Premier McKeeva Bush said Wednesday that work permit holders who earn more than $20,000 per annum will have to pay a 10 per cent payroll tax.
Mr. Bush, who called the tax “a community enhancement fee”, said he did not want to impose the tax, but he had no choice because the United Kingdom was demanding a sustainable budget.
“The [Foreign and Commonwealth Office] insisted that the Government strengthen its fiscal position by implementing a greater level of expenditure reductions than had hitherto been made by honourable ministers and senior civil servants. The concern is to make expenditures more sustainable going forward into future fiscal years,” he said in a statement. “The FCO is also of the firm view that the strengthening and improving of fiscal results for the Government must not occur solely as a result of reductions to expenditure, but revenues of the Government need serious enhancement and expansion.”
With regard to expenditure reduction, Mr. Bush said the government had already made “extremely deep cuts to get the budget to the stage it is.
“This still did not produce enough savings to satisfy the FCO,” he said. “There have been calls to have significant layoffs - in the range of 500-700 - in the civil service from the private sector. Neither the governor nor the deputy governor has come with any such plan and Government could not have accepted it anyway.”
Mr. Bush said the government had a choice of revenue measures to choose from.
“We could have introduced income tax, property tax, Value Added Tax or something softer such as the Community Enhancement Fee,” he said. “Government has opted to introduce a Community Enhancement Fee that is linked to the remuneration level received by work-permit holders in the Cayman Islands.”
The tax is to be implemented during the 2012-13 fiscal year.
Mr. Bush said that the government recognized that the implementation of the new revenue measure must not stifle Cayman’s economic growth or make the cost of business unsustainably high.
“Accordingly, Government - to mitigate the effect on employees of introducing the Community Enhancement Fee - will introduce legislation to make optional, the present mandatory requirement for non-Caymanian employees and their employers to contribute to pensions. At present non-Caymanian employees and their employers each contribute 5 person of the employee's remuneration, to pensions,” he said. “This is a real reduction in the cost of doing business in the Cayman Islands.”
Although employers will no longer be required to contribute to the pension plans of work permit holders, Mr. Bush said they would not be required to pay any of the payroll tax, adding that they could contribute to it “if they want to”.
Pensions are only mandated for the first $60,000 per annum of salary, but Mr. Bush said the payroll tax would be applicable to the full amount of a work permit holders salary no matter how high it was.
With regard to existing pension accounts, Mr. Bush said he didn’t know at this point if work permit holders would be required to keep those accounts open.
“No decision has been made on that depth of question yet,” he said.
Should employers choose not to contribute anything toward the employee’s payroll tax, the effective tax rate of the plan would be 14.28 per cent of gross salary, up to $60,000 per annum. For example, a person making 50,000 per year would have had a gross salary of $52,500 when adding in their employer’s pension contribution. If the employer no longer contributes to the pension plan and doesn’t contribute to the payroll tax, that person would see his net salary drop by $7,500 - or 14.28 per cent. That rate would be the highest of Cayman’s main offshore financial centre competitors.
However, should that person’s employer either continue to contribute five per cent to the pension plan or contribute that five per cent toward the payroll tax, the effective tax rate would be 9.52 per cent.
Mr. Bush also announced two other revenue measures including a five per cent fee “on certain categories of employment” payable by businesses.
“This will serve as a further incentive to hire Caymanians in those roles,” he said.
In addition, Mr. Bush said the government was seeking to “introduce a fee to enhance the regulatory environment in respect of the funds industry in the Cayman Islands
The idea of a payroll tax on work permits only was first considered by the United Democratic Party in the early days of the current administration, which began in May 2009. In a first draft report dated 11 September, 2009, the Economics and Statistics Office looked at a “proposed payroll tax for the Cayman Islands” that was also aimed at work permit holders only and compared it to payroll taxes in other regional island-states. However, the other jurisdictions looked at all imposed payroll taxes on all their residents.
“Based on current research, payroll taxes that have been legislated in other countries are nondiscriminatory with regard to nationality of employees based on the principle of equal compensation for the same level of productivity regardless of nationality.”
That earlier plan was not linked to a suspension of work permit holders’ pension contributions and was proposed to be paid half by employers and half by employees.
Mr. Bush said he believed work permit holders would still want to live and work in the Cayman Islands.
“There’s no racial tension here; people can own as many vehicles as they want; they can own property; they can buy their own home; and there’s no other kind of taxation,” he said.
Mr. Bush said he didn’t think businesses would want to move to other jurisdictions either.
“We have first class infrastructure here,” he said. “None of our competitors are in as good a position as us.”
On the Rooster Crosstalk radio show Wednesday morning, Leader of the Opposition Alden McLaughlin said he had heard the government was considering the tax.
Speaking afterwards, Mr. McLaughlin said instituting a direct tax would have serious longterm implications for the Cayman Islands.
“I’ve never known of any tax that didn’t get expanded or that goes away,” he said. “Once we go down that road, it’s only a matter of time before it expands. This is something no one in Cayman ever wanted to contemplate.”
Mr. McLaughlin said the cost of government expenditures has been exceeding government revenues for some time.
“The trajectory that we’re on... is just not sustainable,” he said. “We didn’t need the Miller-Shaw report to tell us that, but it told us that.”
The problem is spending, not revenues, Mr. McLaughlin said.
“This government, despite all the rhetoric, has done nothing really to reduce the expense of government.”
Mr. Bush, however, did announce some expense reduction plans for the upcoming budget, including:
• The requirement for any newly recruited Civil Servant to contribute to pension and health-care costs;
• The requirement for existing Civil Servants to contribute to their health-care costs from their remuneration;
• The requirement for spouses of Civil Servants who receive health-care coverage from the Cayman Islands National Insurance Company to pay for the coverage;
• A $1.5 million reduction of marketing and public relations expenditures;
• The planned reduction to housing allowances to levels that existed before Hurricane Ivan, which is expected to result in an expenditure reduction of $1.5 million;
• Salary reductions in statutory authorities, which is expected to create expenditure reductions of $1.5 million;
• The centralisation of the procurement of utilities, consumables, janitorial costs and security costs, which is expected to reduce expenses by $1.3 million;
• The sale of the police helicopter because of high operational costs, which is expected to save in excess of $1.7 million.
To read the complete statement from the Premier, please click here.