Bankrupt Cayman Islands to get 38m bail-out

Date: Friday, October 2, 2009
Author: Rowena Mason,

The offshore centre of choice for the world's hedge funds has admitted it may have to begin a new life as a tax haven with taxes.

After lengthy wrangling, the British overseas territory on Wednesday confirmed that it has finally secured permission from the UK to obtain a CI$50m (38m) bail-out loan to plug a 35pc-40pc collapse in revenue this year.

The island's government has also signalled that it is ready to cave into UK conditions on slashing government expenditure
and an independent report on reform of its tax system that could see it start to impose direct levies to obtain further loans worth CI$229m.

Richard Parchment, an adviser to the government in George Town, said a letter would be sent to Britain with a formal agreement this week. Its severe shortage of cash meant it was days away from being unable to pay its civil service.

The Cayman Islands authorities claim that the UK has backtracked on stricter original proposals that insisted on direct taxes.

"There will be no community enhancement fee now, no income tax now, no property tax now, no death tax now," said William McKeeva Bush, leader of government business, in a live television address. But he added that this could change, suggesting the islands have already begun to consider new ways of raising tax revenue.

Although the loans are commercially-funded, Britain would be likely to end up footing the bill in the event of a default by the jurisdiction. The Foreign Office is understood to be concerned that the Cayman Islands could trade on Britain's reputation to secure loans that it cannot afford making its approval for the loan a tacit guarantee.

The Cayman Islands has so far resisted the idea of direct taxation of its residents and companies, arguing that this would jeopardise its livelihood as one of the world's biggest financial centres with the 12th richest GDP per head.

Tony Travers, director of the Caymen Islands Financial Services Association, has been on an aggressive public relations offensive in recent weeks, insisting that the islands were being unfairly victimised as tax shelters.

"I am baffled, bemused and bothered that people call the Cayman Islands a secretive tax haven," he claimed. "We are simply tax neutral. It is unfair that when you see an article about tax havens it's always illustrated by a palm tree, never a Swiss Alp."

The island's lenient tax laws nevertheless enticed 10,000 financial institutions to its shores by mid-2008. At the peak of the hedge fund boom, more than CI$3.4 trillion was flowing through Cayman Island institutions en route to London, New York and other financial centres.

Critics find it hard to swallow the notion that the islands already have a fully transparent financial system.

But Mr Travers dismissed the idea that anyone such as a journalist or member of the public should get access to company records.

"It is a legitimate right to commercial privacy," he said. "We give companies protection but are always ready to pass on information to the authorities if they suspect criminal activity."

Andrew Watt, managing director of tax at Alvarez & Marsal, said reform in the Cayman Islands would make hedge funds likely to take their headquarters elsewhere.

"It is becoming a much, much smaller world for tax havens, but there are still other places for companies to go," he said.