In recent weeks Cayman has received a lot of adverse coverage in
some sections of the international media as reports of its domestic
budgetary difficulties have been relayed by journalists and
commentators with anti- Offshore Financial Centres agendas. In
short, Cayman's financial position is sound and its business
model as a tax neutral structuring and administration centre is not
being revised. International clients can be assured that the
integrity of the structures they have established in Cayman is
completely unaffected by Cayman's domestic fiscal issues. A
brief summary of the background and facts is set out below.
Cayman is an overseas territory of the United Kingdom (UK) and
as a result is subject to oversight from the UK on certain domestic
matters. This oversight provides Cayman, in certain circumstances,
with the benefit of additional security of its budgetary affairs.
Under the Public Management and Finance Law, Cayman is
conditionally required to meet certain key criteria relating to its
debt to asset ratio, debt service ratio and reserves to cover
operating costs. These criteria have been established to safeguard
the fiscal prudence upon which Cayman's public finances are
managed. If any of these criteria are not met or if the relevant
ratios are exceeded, then the Cayman Government requires the
consent of the UK Government to undertake any new borrowing.
Currently Cayman's debt as a percentage of GDP is 24%. This
compares very favourably to many leading G7 economies, such as the
UK, France and the USA where the relevant debt to GDP percentages
are respectively, 55.5%, 73.9% and 90%.
The global economic recession has impacted the Cayman
Government's revenues as the number of new funds, finance and
corporate vehicles established over the last year has reduced
significantly from the very high volumes of recent years. Tourism
and real estate spending in Cayman has also reduced during this
period. This contraction in revenue flows has coincided with
significant funding obligations incurred as a result of a number of
local infrastructure projects initiated by the previous elected
government. As a result the Cayman Government suffered a short term
cash flow problem which it sought to rectify by obtaining private
sector borrowing. In accordance with the Public Management and
Finance Law, permission for this borrowing was requested from the
UK Government. At this point economic considerations were
complicated by political issues, as the UK Government suggested
that Cayman broaden its revenue base by imposing a traditional
direct tax system. After some negotiation (and a lot of misleading
media reports and commentaries concerning direct taxes and
Cayman's financial position - the term "bankrupt" was
inaccurately and pejoratively used by some) the UK Government
consented to Cayman's reduced borrowing request. Since its
election in May 2009, the new Cayman Government has initiated some
significant cost cutting and inward investment projects. The new
Government has proposed a budget which will bring Cayman back
within the debt ratios and operating reserve criteria mandated by
the Public Management and Finance Law. The revenue raising measures
in the budget are fee and consumption taxes. Furthermore, Cayman
has undertaken to conduct a study over the next 18 months to
consider whether or not to broaden its domestic tax base by
imposing a property tax and a payroll tax on local residents. Such
measures (if introduced) would only affect local residents. It is
worth noting that Bermuda, BVI and the Bahamas all have one or both
of these measures in place.
In conclusion, Cayman has been affected by the global recession,
and like many larger economies, it has needed to cut back its
spending and increase its revenue. Fortunately, unlike many of the
larger economies, Cayman has constitutional impediments which
prevent it from incurring unsustainable levels of national debt.
The oversight from the UK Government has provided a safety check to
ensure that Cayman's fiscal prudence remains intact. As a
result, and contrary to the impression created by some media
coverage, Cayman has retained its AAA rating with Moody's. The
domestic economy is stable and the outlook for international
business structured in Cayman remains very positive.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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