Bad tax & terrible timing

| 26/07/2012

The recent announcement that the government is planning to introduce a payroll tax (to be called a ‘community enhancement’ fee) is a bad idea at a bad time. The proposal seems to be to remove the legal requirement for employers and employees to pay pensions for work permit holders and to replace this with a mandatory payroll tax of essentially the same percentage (5% by employees and 5% by employers).

The idea is that this will have a neutral affect because the new tax is the same as what everyone is now paying in pensions.

But that neutrality argument makes no sense for two reasons.

1. Employees will now not have the 10% pension savings which they had before. Instead they will have to pay 5% of their salary to the government and they will now NOT have the other 5% contributed to their pension in their name by their employer. The employee is therefore losing 10% and that’s cash for CIG to blow irresponsibly, not pensions for a later date for the employee.

2. Employers will also be worse off because many of them will have no choice but to opt to pay the 5% pension for the employee in order to keep them happy. That means higher recruitment costs and higher personnel expenses for existing employees. In some cases employers won’t opt in but in many others, such as within the financial services sector, the employers will feel that they have no choice but to do so to continue to recruit the right type of employees and to keep compensation packages competitive.

Community enhancement or division?

The government is disingenuous in its proposal to call the new tax a “community enhancement” fee. First the existing basket of indirect taxes of over 500 million have been utilised to “enhance” the community for the past 5 decades, so there is no reason to think that we now need to find a unique or additional way to do this.

Secondly, why is the community only being “enhanced” by expats’ taxes? If it is truly a community fee it should be paid by all those in the community (for example, a fee of 200 dollars to be paid by every employee per year), but we all know the political reasoning behind this and it has nothing to do with community enhancement. It will, however, further divide the community.

It's also bad politics

The government will no doubt now try to blame their “need” to do this on the FCO. But while the FCO has asked for years for a more sustainable tax base, they have fallen short of demanding any particular form of tax. In fact, their main focus has been on the need for the Cayman Islands Government to reduce its expenses.

So instead of making a difficult decision in an election year and finding other ways to reduce expenditure, the government will take what they mistakenly feel is the “easy” option and tax those that are not on the electoral list.

Their political mistake is that this decision will have a damaging impact on the local economy and Caymanians will also be hurt when the fallout begins.

Finally, those that point to existing payroll taxes in other financial centres to support introducing one in the Cayman Islands miss a crucial point: Cayman has had to increase indirect taxes and fees in many other areas over the years precisely because the governments were trying to avoid any form of direct taxation. As a result, some of our costs, fees etc are higher than in some of these countries used as examples of payroll taxes. But now the Cayman Islands will not only have those higher fees, it will also have the burden of the payroll tax to deal with, because clearly the government is not going to reduce any of its existing fees and indirect taxes.

Moving targets

As a purely practical matter, the Government will likely only be able to collect taxes from those companies that have a proper system in place with proper records etc.

Unfortunately for the financial services sector they will end up being the ones that are relied upon for the taxes actually collected. Many of the smaller more informal firms, such as smaller construction companies etc, will struggle to have systems in place and it will cost more to chase them than what is ultimately collected.

And therein lies the crux of one of the biggest challenges this new proposal will face: the financial services sector is full of persons who understand how to structure their affairs to minimize taxes in accordance with the law. Readers will recall now that this is essentially what they do for a living for their clients. How then do you imagine will the Cayman Islands government be able to effectively collect from a sector that will spend time and resources finding clever ways to minimise their taxes legally?

There are a host of other issues, such as the infrastructure needed to manage this new tax, but these are not mentioned here for brevity. Nonetheless, with the current state of the economy and the political sentiments against the current government, they could not have chosen a worse time to make such a terrible decision.

Category: Viewpoint

Comments (53)

Trackback URL | Comments RSS Feed

  1. Anonymous says:

    I agree it's a bad time to introduce any type of taxation but what is even more concerning is that it wasn't required.  The only financial strategy our leader has employed was not paying the government bills for two months prior to July.  That's it…the government has continued spending on extravagent travel, churches, paving of private parking lots and driveways, and paying for penalties for cancelling the port deal for no legitimate honorable reason.  Our civil service is also our social service..there are great people working there but many not so great as well.

  2. Anonymous says:

    Why does Cayman need to tax the expats?  To pay for the CIG welfare fiasco.  The free gas($500,000 a year) is not free to expats who can't qulialify for it.  The free healthcare and pensions (double or not) is not free for the expats who are not allowed in the club.  The lawsuits that Bush said the public would not pay for.  He obviously meant Caymanians only would not have to pay for his incompetence.  A real tax is used to give a neccesary  enhancement to the givers.  This is a expat protection scam.  And this is what Cayman has degenerated down into.  So far.

  3. Anonymous says:

    Let the fallout begin!

  4. Anonymous says:

    A (relatively) small, one-time, ForCayman Property Tax of say 3% on all property to pay off our debt might be a good idea.

     

    Anybody know what Camana Bay is worth?

    • Anonymous says:

      Typical Cayman rant:  How can we get the expat to put more food in our trough.  The thought of getting a skill and working hard at it would never cross your mind.

      • Anonymous says:

        I'm all for Caymanians paying tax. Didn't you know that Mr. Dart was a Caymanian?

    • Anonymous (not verified) says:

      40% less than this time last week.

  5. Wote says:

    I say 101 for president!

  6. AnonYmous says:

    Its not just the tax that is bad timing, it’s pretty much everything that this government has done! Always the wrong thing at the wrong time. When will the Udp learn?

  7. Anonymous says:

    I am wondering if this tax is approved by England, does this mean that they would want to get  out all the  highly educated people including lawyers and accountants so they can now move in to the cayman islands to control it? Then if they do, there will be no one on Island to assist the caymanians to fight for their country.

    England is having a difficult time now, and they all know the wealth that Cayman Islands has. Food for thought for you Caymanians.

    • cow itch says:

      oh sh%t !    we better start taxing caymanians right away….  ax man you can have my oxtail all you like

  8. Anonymous says:

    The situation here is very obvious. The recent OMOV exercise clearly demonstrated that In spite of all the wotes that the worthless UDP gowerment have bought and continue to buy they are very seriously unprepared for the May 2013 elections. So what do they do? Well since the poor unfortunate expatriates cannot wote for the UDP they have to be the ones to suffer, and of course Mac will be the civil servants' hero once again for standing up to Mr. Bellingham. And our country's economy will continue to sink to the bottom of the ocean, and the UDP will continue to rain mayhem down upon us all like never before. And the social service piranahs in West Bay will continue to chew the flesh from our bones like never before. And certain billionaires will continue to happily walk away with tens of millions of our country's revenue like never before. And Mac will continue to throw away millions of our dollars in the name of nation building like never before. And Mac will continue to buy his backside out of court with millions of our dollars like never before. Hell we might even have the very good fortune of having the Chinese take our country from us and feeding us with rice for the rest of our lives so we never have to worry about silly things like budgets and the economy ever again. And guess who's going to walk away from all if it with his pockets full to the brim and running over forever after? God help us.

    • Anonymous says:

      I think he is the hero standing up for all Caymanians, because the payroll avoids taxing Caymanians. Would you like to see Caymanians taxed?  Not Bush and I am thankful for that.

      • Anonymous says:

        I think we will all know soon enough exactly what kind of hero your beloved Mr Bush is.

      • JTB says:

        You are a tragic advertisement for the quality of education in the Cayman Islands

  9. Anonymous says:

    I can't but not notice how out of sinc were those who has started this One Man One Vote movement. There should have been a movement on the economy and the way the Premier was handling the budget (not enough cuts). Don't get me wrong, the OMOV had its merits and I congratulate the group for upholding its principles, but the many months and the energy it took on changing the electoral system could have been channeled to the way government was handling its finances. It made no sense when you had proponents all island wide for this movement, preaching accountability when the Premier showed up in the LA without a Budget and then you attack him at the eleventh hour. I hear some saying they ant to organize a march. Really?  Shouldn't we had been protesting months ago if this was such an important issue?  Where was Ezzard or Alden leading out on matters of the economy?  Alden, above all persons failed us because Ezzard took his place in being a real Opposition leader.

  10. David says:

    My respect to all expats, but if I was in your country would I not face discrimination and have to pay fees that you would be exempted from because you are citizens of your country?  Or, would I at all times be treated with fairness in a managerial role of a business you have in Cayman?  How many times have Caymanians been discriminated in their own country and many times fired from their jobs just because you prefer your kind over them?  Again, I think we have no problems with expats being here. I am married to one, but I speak no mystery. The more I review the Premier selection of tax out of all the other array of taxes out there, is the more I see it makes sense, because we are the only Carribbean nation that is OUTNUMBERED in our own country. Peace

    • Anonymous says:

      I have been an expatriate in four countries besides Cayman. In none of those countries was i asked to pay any tax the citizens of that country did not pay. In each i was entitled to partake of the health care system (except when i was in the staes) and had i had children, they could have attended statw schools.

      • Anonymous says:

        If you go to the US and you work there, you have to pay tax. Other places are like that too.

        • Anonymous says:

          Yes, but Americans pay taxes, too, and so do the citizens of those countries. What is being suggested here is that only expatriates pay taxes to support the excess of citizens. Nowhere else in the world that I have ever heard of has that kind of discriminatory tax regime.

        • Anon says:

          and do Americans pay the same taxes as the expat.. Yes they do so very different from what is being proposed here

    • Anonymous says:

      Um, no.  You would be expected to pay the same as everyone else where they are from my homeland or not.  In terms of tax on your income you will pay the same as anyone else.  In fact if you came to my country you would get more out of the system that I have paid into by way of direct and indirect taxes for the last 40 years, than I would myself. 

      So no, your xenophobic and discriminatory policies and practices, are non-existent in my own country where you would be made most welcome.

      Peace out.

  11. Anonymous says:

    Young expats – if you are starting out in the Cayman Islands and are going to give some of the best years of your working life to the country, do not give up your pensions easily.  This was the best policy the Cayman Islands had and now they are taking it away.  

    It may seem like no big deal now, as it won't have a massive impact on your monthly income but it is very important.

    When you return back to the UK (or wherever you may be from) and have to start from scratch, when your peers are settled and have built careers, kept up their National Insurance payments, or have built substantial pensions and profited on their property values – that pension may be the only thing you have to thank for your years of work the sunshine.

    This is one to fight.

    • Real world says:

      If you are under 35 then putting any cash into a pension more than you legally have to is probably not worth it.  Spend it while you can have fun with it, especially since there is no asset class going north at the moment. I would not bother with the dull line of squirreling that cash away.

      • Anonymous says:

        Real World : The comment that those under 35 should ‘have fun’ rather then paying into a pension reminds me of the fable of the ant and the grasshopper. All summer long the grasshopper spent his time singing, he scoffed at the industrious ant who worked all summer building up a store. When the season changed and the grasshopper found himself starving he went begging to the ant to help him only to be turned away.

        Saving while young is the single best thing you can do, due mainly to the ‘miracle’ of compounding. Let’s take the example of investing just $100 at the age of 20 and assume a rate of return of 10%. In year 2 the person will have $110, in year three they will have $121 in year 3 they will have $133.1 this will continue on so that when that person retires that tiny $100 they put away when they were 20 is now worth $8,835.

        No asset is going north? If this was even true (which of course it is not) would it therefore not make more sense to save your money so that you can purchase those assets at the bottom?

  12. Google says:

    @17:34 – I think UDP is leaving it for PPM to introduce a TAX ON CAYMANIANS. You think they stupid?!  

  13. Anonymous says:

    no way jose

  14. With Gratitude says:

    Dear Mr Bush,

    Thanks for giving the UK exactly what they have been wanting for the past 5 or 6 years, a direct tax to begin the process of completely destablising our financial services industry. for giving us the perfect "scare" for professional expats looking to work here. and for giving us the The utlitmate tool to fuel yet further speculation that the tax rate will be increased every year to fund extravagant government expenses and a bloated civil service.

    No really…Thank you sir for making such a wise decision and for demonstrating the complete lack of cahoonas to the motherland.

    If you go ahead with this you will change this country forever for the worse. And we will have you to thank for it.

    Now please go back to sleep because you are clearly completely disconnected from the people of this country.

    Sincerely,

    Your peeps.

  15. Anonymous says:

    Theory: the first government to introduce direct taxes in the Cayman Islands will fall flat on its face at the very first election after the announcement.

    Reality: The Payroll Tax, because of what it will do to the local economy, will be the UDP's second "status grants". Bye bye..

    • Anonymous says:

      What is your understanding of the options that the UK presented to the government of the Cayman Islands?

    • Anonymous (not verified) says:

      …and it now should be clear to all that this dire situation is a natural and expected consequence of the manner in which the status grants were handled and the lack of enforcement of Cayman’s laws for a generation.

  16. Anonymous says:

    agree with this. I have been hearing already that some expats will consider relocating elsewhere. the main reason is that this pushes cost of living past a certain point because they were just getting used to it being more expensive here but now with less income on the agenda, it makes no sense financially to some people.

  17. Anonymous says:

    a totally ridiculous proposal. well written article, but no one will listen..at least not the big mac!

  18. Libertarian says:

    As a Caymanian born and grew up here under a single parent, I have always knew that if it wasn't Independence or a Dictatorship that would be Cayman's doom, it sure would be a Direct Tax. My fellow Caymanians, this beautiful island was never ours to keep. We had no control of its governance, and the Constitutions we have was never drafted for our sole interest. Nevertheless, one thing the powers-that-be can never ever take away from you my people, is your ability to leave home if you must, find another place, and create your own paradise. Our men and women of old did not settle down with nonsense. Many women educated themselves overseas, men went away on boats who came back heros with more resilience and experience. And many found home someplace else. They were not scared to explore the unknown. Noble hearts were they. Today, we still all have that impression within our veins, a navigational compass within us all, and all I am saying is to not get tied down with the news of today, because your destiny is still in your hands, and if you must, look out for your interest, it doesn't have to be bogged down by a place. Cayman will never move from the map, and Caymanians will always be Caymanians wherever we go. A little unfortunate news and the power-grabbers, have never stop us from getting a better life and saving or investing for the future. And your not losing a battle when you think of change, Cayman. Your thinking smart and showing to the powers-that-be that like the fishermen of old, nothing gets in the way of your sea of happiness. Look up still.  

  19. Anonymous says:

    It's a 15% tax! Employees pay 10% and then if employers choose not to pay their 5%, the employee has to cover that to total 14.9%.

    If the employee is paying 14.9% AND losing the 5% pension cash means this is a 20% real loss on income.

    No thanks, out of here.

  20. Anonymous says:

    How much money would government save if they cut all travel and Charles Whittakers salary and the monies given to the churchs?

    • Sherlock Holmes-Ebanks. says:

      Send an FOI request to the Ministry Of Sports and you will soon discover its not just Charlie’s salary that is contributing to the problem.

  21. Anon says:

    Another great summary of the situation by 101. I would also add that there is a serious human rights issue with the tax aimed only at expats..

    • Anonymous says:

      Where? What section? You go anywhere in the world, do you know you have to pay fees and taxes that a citizen of the country you are in do not have to pay?

    • Landcrab says:

      Discriminatory taxation is subject to a rights challenge by reason of the interaction of Article 1/1 and Article 14.  Whatever the margin of appreciation this is not within it.  The FCO cannot approve this tax – the UK would be exposed to a domestic damages claim for every $1 of tax paid if it did not exercise it powers to stop the tax at this stage.

  22. Anonymous says:

    I agree with this article. I also happen to think that the real issue here is not government revenues. The CIG's current revenue should be more than enough.The real problem, and the one that the FCO has been seeking to address, is the shocking waste and lack of accountability in Cayman's public finances. Until that issue is resolved any increase in revenue is like giving money to someone with a gambling problem.  It's not going to help and as soon as it's gone they will be back looking for more. 

     

    Unfortunately rather than do what needs to be done, Bush has taken the political line of least resistance. The local voters are unaffected. Or even better, they'll vote for Bush if the opposition opposes the tax and suggests a fair alternative. The civil service remains bloated. The gas cards don't have to be cancelled. Plans to give away free solar panels and renovations to locals will go ahead. The lavish parties in places like Panama can continue. Public finances don't have to be audited. 

     

    Forget Greece and Spain, the mismanagement of public money by the CIG makes those countries look prudent.  Unfortunately its the expats that has to bail them out.

     

    Unless the real issues of waste and accountability are addressed you can be sure that this 10% tax will quickly become a 20% tax and then, if there's any expats left to pay it, a 30% tax and it still won't be enough.

     

     

    • B.B.L. Brown says:

      And I agree with your comment!  No country…… no business…… no individual can remain solvent having more expense than income.   We need a government that can control spending!

    • Libertarian says:

      You got to understand with the Foreign and Commonwealth Office, they are a powerful elite group that are calling that SHOTS for these islands. The UK is in a bad shape financially, they can't afford to have us in a bad shape because we are important to UK banking investors. And they believe in one word for the soluton to an economic problem:  TAX and MORE TAX!  This was mandated from the UK and given to Premier McKeeva Bush to carry through that mandate. They want the budget to show two things:  REDUCTION OF EXPENDITURES and a serious enhanced SUSTAIN REVENUE, which means TAX. It is a hard decision, even Alden McLaughlin weigh in on the damage a direct tax would have on the Cayman Islands yesterday. He said that government's problem was not really in their failure to create revenue, but their failure to STOP THE SPENDING. He even made an admission that this spending went on before his term and during his term when Kurt was LOGB. Spending got us here and the FCO's TAX-SOLUTION for every economic hiccup. I understand that before government was deciding the tax option for these islands, McKeeva was contacted by certian prominent business entities in the Cayman Islands to slash the Civil Service by 600 to 700 persons. The FCO mutter no encouragement to the option, and most naturally, a politician is not going to slash the largest voting block in the country. Besides, if you slash them, you have the fear of increase crime and social disorder. We are in alot of trouble  – any direct tax will harm Cayman. I am betting that the UK will refuse this the contents of this proposed budget with the expat-payroll tax because of discrimination against nationalities, and the Premier may go for a VAT instead like in TCI. All I am saying for all Caymanians, it is time to stop relying on government and thinking about your own interest, because they are thinking about their own too. Constitutionally this country was never ours. Be safe and think smart.

    • Anonymous says:

      I think you will find the revenue net extends to Caymanians before too long – there is not enough in it to feed the spending monster atwhatever percentage is applied, particularly as the high paid expats (and the financial servcies businesses employing them) are best placed to avoid or evade it.  And of course there is no infrastructure to properly enforce it.  Which will lead to the expansion of the ciovil service rather than its retrenchment, which will in turn promptly gobble up the cash any tax generated.  There is a reason that previous suggestions by the UK have focused on property or consumption taxes.  And those will be next on the list. 

  23. Verticalpig says:

    This is going to be as popular, and as easy to push aside, as a potato salad in a steakhouse.

     

    The companies with the high earners set up an employment agency in (say) BVI to hire workers from.  That agency charges the employers continuing hire fees and pays the employees in some bank of their choice, in or outside Cayman. No 'employee' = no employee tax.

     

    Also watch out  the new and popular salary of $19,999, where employees pay no tax  but get their car, utility bills, school fees, housing costs, etc paid for, in part of in full, by the employer. 'Loans' to employees may prove popular too.

     

    This tax will likely cost more to administer than it collects and raises a lot of hackles to no good purpose.

    • Anonymous says:

      I coudln't agree more, if the law states the tax is to be imposed on salaries what is to prevent me from asking my employer for a new salary of 19,999 per year with an annual bonus of 60,000 payable $5k per month?

      I can't wait to read this draft "Community Enhancement Fee" law!

      • Anonymous says:

        Ah, but you haven't been told about the Ex Pat Bonus Premiers Enhancement Fee yet then I guess! 😉

  24. Anonymous says:

    more wonderland nonsense…….. now lets march to the goverrnors house……

  25. durrrr says:

    'The idea is that this will have a neutral affect because the new tax is the same as what everyone is now paying in pensions'

     

    This overlooks the fact that the mandatory pension contributions are capped – this foolishness sounds like it is going to be 10% on the full wack!

    • Anonymous says:

      It also ignores the fact that any pension money contributed still belongs to the employee and is supposed to be returned to them in the future when they leave the island. DUH!

      • Anonymous says:

        They are not ignoring the fact.   It is just too complicated for them to understand. The problem is that they are in charge!

    • Anonymous says:

      What are the pension companies take on all this? Have they issued any statement?