Editor’s note: The following is the full text of a statement released Friday by the Cayman Islands Council of Associations regarding government’s proposal to implement a payroll tax on work permit holders earning at least $36,000 per year.
The statement has been endorsed by the following associations: Cayman Islands Chamber of Commerce, Cayman Islands Bankers Association, Cayman Islands Compliance Association, Cayman Islands Fund Administrators Association, Cayman Islands Tourism Association, Cayman Contractors Association, Cayman Finance, Cayman Islands Insurance Association, Cayman Islands Real Estate Brokers Association, and Insurance Managers Association of Cayman
“The Council of Associations is opposed to any form of direct taxation, but we extend our hand to Government for discussions on practical solutions to our current budget crisis. The Associations regard the Community Enhancement Fee in its current form to be discriminatory, divisive to society and inequitable. This type of fee has been regarded as unlawful in other jurisdictions such as the Isle of Man and Gibraltar.
“Chairman of the Council of Associations, Chris Duggan has written to Premier McKeeva Bush following discussions with the associations, calling for an urgent meeting to discuss alternative proposals to the Community Enhancement Fee and other matters relating to the budget shortfall that currently exists. We believe more can be done to reduce government spending and to generate cost savings as recommended in the Miller-Shaw report. We believe that increasing the cost of doing business at this time may cause a loss of business to our competitors.
“The strength and resilience of the Cayman Islands economy has been founded on the respectful working relationship and partnership that has existed between the elected Government, the public sector, the business community and a diverse, multinational workforce that continues to attract some of the most talented and experienced service employees and knowledgeable professionals in the world. Together, Caymanians and foreign nationals have worked mostly in harmony over many years to address the global and internal challenges that have confronted our Islands and have developed a diversified service economy that is recognised as one of the most successful among the Overseas Territories of the United Kingdom.
“The Council of Associations believes that the current budget crisis facing our Islands requires a fair minded approach to identify strategies that will generate sufficient and sustainable revenue to finance essential public services while enabling the private sector to operate in an environment that promotes job creation and future investment opportunities.
“We must put aside personal and political differences, destructive rhetoric and ideologies and work together to address these pressing challenges. The United Kingdom has demanded sensible solutions that are based on a combination of expenditure savings and measures to raise revenue. The governor has said the precise nature of these measures is largely a matter for the Cayman Islands government and its people but the solutions must be “credible and sustainable.” It is now time for the public and private sectors to sit down together to identify reasonable and fair solutions to these challenges so that we can preserve and grow our economy now and into the future. We are all in one boat and it is time we rowed together,” said Mr. Duggan, chairman of the council of associations
“Following the release of the budget statement on 25 July, the associations have provided feedback and comment on the proposed 10% Community Enhancement Fee, now commonly referred to as the payroll tax for expatriate workers. All associations that have signed this letter oppose any move to a direct taxation system which we agree in its current form is discriminatory and divisive to the social harmony that currently exists in the workplace.
“As Chairman of the Council of Associations I am appealing on their behalf for Government to withdraw this proposal and to meet with a small delegation from the Council in order that we can present and discuss alternative measures that we will demonstrate can provide the funding that is required by the UK in keeping with the terms of the Framework for Fiscal Responsibility. We appreciate and understand that a deadline to submit the budget proposal to the UK is looming, but we insist that all alternatives should be presented and assessed before introducing a harmful, discriminatory direct tax system,” said Mr. Duggan
“Other specific concerns include the method to be used to enforce the proposed fee and the cost that will be required to collect it, and also that a payroll tax will stimulate creative payroll practices to shift remuneration from salaries paid in Cayman to other forms, possibly paid in other jurisdictions.
“Based on consultations with associations involved in the financial services, tourism, development and small business sectors, the economic impact will be significant and wide spread and will impact both existing and new business and investment opportunities.
“Some of the impacts identified by the various industries that may result from the introduction of the Community Enhancement Fee include:
• Increased cost of business will encourage firms to outsource jobs to other jurisdictions;
• Increased costs will discourage existing small local businesses or firms to expand and new businesses from establishing;
• Increased costs will put pressure on employers to increase salaries at a time when the global economy is struggling to recover;
• Taking disposable income from work permit holders will reduce their spending on goods and services and have a negative impact on the level of economic activity which will be compounded by a negative multiplier effect;
• It will become more difficult and costly for employers to attract and retain expatriate workers which may impact the level of service delivery in all areas of the local economy;
• Negative media exposure will damage Cayman’s already tainted international image and reputation;
• Since the reporting of the proposed fee, there has already been reported cancellation or postponement of real estate, property and business expansion plans.
“Development is a vital part of the Cayman Islands economy and we cannot afford to put projects on hold or lose them all together. Residential construction is a growing area in this industry sector and largely generated by expatriate families, which has proved critical to job creation. This is particularly significant while we have fewer larger developments in progress. The proposed tax will dramatically affect this area of the market that is currently supporting many Caymanian families. In fact, this announcement has already put some developments and real estate purchases on hold.
“The introduction of direct taxation in this way will mean giving up our single most important value proposition that we have to offer our investors: no direct taxation in a world where taxation is on the increase. The Council of Associations believes that if we implement the proposed new tax we will have lost the primary advantage that distinguishes Cayman from the rest of the world,” Mr. Duggan said.
“We believe that by creating a system of collecting taxes, investors will be unable to trust that the proposed 10% fee will not change to 20% and that taxing payroll will not evolve into taxing income on residents and eventually investors.
“The real estate industry has already witnessed an outward flee of investors. Apart from the certainty that this will reduce Government Income in the short term, it could very well lead to an outward exodus of tax sensitive investors to other jurisdictions.
“Other sectors of the economy will feel the impact much more significantly, for example, fund administrators. The increased operating costs of work permits combined with the high operating costs to conduct business in Cayman generally have significantly contributed to the decline in the amount of fund administration business performed in the Cayman Islands. Over the last few years, the industry has witnessed the departure or major downsizing of most large administrators. Like many other businesses, fund administrators are already global businesses operating with a single system and can relatively easily close up in one location and move to an already functioning, lower cost location such as Canada, the United States, Ireland or India.
“Administrators’ expatriate staff is typically professional accountants with an expertise very much in demand globally. They (as well as other professionals in the financial services industry generally) will not be remotely interested in taking a 10% salary cut so this will effectively have to be picked up by the companies which adds to payroll costs. They, as well as all expatriate workers in all industry sectors who earn more than $36,000, also understand that not receiving 5% pension contribution is actually a 5% salary cut.”
“A substantial portion of people employed by Fund Administrators are relatively highly paid Caymanian administrative staff and many of these jobs will be in jeopardy if Administrators decide to downsize or move their operations to other lower cost jurisdictions. This scenario may also play out in other areas of the financial industry such as law, captive insurance, trust, private banking and company management firms.
“Historically, most employers in the financial services industry that have operations in both Cayman and Bermuda for example have viewed the dramatically higher work permit fees on somewhat an equal basis when considering that many employers in Bermuda pay either half or all the payroll tax on behalf of the worker. If the Community Enhancement Fee is implemented in its current form and work permit fees remain at their current levels, the Cayman Islands will be far more expensive to operate which will place us in a significantly less competitive position for operating a similar business.
“The Council understands and recognises that reductions to expenditure must remain a priority, but any immediate large scale reduction in the size of the Civil Service will result in individual hardship so a planned and phased approach over a period of years is required that includes a retraining programme that allows Caymanians and legal residents to obtain the skills necessary to be absorbed into the private sector. Additionally, the reductions that are eventually implemented should not impact negatively the smooth operation of the main areas of the economy that generate income that fund essential public services.
“The Miller Shaw Report commissioned by Government in 2009 and released in February 2010 confirmed that it is possible for the Cayman Government to restore and maintain fiscal sustainability by undertaking major cuts in spending, by privatizing enterprises and by selling other assets. The associations believe that the following recommendations should be revisited and implemented as an integral part of any final budget strategy.
• Do not impose direct taxation.
• Orchestrate substantial privatization and other asset sales.
• Make significant reductions in operating expenses.
• Develop and maintain a separate contingency fund.
• Complete audits of all Government agencies, Statutory Authorities, and State Owned Enterprises.
• Reform the budget process to improve transparency and increase accountability.
• Improve the accuracy, reliability, and usefulness of data produced by the Economics and Statistics Office.
• Review Government activities to identify and implement efficiency-enhancing applications of information technology, related reforms, and contracting out.
• Study ways of raising the same revenue but minimizing the adverse effects on economic activity of various levies on the financial services industry, the tourism industry, and the goods and services industry.
• Attract private capital to solve various infrastructure challenges and to develop new enterprises.
• Increase the number of work permits, reduce work permit fees, and make the guest worker program more flexible.