Sunday 6 September 2009

Tax Havens – Another One Bust – The Cayman Islands

Tax Havens – Another One Bust – The Cayman Islands

With the media and our political leaders fixed on the election campaign, the continuing jostling for position over spending, and looking for good smears of one kind or another, out there in the real world things are becoming out of control. The G20 has held another feast day to little purpose, and the worlds financial experts have had a nice photograph taken after dinner but not much else. In the meantime there is a story that China may let some of its weaker hedge funds default. The question is who would the Chinese prefer to suffer the most? Just as worrying, another tax haven in real trouble with unknown and potentially dangerous consequences is the Cayman Islands.

Guess who could be holding the bag in both cases? Yes, the British taxpayer could be called to the rescue yet again. Perhaps I should change the comment on all this from “Bloggo ergo sum” to “Ad nauseam”, it would be appropriate in more ways than one. It is argued if there is a major crash in this jurisdiction it will be a major event on the scale of those in 2008 that nearly triggered a catastrophic failure in the world’s monetary systems. Because these tax havens are secrecy jurisdictions there is no means of knowing beforehand who will be affected, to what extent, and with what collateral damage.

On Friday 1 May in “More Taxing Problems” relating to the UK taking over direct rule in the bankrupt Turks and Caicos Islands, I referred back to the Wednesday 25 March and an item on “A Taxing Problem” on The Bahamas, also where the government has difficulties, which was a revised version of my letter in the FT in February 2000. It suggested that dealing with the Tax Havens might not be a simple business if things went wrong. Yes, the date is right, 2000 it was.

If the governments of Tax Havens which are either UK controlled or Commonwealth members as former colonies collapse because they cannot fund themselves, then who is going to bail them out? There is serious, because whilst the ordinary people will need all the help they can get, just to hand over funds without major structural tax reforms entails giving huge indirect financial support to mega rich celebrities, show biz people, billionaire financiers, sundry Ponzi scheme operators, the Granny Basher property dealers, and of course all those lovely people engaged in free market medication, or rather the narcotics drug trades.
None of this makes comfortable reading. Most “Havens” have rich mobile elites owning property in fortified and heavily guarded settlements serviced by cheap migrant labour and luxury commodities supplied from abroad. The majority of the ordinary people live in real poverty, and also lose out because much of the tax base is regressive sales taxes and other charges. It could become highly unstable.

The Cayman Islands implications spill over into Jamaica, The Bahamas into Haiti, and others into places with their own problems. In Antigua, as we know, all those Texan cricket fans are in real trouble, as in gaol. Has anybody seen Bernie lately?
Richard Murphy of the Tax Research Blog has posted on the Cayman Islands issue setting out the problems bluntly and in full:

“No, you didn’t read that incorrectly. Cayman is insolvent, bust, broke, unable to pay its debts. This is not a rumour, this is fact. This fact is confirmed by the speaking notes used by the Hon. McKeeva Bush for a meeting held with senior Cayman civil servants, government boards and private sector business leaders last Thursday (27 Aug).

So desperate is the current crisis that the Caymans turned to the UK to cover September’s deficit, and have been politely told they may not borrow the necessary funds to pay wages and other commitments in that month.

That means just one thing: Cayman is insolvent. It cannot pay its debts. The UK has refused to let Cayman borrow because it does not believe it will cut government spending and it has seen no commitment by Cayman to raise taxes. And the UK makes it clear in no uncertain terms that is exactly what it thinks Cayman should do.
Look at what he (Chris Bryant) is saying:

1. The US is fragile;
2. The hedge fund business is fragile;
3. The G20 will have an impact;
4. The Foot Commission will have an impact;
5. Trust fund income will fall;
6. Cayman cannot assume it will keep tax haven status;
6. Taxes must be imposed.

It’s hard to see how much more could have been said to make clear that Cayman’s business model is dead. This is extraordinary. Bear in mind Cayman has the thirteenth highest GDP per head in the world, and the highest in the Caribbean. It has more multinational corporation subsidiaries than any other tax haven. It has more banks than any other tax secrecy jurisdiction, and more hedge funds too. And it is bust.

So what are they proposing to do? Unbelievably all proposed taxes are on ordinary people in Cayman:

Imposing taxes on money transfers from foreign workers in Cayman, – Jamaicans being the biggest group;
Introducing property taxes;
Revision to various miscellaneous fees, some of which have remained unchanged for decades;
Increasing customs duties;
Increasing alcohol and tobacco duties;
Increasing gasoline tax;
Legislate the requirement for money in dormant bank accounts to be turned over to the Government; and the
Introduction of a national lottery

That is grossly unfair on the poor in Cayman (the very people the UK says should be protected), shows no real broadening of the tax base but does, most of all, look like rearranging the deck chairs as the ship is sinking. Which is extraordinary by itself in two ways. First, for a place supposedly so clever this is a remarkably poor list of initiatives, and second it does of course say yet again that the vested interest of wealth is being protected.

The odd thing is that is not possible in this situation. If Cayman really is insolvent, and that seems likely, then it is very clear that law and order may fail, property rights may not be protected, and so on. Wealth, in other words, is under real threat and such is the size of Cayman activity I doubt much of it can get out in a hurry without causing massive instability.

So this really is a crisis at the heart of the whole tax haven / secrecy jurisdiction system. The totem of the offshore location is seeing its business model fail, and with it the whole edifice of offshore – including the whole hedge fund edifice that claims to be built around this small island, could fall with it.

This could be a Lehman scale failure. And all for the sake of a few dollars. But a few dollars none the less the UK will not let them have.

Watch this unfold: if London sticks to its guns (and it should) then Cayman is over as a tax haven – as they themselves predict. The fall out will be enormous. The whole hidden economy could fall apart with it – and do not think that will not have onshore ramifications, because it will.

This is what Richard says, so what else is there?

From The Nassau Guardian (29th April 2009)
Prime Minister Hubert Ingraham said the revenue shortfall experienced this fiscal year is so drastic that collecting "every dollar" that it is owed to the government will not be enough to remedy the situation."The hard reality of revenue shortfalls is hitting this Caribbean tax haven hard, and it's having to borrow $200m from a consortium of banks:"If you are not making the money, how else do you recoup it? By taxing you more? How else [do we] do it other than taxing you more?"

Ingraham asked. "There are only (so many) ways to do it: Cut back on services, which means you cut back on people and the delivery of services; increase taxes; or borrow; or a combination of all three."

A contributor to the Tax Justice Network site added this:

"Wondering if some of those delinquent debtors to the Bahamian Treasury on their real property taxes include wealthy individuals who have bought their luxurious behind-locked-gates residences to acquire economic residency, in order to avoid paying taxes due to their original home state? Are there individuals double-dipping on the cheating? And what about the foreign owned banks and trust companies whose very existence there is to provide tax-cheat services? ... Do they have an obligation to pay taxes and are any delinquent?"
Let me see, a tax haven is a community centred on a very rich minority who more or less answer to nobody and pay little or no taxes to anybody anywhere. It is serviced by a dominating financial sector that uses expatriates and others. The local economy that supports this is largely a low wage sector many of which are recent migrants. The politicians are in their pockets and their families employed in the high pay end of the financial industry.

There is unending hype about what makes this a wonderful place to be, and how all those rich are making everybody happy. Does this remind you of anywhere? I’ll give you a clue; some of us call it Iceland On Thames. No wonder our government is passionate on recreating a large and corrupt financial sector in the City, they have a lot of favours to pay off.

Once again, The Big Question, who amongst our political masters have offshore Trusts and accounts in secrecy jurisdictions, and where are they? Watch out now for all those who will be urging help for the plutocrats in peril in tax havens, it might suggest who they are. There may be more to come.


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