What happens to a tax haven when it has to raise taxes? The Cayman Islands may soon find out.President Obama once referred to the Ugland House in George Town, where about 19,000 companies were registered, as “the biggest tax scam on record.”
For a tropical paradise that has never taxed income, property, corporate earnings, retail sales or capital gains, such a suggestion borders on heresy.
The Caymans have built their prosperity less on tourism, like most other Caribbean islands, and more on serving as a tax-free home for 9,253 hedge funds and many more banks and companies that pay small fees to establish the Caymans as their official domicile while operating mostly elsewhere around the world.
Mr. Bush is desperately trying to find a way out of his quandary, caught between the demands of local business leaders to keep things the way they are and insistence from London that the economic model of the Cayman Islands must change.
Perhaps not, but there is no getting around the fact that the balmy days for exotic offshore financial centers like the Caymans could be coming to an end.
It is an image Mr. Bush, 54, is fighting hard to counter. He talks of a new transparency and points to the fact that the Caymans are now on the list of tax-neutral jurisdictions approved by the Organization of Economic Cooperation and Development and has tax information accords with 12 countries.
Now, he is fighting for it.
For five hours one day last week, he holed up in a hotel conference room just off a silky white stretch of beach. Fifty or so of the Caymans’ business leaders told him that not only would they not accept any form of direct tax, but that they would also be unwilling to increase their fees unless Mr. Bush made sharp cuts to the well-paid civil service sector.
Forced to step out of the meeting to take a call from an increasingly impatient British government, Mr. Bush held firm.
He does little to hide his frustration at having to take lectures from a “pushy” British government, which itself faces a debt burden approaching 80 percent of its economic output, on how to run the island’s finances.
But the situation in the Caymans is indeed dire: over the last four years, its debt has doubled to $600 million as previous governments embarked on a series of expensive education projects.
Already, the Caymans’ difficulties are taking a toll. A construction company recently stopped work on a school, saying payments had been delayed (the government claims that bills have been paid), and rumors are rife that public employees will be forced to take a pay cut.
“Where the hell they going?” he snorted. Yes, a recent upswing in crime is a problem, “but people can still walk around with their jewelry. That is what brings all these hedge funds and offshore partnerships. They like to visit their money.”