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.