Archive for June 15th, 2009

Financial forecasts way off

| 15/06/2009 | 47 Comments

(CNS): Falling revenue and increased running cost have dramatically altered the predictions regarding government finances in a matter of only two months, changing the forecasted government deficit for the end of this financial year from just under $29 million to a record $74 million. On 23 March, MLAs voted on the necessary appropriations and changes to the 2008/09 budget to see government through to the end of this financial year. However, in just a few weeks since that vote government earnings appear to have spiralled down and costs spiralled up, dramatically altering the year-end financial forecast.

On Friday afternoon Leader of Government Business McKeeva Bush issued a statement saying that there was a record government deficit of CI$74 million, a record-high level of public sector debt CI$590 million, minimal cash balances of CI$17 million to continue the daily operations of government, and a net debt ratio of 86%, which does not comply with the Public Management and Finance Law. The figures were, the LoGB said, based on requests made by his government immediately following the General Elections for summary financial information about the state of government’s financial results and position, which was provided by Financial Secretary Kenneth Jefferson.

The reason for the dramatic change to the forecast in just a few short weeks stems from a number of sources; the first is a decrease in projected earnings of some CI$17 million. In March Jefferson said the forecasted revenue for the year to 30 June 2009 was CI$507 million but the latest information from ministries and portfolios have downgraded the expected earnings to CI$490 million. This decrease in forecast revenue (since the March forecast by the same people) of CI$17 million caused the Net Debt Ratio, which had been expected to be at 74%, to increase to 86%.

Alongside the reduced earnings of government itself, the statutory authorities and government companies are now predicted to run at losses of $19 million, compared to the $10 million predicted in March.  The Cayman Turtle Farm alone is predicted to lose $10 million before the year end, while the HSA has lost $12 million and Cayman Airways is expected to lose CI$3 million. In addition, the airline will owe approximately CI$16 million in payables at the end of June.

Since the March appropriations there has also been an upward revision of expenditures of around CI$19 million by ministries and portfolios. It was not clear, however, whether this was after the 6% reductions ministries had been asked to make by the previous administration.

Altogether, the operating losses, the fall in revenue and the increase in government running costs have combined to add some CI$45 million to the previously predicted government’s budget deficit.

Bush said that all of these issues would require the government’s urgent attention to improve the overall efficiency in the way that the government operates and to improve the financial viability of the public sector as a whole.  Clearly, the country is now faced with this great challenge of working hard together to resolve these issues,” the LoGB said.

He saidthings were worsened by the current economic climate, which is expected to have a negative impact on government revenues over the next 6 to 12 months. In the absence of funds to stimulate the economy, the administration is committed to ensure that the policy framework is as supportive to the economy as possible to minimise the negative impact.

He also explained that although there are plans to execute Cayman’s first-ever public Note (or Bond) Issue in the US in July 2009, the funds would be used to repay a loan of US$185 million made by the former government against the note issue.

Based on a cash flow forecast from the Treasury Department, which indicates the cash receipts and cash outlays over the period July to December 2009, the government will require cash injections on a monthly basis to meet its operational requirements,” he said. “These shortfalls indicate that the government will need at least a further CI$140 million.”

Bush explained that government will have to increase its borrowing, and when taking into account the liabilities of some of the major authorities and government companies, it may require a further CI$50 million before the end of 2009. As a result the government will now fail to comply with three of the key principles of responsible financial management.

He confirmed the net debt to revenue ratio is forecast to be 86% exceeding the 80% limit set by the UK and that the government is running an operational deficit, which fails to comply with the principle that we should always have an operational surplus. Bush also stated that government is forecast to have only 65 days in cash reserves, unlike the 91 days predicted in June. It is understood however that this 65 day prediction does not count reserves, which stand around CI$74 million and which can be access if approved by the LA.

Bush blamed the pervious government for the dire financial predictions. “As a result of the former administration’s failure to comply with the Principles of Responsible Financial Management that are stipulated in the PMFL, the Cayman Islands Government must now seek the explicit approval of the Foreign and Commonwealth Office of the United Kingdom Government before incurring further borrowings,” Bush said. “This position will continue to be the case until compliance with the Principles is achieved. Nonetheless, the new administration wishes to make it abundantly clear that it will honour all of government’s debt obligations.

He added that despite difficult times ahead the new administration was determined to improve the state of government’s finances and the Islands’ economy.  Bush said government would minimise the amount that it borrows and would carry out an urgent assessment of the situation in order to find solutions to this financial crisis.The short term goal must be to place the government’s financial status back on a stable footing. The long term goal must be to secure continued economic success and sustainable financial viability of the government,” Bush said.

He said it would not be easy and the necessary sacrifices would have to be made, but in the coming weeks some short term solutions would be put in place for both the government’s financial challenges as well as the economic woes facing the country.  Bush said the government would concentrate on bringing new business activity to Cayman, which would require an improvement in various approval processes across government. It will also require a more open and welcoming approach to inward investment. He added that there would be an examination of the performance of its statutory authorities and government and a much needed cost review exercise within central government.

Bush promised not to further impact the current state of the economy with any serious system of major taxes, but government would honour all its financial obligations and act in a responsible and fair manner at all times.  He said that the administration had decided to significantly reduce the costs associated with attending the annual CTO event held in New York by restricting the delegation to officials only and had saved more than $100,000.

“The country is faced with enormous challenges but, by working together, it is the belief and hope that the government will be able to address these very serious issues in the short term as well as put in place long term solutions to secure the continued success of these blessed Islands,” the LoGB stated.

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Ties to home may over ride UK 90 day rule

| 15/06/2009 | 0 Comments

(TIMES): Wealthy people planning to move abroad for part of the year to beat the 50% top rate of tax have been dealt a blow by Revenue guidance on becoming non-resident. However, guidance from HM Revenue and Customs (HMRC) in April indicated that non-residents may have to pay full UK tax if their lifestyles suggest they still have strong associations with Britain — such as membership of a UK gentleman’s or sports club — even if they meet the 90-day test.

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Cayman signs UK tax deal

| 15/06/2009 | 11 Comments

(CNS): Leader of Government Business McKeeva Bush has signed a double taxation agreement (DTA) with the UK on behalf of the Cayman Islands Government. The deal reportedly protects against the risk of individuals or corporate entities being taxed twice on the same earnings. Stephen Timms, MP, who signed on behalf of the UK, said that the agreement includes unprecedented provisions for tax information exchange. It was not stated, however, if a bi-lateral agrement will follow this deal.

In a statement from the Ministry of Financial Services, Tourism & Development Public Relations Unit, it was announced that the LoGB had signed the deal today (15 June) in a ceremony at the UK Treasury.  The DTA, which is another type of bi-lateral tax agreement, is the first double treaty to be signed by the Cayman Islands. “We are very pleased to sign this agreement with the United Kingdom today as part of the Cayman Islands’ continued commitment to high standards of international cooperation and transparency,” Bush said.

Speaking about the UK’s advantage, Timms said that information exchange is a vital tool in ensuring that governments receive the revenues they need to resource the essential public services on which we all depend. “I would like to congratulate the Cayman Islands Government for signing up to an arrangement which includes unprecedented provisions for tax information exchange that meet international standards of transparency,” he added.

The agreement (see details here) places Cayman another step closer to the OECD’s requirement for a minimum of twelve agreements, which the new government has said it is committed to achieving not least in an effort to remove Cayman from the post G20 ‘grey list’. Cayman now has nine agreements in place. UK Permanent Secretary for Tax, Dave Hartnett said the information exchange provisions in this arrangement meet OECD standards of tax transparency.

Negotiations with the UK had been ongoing for a bi-lateral agreemen for several years but these had stalled. The previous government had accused the UK of constantly moving the goal posts with regards to that agreement and said that they had been seeking some form of commercial advantage for Cayman’s offshore industry before signing.

Speaking at what was the regular weekly press briefing prior to the election, the former Minister Alden McLaughlin explained that, while the government had been criticised for not signing treaties, the PPM administration had in fact been engaged in negotiations since they took office, but that did not mean they were able to be successful, adding that the government had to be very careful not to put Cayman at a commercial disadvantage. “We don’t want to put Cayman in a position of competitive disadvantage. We want to be compliant with OECD tax exchange standards but we don’t want to give away things other countries haven’t and then lose business,” McLaughlin said in April.

That view, however, has been disputed by some in the offshore community who questioned the wisdom of holding out on exchange agreements. They say that there is probably very little commercial advantage that the government can negotiate as in most cases Cayman is already getting all the business it is likely to get from a given nation, but that not having tax agreements is currently more of a disadvantage than the risk of losing a competitive commercial edge.

Richard Murphy of Tax Research UK, a critic of TIEA as ineffective in terms of cracking down on tax haven abuse, has dubbed this DTA treaty as useless frm the UK’s point of view. He said it was not a full blown DTA or a a full blown TIEA. "In fact the extraordinary thing is that the information exchange clause is far less onerous than a TIEA. So, for example, there is no reference to the need for the parties to be able to prove beneficial ownership of trusts, companies and other arrangements in their territories, which a TIEA should require," he wrote.

The tax watchdog said that the UK would have as many problems complying as Cayman and Murphy said it would do little to assist Gordon Brown in his camapign against tax havens.

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Appleby absorbs Isle of Man’s biggest law firm

| 15/06/2009 | 0 Comments

(Legal Week): Offshore legal, fiduciary and administration service provider Appleby has merged with Dickinson Cruickshank, the largest law firm in the Isle of Man. The firm will continue to be known as Appleby and the merger is to be effective, once all conditions are met, on 1 October 2009. Appleby is the first global offshore law firm on the island and the move will see Appleby emerge as the offshore law firm with the widest jurisdictional reach, and become the largest offshore law firm by number of partners.

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