HRC says tax OK, OECD not so sure
The announcement that a 10 per cent payroll tax would be levied on Cayman Islands work permit holders who earn more than $20,000 per year has led to repeated cries of tax discrimination over the past several days.
“This opens the door for a possible lawsuit for discrimination if you ask me,” one cayCompass.com website commenter opined.
“Either no one pays tax or all pay tax! No discrimination!” Another wrote on Wednesday, shortly after the Compass reported the payroll tax proposal made by Cayman Islands Premier McKeeva Bush.
A Facebook page dubbed “Caymanians and expats united against taxation” claimed it was started as “a reaction to the latest ignorant and discriminatory policy from the current administration”. The group had nearly 10,000 people sign up as members by Saturday.
The imposition of the payroll tax, as proposed by Mr. Bush, would only apply to work permit holders. Caymanians and status holders would not be affected. However, the Cayman Islands Human Rights Commission confirmed Friday that such a limited payroll tax would fall within the country’s acceptable standards, even when the new Bill of Rights from the country’s 2009 Constitution Order comes into effect in November.
According to a brief statement issued by the commission: “Section 16(4)(a) of the Bill of Rights, Freedoms and Responsibilities (Non-discrimination) exempts (or carves out) government tax from this. The HRC is still researching this to see if there might be any other breach but our initial thoughts are that the government’s budget proposal does not breach the Cayman Islands Bill of Rights, Freedoms and Responsibilities.”
As the committee statement acknowledged, that is likely not the end of the matter.
A report issued in February 2010 by the organisation that represents the Cayman Islands financial services industry, Cayman Finance, commented on the issue of discriminatory taxation.
“Over the last 10 years, the governments of the large economies have been imposing their view of how a tax system should operate on the rest of the world,” the report, written by Bournemouth University Senior Lecturer Richard Teather, read. An example of this, Mr. Teather wrote, was the Organisation for Economic Cooperation and Development’s ‘Harmful Tax Practices Initiative’ as well as the European Union’s code of conduct for business taxation.
“A fundamental principle of these initiatives is non-discrimination,” Mr. Teather said. “If you have a tax, it must apply to everyone.”
The report from Mr. Teather mainly focused on the effects of direct taxation and how it would affect the Cayman Islands economy as a whole.
The Organisation for Economic Cooperation and Development’s tax convention does address non-discrimination with regard to taxation issues, although its recommended protections are by no means absolute.
Rather, a discussion on the non-discrimination clause in article 24 of the tax convention states that it seeks to “balance the need to prevent unjustified discrimination with the need to take account of legitimate distinctions” for taxing purposes.
The opening paragraph of the non-discrimination section states the general principle that “for purposes of taxation, discrimination on the grounds of nationality is forbidden”. However, a key factor in the non-discrimination clause is whether the taxpayer is considered legally resident.
“The underlying question is whether two persons who are residents of the same state are being treated differently solely by reason of having a different nationality,” the OECD discussion paper on its tax convention states. “A taxpayer who is a resident of a contracting state and one who is not a resident of that state are not in the same circumstances.”
Some Caribbean jurisdictions do levy separate taxes on ‘snowbirds’, or individuals who stay in their jurisdictions for only a part of the year. Cayman Islands immigration law makes several distinctions between individuals with ‘permanent residence’ and those who are considered ‘guest workers’ – i.e., work permit holders and government contract workers.
10 per cent of what?
Another issue that remained unclear at press time Sunday, was precisely what part of an expatriate worker’s income would be subjected to the proposed 10 per cent tax if it did take effect.
If the 10 per cent tax was applied to all workers earning more than $20,000 a year, presumably a person earning $50,000 and paying a 10 per cent payroll tax would have to give the government $5,000 per year.
However, in some other countries that apply a payroll tax to businesses, that first $20,000 minimum earning would be subtracted from the total yearly amount.
Meaning the same individual who earned $50,000 per year would only have to pay tax on earnings above $20,000 – in their case $30,000 per year.
That means the tax for that person would only be $3,000 per year.
Requests to government for clarification on this aspect of the payroll tax proposal had not been answered by press time.