Cayman Islands plans income tax on foreign workers

30 July 2012

Cayman Premier McKeeva Bush has surprised the jurisdiction's financial sector by announcing plans for an income tax on work permit holders earning over USD20,000 a year.

The Cayman Islands, which is a UK overseas territory, has come under UK government pressure to reduce its public sector budget deficit. The deficit has risen sharply in the years since the global financial crash of 2008, as government revenues from Cayman's large investment fund sector collapsed. For a while the government tried to balance the books by borrowing, with the result that its national debt has tripled. Annual interest payments to service this debt have reached USD29 million.

In January this year, in an attempt to bring government expenditure under control, Bush circulated new budgetary restrictions to all government departments for the fiscal year starting July 2012, with strict instructions not to exceed them. But in the event, despite significant cuts, departmental cash demands for the coming year exceed these limits by no less than USD150 million.

As a result the UK Foreign & Commonwealth Office has rejected Bush's budget. It is insisting that the Cayman government must raise extra funds through the imposition of new taxes.

Bush has decided on two major new levies. One is a new regulatory fee imposed on the Caymans' large hedge fund industry. No further details are yet available on this levy.

The other, far more controversial levy is a Community Enhancement Fee, in fact an income tax in all but name. Employees on a work-permit and earning over USD20,000 a year will pay a levy calculated at 10 per cent of their remuneration.

There appears to have been no consultation with industry about this tax, and it is bound to be unpopular with the financial and other sectors. Cayman Finance, the Cayman Islands Tourism Association and the Chamber of Commerce have already objected. But Bush is hoping to soften the blow by removing the requirement that non-Caymanian employees and their employers must each contribute 5 per cent of the employee's remuneration to a pension fund.

Anthony Travers, the former President of Cayman Finance and now Chair of the Cayman Islands Stock Exchange, said the tax would cause an exodus of permit holders, and would thus have to be increased again in due course.

Other jurisdictions were quick to point out the likelihood that financial talent may start to leave the Cayman Islands if the new tax takes effect. ‘Bermuda may be looking better and better in its battle for international business with the Cayman Islands’, said the Bermuda Royal Gazette. Bermuda raised its own payroll taxes to 14 per cent two years ago, which industry says led to a ‘silent exodus’ in the insurance sector.

The new budget proposals are still provisional. The UK’s FCO has not yet offered a view.

Sources

Cayman Islands government

Forbes

Cayman News Service

CNS (2)

Bermuda Royal Gazette

CayCompass