Industry analysts say new fees and taxes could bring in needed money to a region where some debts are near that of Greece. But could they scare off investors?
SANTO DOMINGO, Dominican Republic
For a territory of just more than 56,000 people, the Cayman Islands boasts an impressive corporate roster: From some of the favorite US brands like Coca-Cola and Federal Express to the world?s richest sports franchise, English football club Manchester United.?
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The three-island British territory tucked just south of Cuba in the Caribbean Sea has more than 92,000 registered companies, according to the government, most of which do the majority of their business elsewhere.?
A check around the Caribbean reveals similar stories. The islands have long been attractive because they collect little or no taxes. They?ve built economies around financial services, which has proven a more reliable source of income than tourism in recent years. And over time they?ve helped foreign companies and well-heeled individuals reduce their tax bills. Among them is the hedge fund Bain Capital, of Mitt Romney fame, which became a lightning rod for criticism during the presidential campaign.
But something happened on the way to tax haven status: Caribbean governments have accumulated massive debts they are struggling to repay. Without the taxes most governments use to pay for the costs of running public works projects or social programs, the bills have added up. With little in the way of economic expansion ? The United Nations forecasts 1.6 percent growth this year for the Caribbean ? governments are turning to other means.
Well-known tax shelters from the Cayman Islands to the Bahamas to the British Virgin Islands are considering new fees and taxes that would directly affect foreign investors.
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?It is a well established fact [that] ? any government has but one fundamental way to?? have the resources available to fulfill its obligations to its citizens? and that is to raise taxes or fees,? D. Orlando Smith, minister of finance in the British Virgin Islands (BVI), said in a Nov. 15 budget presentation. ?
But industry analysts and tax specialists believe new fees and taxes will bring in needed money for government coffers while doing little harm to the business community.
'The need to raise revenue'
In the BVI, Mr. Smith proposed an increase in trade license fees, which businesses are required to purchase to operate there, and to base work permit fees on salary levels, meaning higher-paid workers, many coming from large companies with multimillion dollar payrolls, would pay more. His counterpart in the Cayman Islands has proposed an increase in registration fees for hedge funds. And in the Bahamas, the government is considering a sales or value added tax as well as a broad-based corporate tax for the first time.
?This is coming from the same pressure that is affecting other governments around the world: the need to raise revenue,? says Bruce Zagaris, a Washington-based lawyer who has advised Caribbean governments on tax matters. ?Small countries, like those in the Caribbean, are more limited in the ability to raise revenue. In many, such as the Bahamas and Cayman Islands, there is no income tax.?
Places like St. Kitts & Nevis and Barbados are among the world?s most indebted governments, with debt-to-gross domestic product ratios of 151 percent and 118 percent, respectively, according to International Monetary Fund (IMF) data. Much-maligned Greece?s debt is only slightly higher at 161 percent, according to the European commission. ?
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