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Letter: Possible direct taxation in the Cayman Islands

Published on Friday, April 30, 2010 Email To Friend    Print Version

Dear Sir:

It is quite delightful to proudly boast that the Cayman Islands is tax free, but is it true? With import duty on practically everything that is imported, except a few basic items, and licenses required for practically everything, every person that lives in the Cayman Islands is paying dearly for the privilege of living in a “tax free” jurisdiction.

But governments need revenue for not only maintaining the present facilities and services, such as the maintenance of road, street lighting, police, fire and ambulances services, etc., but also for improving and adding to the existing facilities and services. Therefore, some form of taxation must be introduced.

It is appreciated that being “tax free” is an incentive for people wanting to come and work in the Cayman Islands, but so many of the expatriate population either save their earning for when they return to their own countries, or they remit money weekly or monthly home to their dependant relatives. Therefore, Cayman is exporting what little money it earns from its financial and tourist industries, with little benefit accruing to the country.

Also, with its own currency at a different exchange rate to that of the US dollar, despite the fact that the country’s reserves are held in US dollars, many people prefer to shop in the United States, thus depriving the country of even more revenue to drive the local economy. This is a relic of when the country first left the Sterling Area, but this exchange rate is now illogical and should be done away with. The Cayman dollar should be at parity with the US dollar.

In the early days of the evolution of the Cayman Islands, apart from the service industries of banking and tourism, building was a fruitful source of revenue for the government, derived from the import duty on all building materials, for Cayman has little to no natural resources of its own. However, the long term effect of this was disastrous for the native Caymanian for so many of them sold their land, their birth-right, to make a quick profit, and the foreigner was quick to take advantage of it by creating a building boom.

We now have a situation where the majority of the local population is less well-off than their imported expatriate neighbour, and their children will be faced with having to rent from the foreigners in years to come.

With the expansion of the population and the services that government had to provide, many Caymanians found a sinecure in the civil service where they had exclusivity and security of employment, and in consequence, the cost of running the country became one of the most expensive in the world in relation to the country’s gross domestic product.

Through an ambitious capital expenditure programme which coincided with a reduction of government revenue, the Cayman Islands is now in debt and needs to raise additional revenue.

Several suggestions have been put forward to increase the government revenues, such as the introduction of income tax, a property tax, or a payroll tax, or alternatively, to reduce the cost of government, which means a reduction in the civil service, and each of these suggestions is dealt with below in order of suitability.
  1. Reduce the cost of government. Undoubtedly the civil service has become too big, too expensive for the country, and possibly too inefficient, but to use it as a quick fix to solve the financial difficulties of the country would be both inhumane and self defeating. Having made a mistake in the first place by hiring a person only to then fire him because of budgetary restraints is morally wrong and very damaging to the fabric of the Caymanian society when there are other remedies at hand. Far better to stop the rot by putting a moratorium on any further employment except when replacing an existing post through natural waste, and use the next year or two to cut out waste and to introduce a system of greater efficiency. This is a long term exercise, not a “quick fix”, and it is the indigent Caymanian we are concerned for.

  2. A payroll tax. Such a tax would put up the price of the product or the service being supplied by the local business owner, which in turn would affect his future business prospects, and would undoubtedly affect the local cost of living.

  3. An income tax. This would have to cover both businesses and individuals otherwise it would be rife with evasion. Not only would such a tax destroy the charm and reputation of the Cayman Islands as a country with no taxes, but it would also drive business away, for one of the country’s greatest assets at the moment is being income and corporation tax free. Also, to set up such a system would require time and money, and to set up a compliance system would cost even more money, for it is readily acknowledged that more than 50% of taxes collected through Income and Corporation Tax would be spent on collecting them and monitoring the system. The only favourable thing to be said for such a system is it would create employment.

  4. A property tax. Apart from the initial stamp duty on purchasing a property, no other outgoing is required from the property owner. The property owner therefore enjoys the new roads, the upkeep of the existing roads, the street lighting, the police, fire brigade and ambulance services, the mosquito eradication service, and all other government services completely free of charge. Added to this, a highly paid expatriate or a wealthy foreigner can use his wealth to get a mortgage from the local banks to buy an apartment or a property which he can then rent out, and the rent pays for the mortgage. This he can do several times over, even if it requires getting a Trade and Business License using a local service provider, and the wealth he creates goes into his pocket for future export to his home country. To impose a small annual fee of say ¾% on domestic properties up to a value of US$2 million and a flat rate of US$15,000 for higher valued properties would hardly affect a property owner, and the Lands and Survey Department already has every property in the country registered with its value recorded. Commercial properties could pay a fee of, say, 1% per annum. It would therefore be a very simple matter and relatively inexpensive for an invoice to be sent out once a year to every property owner, setting out the amount owing. This would be described as an Environmental Fee and not a Property Tax, and thus the country would remain “tax free”.
To safeguard the poorer local population, the Environmental Fee would not be payable on properties with a valuation of less than, say US$300,000 and which are being lived in as the sole property of the owner. All other habitable properties and business premises regardless of value would be subject to the Environmental Fee. Also, undeveloped land would be exempt from the environmental fee, thus protecting farmers and those Caymanians who still own land which has been in their families for generations.

Such an annual fee could not only do away with the present indirect tax system that the country employs, namely import duty which is so unfair on the less fortunate, but it would also raise additional revenue for the government with which they could continue with their programme of adding to and improving on the existing services and structure of the country. This new source of income would be sustainable, in that it would be due every year, and the rich who tend to live in more expensive property, would pay more which they are well able to afford, to the benefit of society as a whole.

Thus, the country would achieve its objectives, namely;
  • No taxation.
  • A sustainable annual revenue stream.
  • The government could continue with its ambitious programme of capital expenditure.
  • Indirectly, the rich would be helping the poor, without any form of socialism.
  • The civil service would have time to put its house in order without any inhumane acts that would adversely affect their members’ standard of living.
  • With the abolition of import duty, local businesses and tourism would thrive.
  • The Cayman Islands’ credit rating would remain high and would allow for more short term loans at today’s favourable interest rates.
The United Kingdom (FCO) would also have achieved its objective.

R. Lewis
 
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