The Cayman Islands government has been forced to introduce its first direct tax,
and undertake stark public sector retrenchment, to address the budgetary concerns
voiced by the United Kingdom's Foreign and Commonwealth Office (FCO).
In June 2012, the FCO informed the Cayman government that it would not be permitted further borrowings to sustain the territory's recurring budgetary deficits, as was proposed in the original 2012/13 Budget of June. At the time the Cayman
government was given two months, until August 31, to draft more ambitious budgetary plans including deep expenditure cuts, and if necessary new revenue measures.
The new budget, presented by Cayman Premier McKeeva Bush on July 25, 2012,
presents plans to slash government expenditure,
whilst allowing for the continuation of vital capital projects. Due to the territory's
inability to borrow to service its debt, the budget provides for a fiscal surplus
of USD84m, making available the USD29m needed this year to service the debt,
and also pay toward past service pension liability - consistent with the legal
obligations agreed with the FCO.
In announcing his budget, Bush conceded that the government was faced with
either introducing a new tax, or cutting public sector employment by around
500-700 persons - a level the government could not have agreed to, he said.
Faced with the choice of introducing income tax, a property tax or a value-added
tax, Bush said the government had drawn up plans for a less draconian levy,
the Community Enhancement Fee, effectively a payroll tax on foreign workers. The 'Fee' is to be applied on the remuneration
of work-permit holders in the Cayman Islands with a 10% rate applicable to income over USD20,000 per year.
A further levy of 5%, payable by employers, will be
imposed in respect of non-resident employees engaged in certain categories of work.
To reduce the impact of the measures, the government is to introduce legislation to
make optional the presently-mandatory requirement for non-Caymanian employees
and their employers to contribute an amount equal to 5% of the employee's remuneration to a pension scheme.
Lastly, the government has announced that it is considering increasing fees on the funds industry to establish a greater contribution from the sector towards regulatory costs.