Taxing question wrestles 'tax-neutral' haven to the ground

The Age

Monday October 5, 2009

Landon Thomas, Landon Thomas is a writer for The New York Times.

Britain will make an example of the Cayman Islands, writes Landon Thomas. CAUGHT in a vice of shrinking revenue and stubbornly high public spending, the Caymans averted a fiscal crisis last week by securing a $US60 million ($A69 million) overseas loan.But the Foreign and Commonwealth office in Britain, which oversees the Caymans and can veto foreign lending requests, has delivered an ultimatum: the rest of the $US284 million the Cayman Government says it needs will not be forthcoming until this offshore financial centre imposes spending cuts and considers direct taxation on businesses here and its 57,000 residents.For a tropical paradise that has never taxed income, property, corporate earnings, retail sales or capital gains, such a suggestion borders on heresy.The Caymans have built their prosperity less on tourism, like most other Caribbean islands, and more on serving as a tax-free home for 9253 hedge funds and many more banks and companies that pay small fees to establish the Caymans as their official domicile while operating mostly elsewhere around the world.With the explosion of global finance, the Cayman model flourished, and fees from financial institutions, together with tourism, made up as much as half of government revenue. Duties on imported goods accounted for the other half.In June, the full effect of the financial crisis touched shore with the effect of a hurricane. A drop in financial and tourism revenue transformed a projected surplus into a deficit of about $US100 million �� a huge gap for an annual budget of about $US800 million �� and the leader of the Cayman Government, W. McKeeva Bush, warned of a fiscal crisis.Mr Bush is desperately trying to find a way out of his quandary, caught between the demands of local business leaders to keep things the way they are and insistence from London that the economic model of the Cayman Islands must change.��The UK has to be practical,�� he said, warning that too bold a new tax program could prompt Cayman-based financial firms to leave. ��They don't want me to go belly up.��Perhaps not, but there is no getting around the fact that the balmy days for exotic offshore financial centres like the Cayman Islands could be coming to an end.With pressure building in Europe and the United States for a system-wide crackdown on offshore tax havens �� the Caymans prefer to call themselves a tax-neutral portal �� Britain appears determined to make an example of a place that has become a worldwide symbol of secrecy and intrigue.Parts of The Firm, the John Grisham thriller about offshore skullduggery, were set in the Caymans, and during his campaign, President Barack Obama referred to Ugland House in George Town, where about 19,000 companies are registered, as ��the biggest tax scam on record��.It is an image Mr Bush, 54, is fighting hard to counter. He talks of a new transparency and points to the fact that the Caymans are now on the list of tax-neutral jurisdictions approved by the Organisation for Economic Co-operation and Development and has tax information accords with 12 countries.A wealthy businessman who made his fortune in real estate, he credits the tax-free policy for transforming the islands.A native of the Caymans, Mr Bush recalls growing up in poverty and walking to school through a fog of mosquitoes so thick he could barely see. As a teenager, he worked on the construction crew that put up the building for Barclays Bank in the 1960s.��There were no cars, no electricity �� there will be no going back to living under the coconut tree,�� he said in an interview in his government office in George Town. ��The people have prospered �� this country was built on this model.��Now, he is fighting to preserve it.For five hours one day last week, he holed up in a hotel conference room just off a silky white stretch of beach.Fifty or so of the Caymans' business leaders told him that not only would they not accept any form of direct tax, they would also be unwilling to increase their fees unless Mr Bush made sharp cuts to the well-paid civil service sector.Forced to step out of the meeting to take a call from an increasingly impatient British Government, Mr Bush held firm.��We have not agreed to any direct taxation,�� he said, his voice worn from negotiations that now consume his 14-hour work days. But he acknowledged the pickle he is in. ��It is a question of how much pain the people of Cayman and the business community will accept,�� he said.The situation in the Caymans is indeed dire: over the past four years, its debt has doubled to $US600 million as previous governments embarked on a series of expensive education projects.Already, the Caymans' difficulties are taking a toll. A construction company recently stopped work on a school, saying payments had been delayed, and rumours are rife that public employees will be forced to take a pay cut.��Face it, this place is broke, and it is because the model is wrong,�� said Desmond Seales, the publisher and editor-in-chief of The Cayman Net News, a local newspaper. He cites as proof the fact that the Government owes him $US50,000 in advertising and printing costs.But Seales is a lonely voice calling for the financial sector to pull more of its own weight. He points to the low $US3000 annual fee that multibillion-dollar hedge funds pay to register here (even Mr Bush calls this figure ��ridiculously low��), and proposes a tiny tax on the trillions of dollars that he says flow in and out of the island on a daily basis.But wouldn't that cause wealthy people to move their money elsewhere?��Where the hell they going?�� he snorted. Yes, a recent upswing in crime is a problem, ��but people can still walk around with their jewelry. That is what brings all these hedge funds and offshore partnerships. They like to visit their money.��

© 2009 The Age

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