Wednesday, September 2, 2009

UK presses Caymans to raise taxes to solve deficit

Britain is pressing the Cayman Islands, one of the world's major tax havens and a U.K. territory, to raise new taxes as part of a plan to bail itself out of a financial hole.
Saddled with a budget deficit and unable to pay all its bills last month, the Cayman government had negotiated bank loans of up to CI$372 million ($465 million) to see it through the financial year ending June 30, 2010.
But last week the British government refused to permit the territory to borrow unless it developed a plan to curb expenditure and widen the tax base.
The Cayman government is working on its response, officials said Wednesday.
As a British Overseas Territory, the Cayman Islands is largely self-governing, but it needs permission from Britain to borrow beyond its statutory debt limit of 80 percent of annual revenue, said Ted Bravakis, spokesman at the Cayman Ministry of Financial Services.
"I fear you will have no choice but to consider new taxes -- perhaps payroll and property taxes such as those in the British Virgin Islands," Foreign Office Minister Chris Bryant said in an Aug. 27 letter to McKeeva Bush, leader of the Cayman government.
Bryant added that it would be unwise to "expect that the Cayman Islands' prosperity can presume on an offshore tax haven status."
Tourism, which accounts for about three-fourths of the economy in the three Cayman islands, has been hit by the global recession. Visitor arrivals were down 12 percent in the first four months of the year, according to the Caribbean Tourism Organization.
Financial services, the other pillar of the islands' economy, have also suffered.
The government of the islands, which lie 150 miles (240 kilometers) south of Cuba, depends largely on indirect taxes including customs duties and stamp duties on transactions including property sales, mortgages, land leases and rents. Business licenses cost a bank up to CI$500,000.
The Cayman Islands does not directly tax any of the companies registered there, and has no income tax or capital gains tax.
According to Cayman Islands Financial Services, more than 80,000 companies were registered there. The Cayman Islands Monetary Authority lists 269 registered banks, of which six provide services on the island; more than 800 insurers and 9,000-plus mutual funds are also registered.
Bush said in a speech last week that the Cayman government logged an operating deficit of CI$81.1 million for the year ending June 30 -- equal to nearly 17 percent of the government's income for the period -- instead of the surplus of CI$13.5 million projected in the budget.
Operating revenue of CI$487 million fell short of the budget projection of CI$528 million.
In order to pay civil servants on Aug. 25, Bush said, the government postponed payment of pensions and health insurance, and put off payments to contractors and other suppliers.
"Things will need to change," Bush said, though he appeared to rule out any direct taxation on businesses or the islands' 52,000 residents.
"We will either need to make aggressive cuts in either jobs or work hours for civil servants as well as raise indirect taxes, or we will need to focus on the areas where we can secure the revenues without harming our economy and our quality of life," Bush said.
U.S. President Barack Obama has named the Cayman Islands as one of the tax havens he would like to see closed. He has referred several times to Ugland House in George Town, the Cayman capital, which is the registered office for nearly 19,000 companies.
"Either this is the largest building in the world or the largest tax scam in the world," Obama said in a May 4 speech.
"And I think the American people know which it is. It's the kind of tax scam that we need to end."
Under such pressure, the Cayman Islands this year has signed up to agreements with 12 countries to exchange information on tax issues, and the Organization for Economic Cooperation and Development added it to a "white list" of jurisdictions that cooperate in tracking tax evaders.
Bryant demanded that the Cayman government develop "a clear strategy for cutting borrowing and debt over the next three to five years and tackling expenditure."
"I doubt that the Cayman Island government can afford to take on extra debt without both getting expenditure under control and widening the tax base," Bryant wrote.
"I therefore need to be absolutely convinced that there is a sustainable medium-term plan for turning round the public finances and paying off the debt before being able to consider any extension of borrowing."
In his speech last week, Bush outlined several possible economic development projects, including relocation of the capital's cargo port, developing a channel to allow mega-yachts to berth in George Town, building new cruise ship berths, and making more effort to attract five-star hotels, golf courses and other tourist developments.

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