Last week’s town hall-style meeting at The Ritz-Carlton called by the government has set the island and no doubt the wider international community buzzing with the news that the Cayman Islands government faces an immediate deficit which the UK government will not at present allow to be covered by borrowing. Business Editor, Lindsey Turnbull speaks with the business community to examine whether the UK government’s call for Cayman to introduce some form of taxation is appropriate for this jurisdiction and discusses the way forward for Cayman’s beleaguered finances.
Laying out the stark economic situation with regards to Cayman’s finances, Leader of Government Business McKeeva Bush said last week that as at 30 June, the entire public sector has an operating deficit of CI$81.1 million, taking into account Operating Revenue at CI$487.4 million, Operating Expenses of CI$557.1 million and the net loss of the public authorities to the tune of CI$11.4 million.
Looking ahead, the situation does not immediately improve. The forecast cash position as at 30 September for government states that it will incur approximately CI$78.1 million in cash outflows, while it is estimated to collect CI$29.5 million in cash. Utilising the remaining CI$4.5 million of the overdraft facility, the government will face a cash shortage of CI$44.1 million.
Any new borrowing by the government to meet such a shortfall, urgently needed to pay civil servants’ salaries for September, now requires special permission from the UK government because the previous government broke the parameters defined by the Public Management and Finance Law during the last fiscal year with a record deficit and record borrowing.
Specifically, neither of the major construction projects, the new schools and the government administration building were funded by proper long term borrowing arrangements.
In a letter to the Cayman Islands Government, the new Minister from the Foreign and Commonwealth Office, Chris Bryant, obviously affected by the precarious current financial position of the United Kingdom, made it clear that the UK government’s approval for more borrowing would not be automatically given and that the Cayman Islands needed to convince the OT minister that “there is a sustainable medium term plan for turning around the public finances and paying off the debt before being able to consider any extension of the borrowing.”
The letter goes on to state that the OT minister believes that public finances would be ‘more resilient in the face of these uncertainties” and would give him confidence that Cayman would be able to service any new borrowing by “widening the tax base”.
Bryant goes on to say that he feared the Cayman Islands “will have no choice but to consider new taxes – perhaps payroll and property taxes such as those in the BVI.”
Many business people in Cayman believe that the statements in Bryant’s letter are nothing short of hypocritical and patronising, at a time when the UK’s borrowing has reached unprecedented levels and it was recently revealed that UK Chancellor Alistair Darling’s 50 per cent top rate tax introduced in his April budget has actually had the opposite effect to an anticipated increase in government revenue, having contributed to a 20 per cent shortfall in tax collections as against budget projections, as businesses moved out of the United Kingdom.
At the time the 50 per cent top tax rate was brought in James Browne, a senior research economist at the UK’s Institute for Fiscal Studies said: “Alistair Darling’s income tax increases for the rich will significantly complicate the tax system and may well raise little revenue.”
Strangely, Bryant says in his letter that it would be “unwise to expect that the Cayman Island prosperity can presume on an offshore tax haven status” as if that were a correct characterisation. But regardless, the very idea of Cayman introducing any form of direct taxation on its residents has been hailed by Cayman’s business community as “a road to perdition”, “ludicrous” and “beyond contemplation”.
A taxing situation
Former Cayman Islands Monetary Authority Chairman Tim Ridley believes that an annual community service charge (or property tax) based on property value should be considered.
He says: “Property owners around the world are accustomed to paying such a charge (UK rates/council tax, US property tax, Swiss real estate tax, etc). It should be dedicated to services that are clearly identified and people want and need, for example the emergency services and waste disposal and not just for general revenues.”
Ridley says that a quarter of one per cent charge on the estimated US$12 to US$18 billion worth of real estate in Cayman would produce annual revenue of between US$25 million and US$45 million.
“This would be much more consistent and reliable than one off stamp duty that is so dependent on a buoyant market. There could be appropriate exemptions for low value properties and those in real need and genuinely unable (rather than unwilling) to pay.
An incentive to the acceptance of the new charge, a further reduction in stamp duty of sales/purchases might be considered. The short term loss of revenue would be more than recovered over time by the new charge,” he says.
However real estate professionals believe this to be a dangerous move.
JC Calhoun, Owner/Broker with Coldwell Banker says that property tax is a very risky proposition: “Caymanian families could not afford to continue to hold onto their heritage if it was introduced as it would be an added expense making prices and rents higher and properties more difficult to get a positive return on in this current market. As a result, more would come on the market at lower prices, and fewer would be built in the future.”
He can see no benefit to introducing a property tax as far as overseas investors are concerned either: “We have historically attracted business with no direct taxation. Add an annual property tax to a stamp duty currently paid and then it becomes unacceptable in their minds (and mine, too). Foreigners who currently buy and hold land inject money into our system, and take nothing. They rarely use our schools or hospitals or essential services. And when they do come down on vacation, to dream of one day building a house here, they inject more money into our economy, while using our infrastructure just a few weeks a year. You put on a property tax and you risk losing them – and their income.”
In general, Calhoun believes that, right now, with most of the world’s investors skittish and being very careful with their money, and rental and lease rates falling, a property tax will make it even harder to sell a property in Cayman and will act a deterrent to much needed inward investment.
“Real estate provides us all with an investment alternative when the stock market can’t be trusted and bank interest rates are low,” he says. “It provides us with an alternative which encourages spending by the people (and the real estate companies), and provides revenue to government through stamp duty at times when there is little income from other sources.”
By introducing a property tax, Calhoun says we simply get more bureaucracy, lower real estate values, less future real estate development, less inward investment, fewer jobs and a net loss financially to the country.
Kim Lund Owner/Broker with Re/Max agrees with Calhoun and states: “Some hard decisions need to be taken. However, these decisions need to be positive and not a knee jerk reaction, like raising taxes. Such measures will only drive investment and spending away, thereby reducing the standard of living and opportunities for Caymanians and residents.”
With regard to income tax, Ridley says the idea has serious implications for the financial services industry and perceptions of Cayman and also requires a significant infrastructure to implement and collect.
On the issue of income tax, Conor O’Dea, Managing Director with Butterfield Bank (Cayman) Ltd is vehement: “We cannot contemplate introducing income or property tax as it will ultimately destroy the Cayman business model and the economy will slowly erode, or maybe not so slowly.”
One industry expert analysed the situation thus: “The FCO continue to make the classic mistakes of analysis of the Cayman model and clearly has no understanding of the transactional flows in the Cayman Islands. The FCO misunderstand what makes Cayman attractive as a financial centre of excellence. The references to “tax haven status” are ill founded and archaic. Further the application of the UK high tax model to Cayman is economic mumbo jumbo, but what makes the FCO position untenable is that the high tax model is clearly failing in the UK. The FCO position is transparent and it is naïve to believe that we do not fully understand the agenda of the UK government which is now obliged to regard any well recognised tax transparent tax neutral jurisdiction as a significant competitive threat. The failed high tax policies of the UK are causing an exodus of business from the City of London and tax revenues in the UK are falling far short of budget. In that context the obvious conclusion is that it is Cayman’s absence of direct taxes which the UK government regards as the competitive threat and hence the FCO suggestions about introducing taxation in Cayman.”
They continue: “The FCO advice is not about helping the Cayman Islands deal with a short term funding issue (which is the point it is statutorily obliged to consider) it is about saving the UK ‘s high tax model. Commentators in the Cayman Islands should not be quite so naïve about the FCO’s real agenda nor be quite so ready to march to the tune of the FCO drum. There are clear alternatives to the introduction of taxation in Cayman which will protect the long term business model of the Cayman Islands going forwards for the benefit of future generations. The UK high tax and unemployment model is not something we should be rushing to emulate.”
Creative thinking to pave the way forward
Numerous creative and forward thinking suggestions have been discussed within the business community as a way of filling the Cayman government’s empty coffers in the immediate short term, as well as innovative ideas for the medium to long term, all of which do not require a levy of direct taxation of any kind.
Business professionals are in agreement that the government needs to lead by example and cut expenditure within its own civil service.
O’Dea states: “Everybody is shocked by the financial situation which Cayman finds itself in and it is obvious that strong leadership is required at this time. Tough decisions need to be made now to address the situation and allow the Cayman Islands government put forward a financial and economic plan to get us out of this untenable financial situation. The primary focus must be on reducing government expenditures as a matter of urgency.”
He continues: “We must be able to resolve the financial situation by creating an environment which allows for sustainable economic growth across all sectors of economy, ultimately boosting government revenues and employment opportunities. Significant savings need to sought from government departments which would involve job sharing and other such initiatives including early retirement and a level of redundancy similar to what most private sector entities have been experiencing for past 12 months. That said, wholesale redundancies in the civil service would be detrimental to the economy.”
Adding to the Leader of Government Business McKeeva Bush’s revenue increasing suggestions, such as increasing customs, alcohol and tobacco duties and increasing gasoline tax, Ridley also suggests solving the short term problem by cutting waste, cost savings and increasing vehicle import duties and annual licensing fees for vehicles, based on engine size and/or value.
Kim Lund has some innovative suggestions with regard to the property markets: “Offer all purchasers who have a pending or pending/conditional contract to buy a property, which will not close for at least two months, a 20 per cent discount on their Stamp Duty if they pay the Stamp Duty immediately. Currently, we have 123 pending sales and 111 pending/conditional sales listed in CIREBA, not counting the many others that are not in CIREBA. That would almost immediately bring in several million dollars.”
He also suggests the possibility of moving the West Bay Road from Public Beach on West Bay Road, around the Harbour Heights condominiums and all the way up to the Heritage Club condominiums because, he says, at present, the Seven Mile Beach land is too narrow to build beachfront condominiums and hotels.
He states: “If West Bay Road could be moved back about 300 feet, the land value would increase exponentially. It would immediately facilitate opportunities for sales of this land to developers, providing huge stamp duties of tens of millions of dollars to government. There would be room for probably 10 new developments to be built over the next decade, which would provide stamp duty on the sale of each condominium and then ongoing accommodation tax from tourist rental income.”
Other innovative and somewhat controversial ideas include selling Caymanian Status and Permanent Residency for extremely high sums of money, thus bringing immediate (and most certainly guaranteed) income into government’s coffers, as well as implementing a system for perhaps a finite amount of time whereby companies in good standing with the immigration boards could be guaranteed work permit approvals (so long as the individuals applying meet the basic criteria on health and police records) within seven days.
Whatever solutions government choose, the business community is generally in agreement that direct taxation is most definitely not the answer.