Islands under pressure to change "no direct tax" model
Struggling with financial squeeze, bloated civil service Britain wants territory to shed tax haven image
GEORGE TOWN, March 19 (Reuters) - Cayman Islands leaders are welcoming a report released this week that says introducing direct taxation would put the Caribbean hedge fund hub at a disadvantage to other international finance centers.
"Our position is, and will continue to consistently be, that we do not believe that direct taxes are good for this country," Caymans Premier McKeeva Bush said, hailing the findings of the report by the so-called Miller Commission.
The British territory, a beach-lined island group south of Cuba that is legal home to many of the world's hedge funds, has long relied on the 'no direct taxation' model as the cornerstone for the development of its financial sector.
But with major industrialized powers of the G20 group taking aim at tax havens, the Cayman Islands has come under pressure from London since last year to establish some kind of direct tax to plug a fiscal deficit.
The Caymans had to go to the United Kingdom last year for permission to exceed its debt limits to make up for budgetary shortfalls, resulting from a combination of capital overspending, a bloated civil service and the global economic downturn.
Britain's Foreign and Commonwealth Office granted permission for it to borrow $312 million, but told the island territory to set up an independent commission to look at new revenue measures including direct taxation.
The Caymans brought in the former chairman of the U.S. Federal Trade Commission, James Miller, to head up the commission along with former UK Parliament member David Shaw and Cayman Financial Secretary Kenneth Jefferson.
In recommending against direct taxation, the Miller Commission report noted that international financial sectors displayed a high level of mobility, making it easy for firms in one center to move operations to competing jurisdictions.
The British Virgin Islands, Bermuda, Ireland and Canada were actively enticing Cayman firms to relocate, it said.
Anthony Travers, chairman of the Cayman Islands Financial Services Association, said the Miller report's findings supported its own research that direct taxation would cripple the financial sector.
"All of the public and private sector are geared toward indirect taxation," said Travers.
The financial services sector accounts for about 55 percent of the Cayman economy, according to an Oxford Economics report. It also brings in 40 percent of government revenue,
SUSTAINABLE MODEL?
"Direct taxation would be a huge change in direction and require vast changes in organizational structure. And it is unnecessary at this stage when there is a great number of alternatives available for the Cayman Islands economic model and its sustainability moving forward," Travers added.
Bush said Britain's Foreign and Commonwealth Office was continuing to suggest that the Caymans' international reputation would be improved if it were to introduce some form of direct tax in the country, as it would be less likely to be viewed as a tax haven.
Some foreign companies have moved part or all of their operations from the Caymans to other jurisdictions, citing the global economic downturn and operating efficiencies.
To head off a further exodus, Cayman Islands authorities have promised incentives in immigration rules to make it easier for firms to keep key expatriate staff on the islands longer.
To tackle the deficit problem, the Miller Report said the Caymans should bring its borrowing under control and significantly decrease public spending by reducing civil service employees and unfunded benefits. It also recommended salary cuts and privatizing several government agencies.
Timothy Ridley, former chairman of the Cayman Islands Monetary Authority, expressed doubts about whether the government had the political will to cut a bloated civil service to maintain the financial viability of a 'no direct taxation' model.
"What we have now is not sustainable even with savage cuts in expenditure. The sooner government and the community as a whole wake up to this fact the sooner we can address the issues in a meaningful way and develop broader and more stable revenue sources," Ridley said.
Britain was sending a special team to the Caymans next week to conduct another economic review, including a look at the island's draft three-year plan on sustainable public finances.