While COVID-19 shut down almost the entire economy during lockdown and halted tourism for the foreseeable future, the financial services industry faced yet more regulation.
Lockdown and border closure hits businesses hard
The year began and ended with the prioritisation of health over business. From the initial lockdown measures to the continued border closure and the halt to tourism, the COVID-19 pandemic has taken its toll on all types of businesses.
While statistics are hard to come by, business failures of restaurants, dive shops and tour operators, as well as hotel closures, are visible everywhere. An estimated 7,000 workers have already left the islands.
Nearly 3,000 qualifying tourism workers are receiving a monthly $1,000 stipend from government. For context, Cayman’s number of unemployed in the entire workforce typically ranges between 1,000 and 2,000.
In August, government forecast a 7.2% drop in Cayman’s gross domestic product for 2020, followed by a 6.4% increase in 2021. However, this was predicated on a gradual border reopening beginning in September.
Although Cayman is expected to start a vaccination programme in January, a meaningful return of tourism is unlikely to occur before the second half of next year, as evidenced by the recent extension of the government stipend for displaced tourism workers until June 2021.
On a positive note, the lockdown measures have succeeded in suppressing the virus locally and businesses that do not rely on tourism or business travel can continue almost as normal.
The financial industry has pushed on with little noticeable impact and the construction sector continues to boom, with new hotel and hospital developments in the pipeline for next year.
But how quickly the economy as a whole can recover will still rely on when and how far tourism can be revived and the economic impact on global demand for Cayman’s financial services industry.
Cayman was added to and taken off EU tax blacklist
In February, the European Union added the Cayman Islands to its list of non-cooperative tax jurisdictions, stating Cayman had not implemented tax reforms by the agreed deadline.
The Cayman Islands had committed to address EU concerns over economic substance in the area of collective investment funds by the end of 2019.
However, Cayman’s Legislative Assembly amended the Mutual Funds Law and passed a new Private Funds Law, which implemented new rules for the registration, administration and supervision of funds, at the end of January 2020.
Premier Alden McLaughlin said the EU’s decision was “deeply disappointing”, noting that over the past two years, Cayman had cooperated with the EU to deliver on its commitments to enhance tax good governance.
Cayman legislators subsequently tweaked existing legislation further.
This included a last-minute amendment to the definition of private fund in the new Private Funds Law. The law requires certain closed-ended funds, or private funds, to register with the Cayman Islands Monetary Authority, which now has enforcement powers over the funds.
The law also demands that private funds file audited accounts, have appropriate internal asset-valuation procedures, and have proper custodial and cash-monitoring processes.
The wider definition of private fund meant that more than 11,200 funds registered as private funds – and the vast majority of them only did so within a month of the 7 Aug. deadline.
Since 2018, Cayman has adopted almost 20 legislative changes in line with EU criteria.
Crucially, Cayman has introduced economic-substance legislation in response to EU pressure to curb tax avoidance by companies who operate in low-tax jurisdictions without having staff, offices or other operations there.
Companies that are engaged in relevant activities – banking, insurance, fund management, financing and leasing, shipping, intellectual property, collective investment vehicles and holding companies – must demonstrate they have a minimum of economic activity locally to take advantage of the zero-income-tax regime.
Specifically, companies in these mobile business sectors must show that their core income-generating activities are managed locally and conducted with qualified employees, with sufficient infrastructure and expenditure in Cayman.
In combination, these efforts resulted in Cayman being removed from the blacklist in October, “after having passed the necessary reforms to improve their tax policy framework”, the EU Council said.
No global corporate tax reform deal in 2020
Attempts to reform global rules for corporate taxation, to address the challenges presented by the digital economy, failed in 2020.
The initiative, driven by the OECD/G20 Inclusive Framework on BEPS, managed to agree on a two-pillar approach that the 137 member countries have been developing since 2019.
But negotiations were hampered by opposition of the US government, which feels the proposed reform predominantly targets US tech companies.
Pillar I seeks to establish new rules on where tax should be paid and how taxing rights are shared between countries. These rules initially targeted multinational tech companies to ensure that they pay taxes where they conduct a significant amount of business, not just where they have a physical presence, as required under existing tax rules.
However, the proposed new rules will apply to all types of multinational companies.
Pillar II would introduce a minimum level of tax that multinational companies must pay globally. The OECD argues this would address the remaining issues linked to profit shifting by large corporations.
This measure is aimed at zero-tax and low-tax jurisdictions, including the Cayman Islands. A blueprint approved by the Inclusive Framework sets out rules that “would provide jurisdictions with a right to ‘tax back’ where other jurisdictions have not exercised their primary taxing rights, or the payment is otherwise subject to low levels of effective taxation”.
The Inclusive Framework said it aims to resolve the remaining technical issues, and develop model draft legislation, guidelines, and international rules and processes by mid-2021.