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30 July 2014 17:01 (South Africa)
World

Paradise lost for expats in the Caymans

  • Rebecca Davis
  • World
C:\fakepath\Rebecca Caymans

The Cayman Islands have for years been a popular destination for South Africans working in financial services, attracted by its tax-free status. Now the government has announced plans to impose a 10% payroll tax for the first time. The controversial aspect? It will apply to expats only. By REBECCA DAVIS.

If you were to walk through Georgetown in the 1960s, you would have found the Cayman Islands capital to be a sleepy little place, with one bank, one paved road, no telephone system, and a tendency for cows to wander into the town centre. Today, Georgetown is a bustling port town, home to luxury hotels, upmarket sushi restaurants, shops selling pirate-themed tat to cruise ships, and an endless array of financial services firms.

The major reason for the Cayman Islands’ growth from that quiet little village into the world’s fifth largest financial centre is down to what happened in 1966. In that year, the Caymans published a set of laws establishing the country as a tax haven, where no corporate or personal taxes would apply. (There is a legend that the Cayman Islands were awarded tax-exempt status by King George III as a reward for rescuing 10 British merchant ships that ran aground in 1794, but the story is apocryphal.)

The Cayman Islands are a British Overseas Territory, and Nicholas Shaxson’s 2011 book Treasure Islands: Tax Havens and the Men Who Stole the World records that opinion in British power circles about the Caymans’ new status was initially mixed, with an Inland Revenue official quoted as saying at the time that this measure “blatantly seeks to frustrate our own law for dealing with our own taxpayers”. 

But both the Bank of England and the British overseas development ministry were in favour of the new arrangement, and Shaxson notes it only took a few months for the transformation of the Caymans to begin: its airport was expanded to accommodate international jet travel and the islands were connected to the international phone network.

Today, the Cayman Islands punch way above their weight when it comes to financial hubs. More than 9,000 mutual funds, 260 banks and 80,000 companies operate through the islands. Of course, not everyone applauds this state of affairs. In the wake of the banking crisis there have been calls for a crackdown on tax havens, and widespread disapproval of individuals and corporations routing their money through countries like the Caymans. A continual criticism of US presidential hopeful Mitt Romney throughout his campaign has been the fact that he receives large payments from his investments in a private equity firm, Bain Capital, based in the Caymans.

The Tax Justice Network estimates that up to 46% of the world’s total economic output is held in tax havens, and about $250-billion in tax revenue is lost annually by governments around the world as a result. Last year the Tax Justice Network ranked the Cayman Islands the second most financially secretive country in the world, pipped only by Switzerland. (The USA came fifth.) 

This murky aspect aside, the vibrancy of the Caymans as a financial centre, along with its idyllic island lifestyle and the promise of tax-free salaries, has made it an enticing prospect for expatriate workers. But paradise, it appears, has a sell-by date. Beyond the financial industry and tourism, there’s not a lot of activity happening economically in the Caymans – their major exports are fish and cut flowers. The government’s main source of income is the indirect taxation imposed through import duties on most goods brought on to the island – which contributes to a high cost of living. 

Because the Caymans are still governed by England, their budget has to be approved by the British Foreign and Commonwealth Offices, which have grown unhappy with the islands’ budget deficit in recent years. In September 2009, Britain refused to allow the Caymans to borrow money to cover the deficit, and suggested instead that the islands find a way to cut down on spending and widen their tax base. It is this pressure that Premier McKeeva Bush blamed for his proposal last week that expatriate workers who earn more than $24,390 per year will be subjected to a payroll tax of 10%.

Bush didn’t use the word “tax”, since it’s a dirty word in the Caymans – referring to it instead as a “community enhancement fee”. The Caymanian Compass newspaper quoted him as explaining the measure by saying: “We could have introduced income tax, property tax, Value Added Tax or something softer such as the Community Enhancement Fee. Government has opted to introduce a Community Enhancement Fee that is linked to the remuneration level received by work-permit holders in the Cayman Islands.”

Bush – who has been implicated in a rezoning-for-cash scandal dating back to 2004 - said the tax would also be an incentive for business to hire Caymanians in roles currently filled by expats. The protection of jobs for locals has long been a political preoccupation on the islands: no expatriate is permitted to move there without a job offer, and technically businesses are only permitted to hire expats when they cannot fill the position from the local Caymanian population. 

As per the country’s 2010 census, there are 52,560 people living in the Cayman Islands, with Cayman citizens only slightly outnumbering expats. Just over 55% of all residents – 29,720 – claim Cayman Islands citizenship, with the remaining 22,840 residents being drawn from countries like Jamaica, the UK, the US, Canada, the Philippines and South Africa. The census recorded an unemployment rate among Caymanians of 9,8%, which amounts to a political hot potato in such a tiny country. Among the measures already in place to protect local jobs is a controversial “rollover policy”, which holds that expats may stay in the country for only seven years at one time, not long enough to apply for permanent residence status. 

Despite the ostensible benefits to Caymanians, opposition politicians immediately denounced the payroll tax plan. Leader of the Opposition Alden McLaughlin was quoted on Thursday as warning local Caymanians that the introduction of the tax would amount to a slippery slope. 

“For those who think that somehow they’re insulated from this – once government implements this system, it just takes a stroke of a pen to include Caymanians or to raise the rate from 10% to 15%,” he said.

Financial experts have warned that the plan could see capital fly to neighbouring jurisdictions like Bermuda. This was also the finding of a government-appointed commission two years ago. It is assumed that there would be two possible outcomes: either business would have to raise salaries in order to compensate for the tax to keep attracting skilled workers, which would render the Caymans a less enticing place to do business, or salaries would remain on the same scale and expats doing the maths would conclude that they could be earning more elsewhere, given the high living costs. The point has also been made that the people most hurt by the flat tax rate would be middle-income professionals – the super-rich (like Romney) who store their money in the Caymans would be untouched by it.

Among the expat community, the response appears to be one of shock and anger – not merely about the money, but also the sentiment that their presence on the island is interpreted as unwelcome. A Facebook group called Caymanians & Expats United Against Taxation has already gained over 9,500 members since being set up last week, and a protest against taxation without representation was being planned for Monday. 

“In an economy that is basically run with expats’ money, imposing a tax is economic suicide! Adding 10% on top of an already high cost of living will be the tipping point,” one individual commented on an online message board. “So let me understand…the taxpayers don’t get to vote and the voters don’t have to pay tax?” another wrote.

But some Caymanians were defiant in their online support of the measure. “It’s OK for Caymanians to be jobless, homeless, on social services, stand in soup lines, lose their houses and live on the streets taking to crime, but expats want to protest because they have to pay a simple tax that they are accustomed to in their own country?” one wrote. Another commented: “Go back to where you are from so young Caymanian people have a chance at the jobs.”

Premier Bush has said that he was presented with a Sophie’s Choice by Britain: either find a tax to impose or slash the jobs of up to 700 public sector workers, a move which would be extremely politically damaging. He also said the Foreign and Commonwealth Offices demanded cuts of $20-million to social services benefits, which he refused because they would bring further hardship to the local population.

It’s a thorny issue, and one that highlights the strangeness of the Caymans’ situation: essentially a floating office for audit firms and hedge funds, with local industry centred on catering to the needs of the expatriate professionals who staff them. While there are some who will see the policy as xenophobic, it is not unusual for tax havens to differentiate between residents and non-residents – but traditionally things have been the other way round, with the lowest taxation offered to non-residents.

One indication that the move may be a bad one, however, is found in the results of a government review of the rollover policy – which restricts expats to a 7-year stay – published in June. The Term Limit Review Committee recommended that the government should remove the limit to avoid economic damage to the islands. It was Premier Bush who called for the review last September. 

The Caymanian Compass reported: “Mr Bush said the effect of expatriate workers departing has also hit service industries such as supermarkets, construction companies and other trade jobs”. This seems tantamount to an admission that, though expats may be resented, their presence on the islands is an economic necessity.   

Some have suggested that the payroll tax proposal may be part of a “bait and switch” – that Bush introduced the controversial measure expecting this outcry, and will subsequently cancel the plan in favour of introducing another taxation method such as VAT, which might be better received in the aftermath. Either way, it seems that the description of the Caymans as a “tax haven” is one whose days may be numbered. DM

Read more:

  • You know it’s bad when the Cayman Islands calls for income taxes, in Forbes
  • Government announces expat tax, in the Caymanian Compass 

Photo: Cruise ship passengers enjoy Seven Mile Beach during a half day stop in port in George Town, Cayman Islands, April 27, 2010. REUTERS/Gary Hershorn

  • Rebecca Davis
  • World


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