Cayman Islands in Shock Move to Introduce 10% Payroll Tax

In a shock move, the Cayman Islands Premier McKeeva Bush has announced the introduction of a new payroll tax following pressure from the UK to balance its books. 

Employees holding work permits and earning more than CI$20,000 per annum will have to pay a 10% tax on their employment income and businesses who employ foreign workers will also have to pay a new employment fee.  Although McKeeva Bush insisted on describing the new levy as a "Community Enhancement Fee" rather than an income tax, in effect it does amount to much the same thing and no-one will be fooled by the semantics.

The move is controversial and unexpected because it marks a hugely significant departure for a jurisdiction which up up until now has prided itself on its tax free status.  The fear is that, as has happened in many other jurisdictions in the past when new taxes have been introduced, it is all too easy to allow them to steadily increase over time, or to widen their scope (for example to include local Caymanians in the requirement to pay, rather than confining the tax to expatriate workers) and therefore that the introduction of the tax is simply the thin end of the wedge. 

Furthermore, because the Island currently has no infrastructure in place to monitor and collect such a tax, it is feared that the costs of administration will be disproprotionately burdensome relative to the amounts collected.

In taking this step, which McKeeva Bush explained as being necessary to avoid having to make redundancies in the civil service, the government is going against advice it received from external consultants in the Miller-Shaw Commission Report in 2010 which said that "Adopting any form of income or payroll tax would remove much of the fiscal allure that has boosted the economy". 

The move will undoubtedly make a career in the Caymans Islands less attractive to expat workers.  The Islands have been very successful over the years in recruiting high calibre individuals to work there, not least because of the attractions of a tax free income.  Although 10% is still a much lower level of tax than in most other countries in the world, when you take into account the very high cost of living and the inconveniences of being based in a remote location with expensive travel links, then the prospect of relocating there becomes less attractive.

I can't help but think that there must have been other more appropriate ways of balancing the books (such as a more focused attempt at cutting out fat and inefficiency in the civil service) rather than sacrificing one of the fundamental tenets on which Cayman has built its financial services business.  No-one would argue that cost-cutting is easy, but sometimes it is a necessary evil.

Isle of Man opens tax strategy up for debate

The Isle of Man government has launched a public consultation relating to the Island’s taxation, ahead of the preparation of a new tax strategy before the end of this year.

Taxation of businesses in the Isle of Man currently takes two basic forms: corporate income is received tax free, unless it derives from banking business or from Manx land and property, where a 10% tax rate applies.  

The Government has confirmed that it is committed to retaining a tax-neutral form of business structure in the Isle of Man, which it sees as a key aspect of its competitiveness as an international finance centre, but it recognises that having a 0% rate for most businesses leads to some negative comment internationally.  Furthermore, the 0% tax rate applies in the Isle of Man to a wider category of businesses than in other offshore financial centres; in Jersey, for example, all regulated financial services companies are taxed at 10%, not just banks and in Guernsey, regulated utilities are taxed at 20%.

The Treasury is therefore inviting comments on a number of issues, including whether the coverage of the 10% tax rate be widened, and if so to which business sectors; whether capital allowances should be retained, and, if so, how the system could be simplified or used to incentivise business investment.

The review is not limited to matters of business taxation, but also covers personal taxation and international taxation issues.  In the last 10 years or so the Isle of Man government has pursued a policy of trying to keep the Isle of Man at the forefront of small financial services centres in implementing tax co-operation policies.  The consultation paper poses the question of whether the Isle should seek to continue with this stance and whether it should attempt to put a series of Double Taxation Agreements in place.

It is no surprise that the Manx government is considering its options going forward - such is part of the bread and butter of business for an international finance centre.  However, it is brave in posing many fairly radical questions so openly, as uncertainty regarding future taxation is always problematic for international finance centres, whose clients prize stability and consistency very highly.

Orangefield Acquires Waterlow

The Dutch head-quartered Orangefield Group, global trust company and fund administrator, has acquired London’s Waterlow Legal and Company Services, part of Wilmington Group PLC, its 6^th acquisition since 2011, following the purchase Hong Kong’s ICS Trust in June of this year.

Although not a large transaction, the acquisition of Waterlow and its thirteen employees enables Orangefield to strengthen its presence in London, which it sees as a key jurisdiction for holding companies.

Waterlow provides basic company secretarial services such as provision of registered office, filing of statutory documents and annual returns. 

Guardian Trust Company's Licence Suspended in Nevis

The Nevis Financial Services Regulation and Supervision Department has suspended the license for Guardian Trust Company Limited (which has a sister company in Hong Kong) to act as Registered Agent for Trusts, Limited Liability Companies (LLCs) and International Business Corporations (IBCs) in or from within Nevis and has warned the public against doing business with the company.

The reasons for the suspension have not been made public, but Offshore Alert has been exposing the trust company’s criminal connections for 11 years, and the firm has been embroiled in tax fraud investigations in the US for some time.  The reaction of the Nevis authorities can hardly be said to have been swift, but at least they have finally taken action.

The Nevis based Guardian Trust Company is not believed to be connected to various other trust companies in other jurisdictions (including Jersey, New Zealand, Switzerland and BVI) which have the misfortune to share its name.  Perhaps time to consider rebranding.

Company formation leader Jordans to enter legal market

The UK’s leading company formation agent, Jordans Limited, has applied to convert to an alternative business structure (ABS) in a bid to “move up the food chain”. 

The company, which currently offers a range of services including company formation, company secretarial, accounting and company searches, now wishes to provide legal services to existing client companies and also to win outsourced work from City law firms.  It perceives these as being higher up the value chain than the relatively commoditised areas in which it currently operates, where costs have been relentlessly driven down through competition.

As a company competing effectively in an efficiency driven market, Jordans should be well placed to handle those parts of the law which are capable of benefiting from process discipline and technology, and it has the added benefit of an existing huge client list to whom the services can be marketed. 

However, it will need to balance carefully the desire to offer more valuable legal services with the need to avoid biting the hand that feeds it – much of Jordans’ current work is believed to come from referrals from City firms, and they will not wish to cut themselves off from this lucrative source of work.  So for the time being at least, it seems they are content to stick to relatively “plain vanilla” areas of non-contentious company and commercial legal work such as terms of business, share schemes, due diligence, debt collection and, potentially, intellectual property.  It is keen to make it clear that it is not planning to become heavily involved in transactional work.  The company is quoted as aiming to target companies with a turnover of between £5m and £500m. 

The Jordans group is 150 years old and its business is structured as three separate entities. Jordans Limited (the entity making the ABS application) is the corporate services arm with bases in Bristol, Edinburgh and London.   Jordan Publishing, the second arm of the business, publishes legal information, while the third, Jordans International, provides corporate services to international clients and has bases in a number of offshore jurisdictions.

The firm is currently recruiting for a leader for the ABS business and has 5 paralegals on the payroll thus far – hardly a market-shaking number, but a start.

The interesting issue will be whether UK law firms do turn increasingly to outsourcing work to third parties such as Jordans, or whether in fact they take the opportunity to start moving into the space currently occupied by Jordans.  I am aware of at least a handful of law firms who are considering the establishment of ancillary business in the fiduciary and BPO spheres, in moves which follow what many of the offshore law firms successfully did many years ago.

The SRA is currently reviewing the Bristol-headquartered company’s application for a licence.  Jordan’s hope the approval and launch will come by early next year, although that may be optimistic considering the length of the current backlog at the SRA.

Who's winning the captive race?

There has been quite a bit of speculation about which territories will be winners and losers in the offshore insurance markets in the future, particularly as the impact of the Islands’ differing responses to the Solvency II regulations are felt.  I thought it would be interesting therefore to see how the 3 key offshore insurance jurisdictions are faring.

Bermuda of course is the grand-daddy of them all.  Long established in the insurance market, it built an enviable position over the years to be the acknowledged leader, but recent years have seen the sector declining slightly.  In 2007 Bermuda had 1,481 insurance licences in issue, a figure which had declined to 1,230 by the end of 2011.  Although this is not an insignificant drop, Bermuda still remains by some margin the largest of the insurance jurisdictions and is still attracting some new business (with 23 new captives having been established in 2012, by the end of May).

Guernsey’s share of the market is smaller, but it appears to be growing significantly faster than that of Bermuda.  Figures from the Guernsey Financial Services Commission show that there were 739 international insurance entities licensed in the Island at the end of May 2012 compared to 687 at the end of December 2011. The number of international insurance entities licensed in Guernsey increased by 52 during the first five months of this year – more than double the growth seen by its larger rival. 

There is a crucial difference between Bermuda and Guernsey in that the former has announced its intention to achieve equivalency for Insolvency II purposes, whereas the latter has decided not to.  Whether or not the differing growth rates in 2012 between the jurisdictions reflect this difference of approach, or other factors, remain a matter of conjecture at this stage, but I would suggest that it is too early to attribute Guernsey’s success to its stance in relation to Solvency II, for two key reasons. 

Firstly, a significant proportion of the growth in Guernsey in the first 5 months of 2012 relates to new cell companies being formed in connection with the UK’s NewBuy scheme.  The NewBuy scheme was launched in March by the UK Government, in conjunction with the Home Builders Federation and the Council of Mortgage Lenders to offer prospective home owners new-build properties with 95% mortgages underwritten by house builders and the UK Government. The HBF PCC in Guernsey provides the insurance to the lenders under NewBuy as well as being the conduit for the guarantee from the UK Government.

The second indicator that Guernsey’s approach to Solvency II is not the cause for the rapid growth in 2012 lies in analysing the Cayman Islands, which has also chosen not to aim for equivalency – at least for the time being.  Cayman’s insurance industry is almost identical in size to that of Guernsey, but has been in a slight decline since 2009, when it had 790 registered entities on its books.  Although it is still registering new entities, those which are closing have outnumbered them in recent years, leading to a small net decline.

Cayman, like Bermuda, sources a great deal of its insurance business from the US, compared to Guernsey which sources the majority from the UK.  It would seem, therefore, that the most recent statistics from the three Islands reflect the levels of activity in the US and UK markets more closely than they reflect a response to Solvency II developments.  We will have to wait a bit longer to see who has backed the right horse in relation to the latter.