Foot report criticises spending

Recommends taxation

A UK report on British offshore financial centres has criticised the Cayman government for its public spending policy and lack of planning.

The report of Michael Foot, which was commissioned by the UK Chancellor of the Exchequer last December, was publicly released on Thursday.

‘Decisions taken by some of the Overseas Territories to use increased revenues to raise current and capital public spending, sometimes combined with insufficient attention to data quality and the absence of robust medium-term planning, has left local governments facing difficult short-term choices to restore the public finances,’ the report stated. ‘This is clearly illustrated by recent events in the Cayman Islands.’

Mr. Foot, a former inspector of banks and trust companies with the central bank in the Bahamas, was tasked with the production of an independent review of the long-term opportunities and challenges facing the UK’s offshore financial centres.

In light of the financial and economic crises, the report was motivated by the UK Chancellor’s concerned over any contingent liabilities that may arise for the UK from its overseas territories and crown dependencies.

The report identified the Cayman Islands as one of the jurisdictions that grossly overestimated government revenues.

It suggested that the negative impact on public revenues was particularly significant in Cayman, because the sectors most hit by the economic decline – tourism, construction and financial services – accounted for a larger share of the economy in Cayman than in the other analysed jurisdictions.

Mr Foot stated in his report that the global downturn should serve as a reminder to implement more robust economic planning and fiscal control measures, including timely and accurate measures of public revenues and expenditures.

He further suggested medium-term economic planning and effective measures to control public spending and enhance the efficiency of the public services.

Reiterating the position of the UK Foreign Office, Mr. Foot also recommended that offshore financial centres should develop a diversified tax base.

However, any decision to broaden the tax base would have to be considered within the context of international tax competition, he argued.

The report featured a separate analysis by accounting firm Deloitte of the role that taxation plays for the business model of offshore financial centres.

It also researched the impact the introduction of a corporate tax or a value added tax would have.

Using the examples of the Cayman Islands and Jersey, Deloitte comes to the conclusion that there was a ‘compelling case’ to introduce VAT or a goods and services tax to broaden the revenue base. This was particularly important should the global trend for reducing reliance on customs duties continue, Deloitte wrote.

With regard to a corporate tax Deloitte noted the ‘substantial direct and follow-on impacts’ that the reduction of the financial services sector, as a result of taxation, would have for the entire Cayman economy.

It found the introduction of a corporate tax ‘may lead to an exit of companies where relative tax liabilities exceed the cost of relocation (including loss of benefits from locating in Jersey and the Cayman Islands).’

An increase in tax liabilities for domestic and remaining companies in turn could lead to reduced investment and output effects, Deloitte wrote.

Still Deloitte asserted ‘the downside of a properly-constructed best practice corporate tax system would appear to be relatively limited’, because ‘the full amount of tax is likely not to be incremental from the point of view of companies or shareholders in either of the jurisdictions’, as some multinational companies would be able to offset the tax against domestic tax liabilities.

The report, however, did not suggest whether and how much additional revenue could be generated through new taxes.

Deloitte concluded that British Crown dependencies have industry bases that are sufficiently diverse to raise ‘worthwhile levels of corporation tax’, but that this was not necessarily the case in some less diversified economies of the Overseas Territories.

The report also admitted that administrative problems, such as the lack of a system to collect the taxes, may constrain the development of these tax systems.

In terms of the hotly debated use of offshore financial centres by UK companies to avoid taxes, Deloitte estimated that the amount of unpaid tax was likely to be significantly lower than what has been suggested by previous studies.

Mr. Foot also analysed a number of other areas such as compliance with international standards in terms of tax information exchange and regulations tackling money laundering and financial crime.

Here the report’s verdict was largely positive, noting that some of the jurisdictions have decided to move faster and raise their standards further than required by minimum international standards.

‘It is important that those that move swiftly are seen to benefit from improved international acceptance,’ Mr Foot wrote.

The Leader of Government Business McKeeva Bush welcomed the report in a press statement.

‘The Cayman Islands has supported several third-party reviews of our financial sector over the years and their outcomes have consistently provided valuable insights for all involved.

‘This most recent review is no different and we welcome the constructive observations and recommendations put forth by the review team,’ he added.

0
0

NO COMMENTS