Tuesday, July 31, 2012

Income Tax would destroy Cayman

Our local rulers’ much-publicised proposal to impose a tax on income generated by non-Caymanians may already have put Cayman onto a slippery slope from which there is no escape. I don’t think the proposal will be implemented, but the very suggestion is scaring the bejesus out of our tax-haven professionals and their clients, and amusing those international publications that have heard of it.

The proposal is irresponsible in the extreme, and betrays an alarming ignorance of what makes tax-havens tick. Our professionals are all aware of the danger posed by that ignorance. They also know how irresolute the British Foreign & Commonwealth Office (FCO) is in the face of bluster from our local politicians. One can well imagine that the professionals have some good emergency plans in place.

I don’t think Britain wants to see the end of Cayman’s tax-haven; it is too valuable an asset to British commercial interests. However, there may be other factors in play that haven’t been disclosed. For all we know, Britain is planning to do what it did to Diego Garcia and turn Cayman over to the Americans. The last thing the US would want is de-facto independence in islands so close to its naval base in Cuba. You never know!

The income-tax proposal and the political rhetoric that accompanies it have whipped the vocal minority of Cayman’s xenophobes into a frenzy of anticipation. Taxing expats’ income is wonderful news for the “stick it to the expats” crowd. All the same, Work Permit foreigners would be wise not to rush to the exits just yet. Yes, they should quietly sell their houses and apartments, if they can, and shift all their long-term savings out of Cayman. (Expats on Work Permits are damn fools if they buy property here anyway, even without the latest threat.) But there’s no need to panic, just yet.

Even the bare bones of the proposal – a tax on wages and directors’ fees and the like – would take a long time to implement. Government’s legal draughtsmen lack expertise in their job, and competence. Has there ever been a Caymanian law that didn’t need amending within three weeks of its passage? No there hasn’t. A new tax-collection bureaucracy would take some time to organise. It can’t piggy-back on the existing procedure that collects pensions-contributions, as has been suggested.

More than in any other place I can think of, a new tax law would need to take account of the strength of the resistance. Cayman is an island of tax-dodgers, after all. Tax-haven professionals in every tax-free jurisdiction run rings around their counterparts in the tax offices of the world’s major nations. Unless it could recruit some experienced poachers and turn them into gamekeepers, Cayman’s tax-collection agency would stand no chance at all.

Also, ours is a business culture that is steeped in secrecy. Giving tax-office clerks the authority to inspect individual and corporate bank and brokerage accounts is out of the question. Even if it were to happen, much taxable income would be quickly redesignated as non-taxable – bonuses or consultancy fees paid into overseas accounts, for instance. Or, “exempted” companies would be utilised, of the kind used by Offshore clients. Would the tax-inspectors demand to see the bank accounts of every exempt company? Not if the Offshore sector were still in operation, it wouldn’t.

The taxing of expats’ remuneration would only be the beginning, of course. Caymanians’ wages etc would be next, then everybody’s dividends, then corporate profits. Government’s extravagances – the root cause of all our fiscal problems – will never end until the FCO calls our politicians’ bluff and takes direct taxation off the table.

It may be too late to act, even this early. Cayman’s Offshore haven has a lot of momentum, and will take a lot of stopping. But if anything can do it, it’s the prospect of a tax on income and profits.