Offshore Haven Considers a Heresy: Taxation

By LANDON THOMAS, Jr.
NYT

GEORGE TOWN, Cayman Islands — What happens to a tax haven when it has to raise taxes? The Cayman Islands may soon find out.

Caught in a vise of shrinking revenue and stubbornly high public spending, the Caymans averted a fiscal crisis this week by securing a $60 million overseas loan.

But the Foreign and Commonwealth office in Britain, which oversees the Caymans and can veto foreign lending requests, has delivered an ultimatum: The rest of the $284 million the Cayman government says it needs will not be forthcoming until this offshore financial center imposes spending cuts and considers some form of direct taxation on businesses here and its 57,000 residents.

For a tropical paradise that has never taxed income, property, corporate earnings, retail sales or capital gains, such a suggestion borders on heresy.

The Caymans have built their prosperity less on tourism, like most other Caribbean islands, and more on serving as a tax-free home for 9,253 hedge funds and many more banks and companies that pay small fees to establish the Caymans as their official domicile while operating mostly elsewhere around the world.

With the explosion of global finance, the Cayman model flourished, and fees from financial institutions, together with tourism, made up as much as half of government revenue. Duties on imported goods accounted for the other half.

(More here.)