitable. This type of fee has been regarded as unlawful in other jurisdictions such as the Isle of Man and Gibraltar."

"We believe more can be done to reduce government spending and to generate cost savings as recommended in the Miller-Shaw report. We believe that increasing the cost of doing business at this time may cause a loss of business to our competitors."

"The introduction of direct taxation will mean giving up our single most important value proposition that we have to offer our investors: no direct taxation in a world where taxation is on the increase. The Council of Associations believes that if we implement the proposed new tax we will have lost the primary advantage that distinguishes Cayman from the rest of the world. We believe that by creating a system of collecting taxes, investors will be unable to trust that the proposed 10% fee will not change to 20% and that taxing payroll will not evolve into taxing income on residents and eventually investors."

"The real estate industry has already witnessed an outward flee of investors. Apart from the certainty that this will reduce government income in the short term, it could very well lead to an outward exodus of tax sensitive investors to other jurisdictions," the Association warned.

TAGS: Isle of Man | environment | tax | business | sales tax | Gibraltar | public sector | law | financial services | employees | budget | Cayman Islands | United Kingdom | payroll | professionals | trade | services

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