Bad tax & terrible timing
The recent announcement that the government is planning to introduce a payroll tax (to be called a ‘community enhancement’ fee) is a bad idea at a bad time. The proposal seems to be to remove the legal requirement for employers and employees to pay pensions for work permit holders and to replace this with a mandatory payroll tax of essentially the same percentage (5% by employees and 5% by employers).
The idea is that this will have a neutral affect because the new tax is the same as what everyone is now paying in pensions.
But that neutrality argument makes no sense for two reasons.
1. Employees will now not have the 10% pension savings which they had before. Instead they will have to pay 5% of their salary to the government and they will now NOT have the other 5% contributed to their pension in their name by their employer. The employee is therefore losing 10% and that’s cash for CIG to blow irresponsibly, not pensions for a later date for the employee.
2. Employers will also be worse off because many of them will have no choice but to opt to pay the 5% pension for the employee in order to keep them happy. That means higher recruitment costs and higher personnel expenses for existing employees. In some cases employers won’t opt in but in many others, such as within the financial services sector, the employers will feel that they have no choice but to do so to continue to recruit the right type of employees and to keep compensation packages competitive.
Community enhancement or division?
The government is disingenuous in its proposal to call the new tax a “community enhancement” fee. First the existing basket of indirect taxes of over 500 million have been utilised to “enhance” the community for the past 5 decades, so there is no reason to think that we now need to find a unique or additional way to do this.
Secondly, why is the community only being “enhanced” by expats’ taxes? If it is truly a community fee it should be paid by all those in the community (for example, a fee of 200 dollars to be paid by every employee per year), but we all know the political reasoning behind this and it has nothing to do with community enhancement. It will, however, further divide the community.
It's also bad politics
The government will no doubt now try to blame their “need” to do this on the FCO. But while the FCO has asked for years for a more sustainable tax base, they have fallen short of demanding any particular form of tax. In fact, their main focus has been on the need for the Cayman Islands Government to reduce its expenses.
So instead of making a difficult decision in an election year and finding other ways to reduce expenditure, the government will take what they mistakenly feel is the “easy” option and tax those that are not on the electoral list.
Their political mistake is that this decision will have a damaging impact on the local economy and Caymanians will also be hurt when the fallout begins.
Finally, those that point to existing payroll taxes in other financial centres to support introducing one in the Cayman Islands miss a crucial point: Cayman has had to increase indirect taxes and fees in many other areas over the years precisely because the governments were trying to avoid any form of direct taxation. As a result, some of our costs, fees etc are higher than in some of these countries used as examples of payroll taxes. But now the Cayman Islands will not only have those higher fees, it will also have the burden of the payroll tax to deal with, because clearly the government is not going to reduce any of its existing fees and indirect taxes.
As a purely practical matter, the Government will likely only be able to collect taxes from those companies that have a proper system in place with proper records etc.
Unfortunately for the financial services sector they will end up being the ones that are relied upon for the taxes actually collected. Many of the smaller more informal firms, such as smaller construction companies etc, will struggle to have systems in place and it will cost more to chase them than what is ultimately collected.
And therein lies the crux of one of the biggest challenges this new proposal will face: the financial services sector is full of persons who understand how to structure their affairs to minimize taxes in accordance with the law. Readers will recall now that this is essentially what they do for a living for their clients. How then do you imagine will the Cayman Islands government be able to effectively collect from a sector that will spend time and resources finding clever ways to minimise their taxes legally?
There are a host of other issues, such as the infrastructure needed to manage this new tax, but these are not mentioned here for brevity. Nonetheless, with the current state of the economy and the political sentiments against the current government, they could not have chosen a worse time to make such a terrible decision.
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