Although the discussion in Cayman over direct taxation has been put on the back-burner after the Cayman government received permission from the UK Foreign and Commonwealth Office to borrow another CI$155 million to finance construction projects and budget shortfalls, it is still worth-while to analyse how governments of offshore financial centres generate revenue.
In the following excerpt of his paper “Squaring the circle – a response to the Miller Shaw report”, Steve McIntosh, the CEO of offshore recruitment firm CML, compares work permit fees in Cayman to payroll tax in Bermuda.
Cayman work permit fees vs. Bermuda payroll tax
Whenever payroll tax has been mooted, I have always presumed that the new proposal is a payroll tax on employees. We already have a de facto payroll tax on employers: work permit fees. Therefore, any discussion of payroll tax on employers is largely moot. Not only do we already have one, it has been raised repeatedly in recent years to the point that many financial services firms have expanded in competing jurisdictions at the expense of the Cayman Islands.
Consider the difference between Cayman Islands “work permit fees” in the Cayman Islands and Bermuda payroll taxes illustrated in Table A below.
Bermuda payroll taxes are between 11.75 and 16 per cent2 of payroll depending on the size of the employer’s payroll, with employees paying up to 5.75 per cent of their salary towards the levy3. This leaves employers with a net rate of between 6 and 10.25 per cent of payroll depending on size. The administrative fee for processing work permits in Bermuda is a flat charge of US$700 per annum for all employees regardless of job title or salary.
As Table A illustrates, work permit fees in the Cayman Islands are already far in excess of comparable payroll tax rates in Bermuda. The Cayman Islands work permit fee for a financial controller earning US$65,000 is up to 4 times the equivalent payroll tax levy in Bermuda. The fee for audit seniors, probably the predominant job title in the Cayman Islands financial industry, is between two and four times the equivalent payroll tax levy in Bermuda. And that excludes an additional trade and business license fee of CI$1,000 per professional member of staff paid by local audit firms (among others) and an additional charge of up to CI$400,000 based on headcount.
The table also illustrates the arbitrary and regressive nature of Cayman Islands work permit fees, the rates of which vary wildly between job titles and companies, and take no account of the size or profitability of the employer, or of the employees’ value to the company.
This analysis doesn’t even speak to any of the following additional immigration costs incurred here in Cayman by comparison to the Bermuda payroll tax system:
Work permit fees cannot be refunded in pro rata to the length of employment. If an employee leaves seven months into a permit the employer still pays the full annual cost.
No reduction in permit fee is provided for part-time staff, prejudicing smaller companies who are more likely to have part-time staffing requirements.
Changes in job title are charged at 50% of the work permit for the new job title, no matter at what point in the permit year the change takes place. So if a firm promoted someone from say, senior accountant (salary of say CI$61,500) to manager (say CI$73,800) half way through a work permit year, they would pay the permit fee for senior accountant (CI$12,500) plus half the manager fee ($7,750) a total of CI$20,750 or 30% of the salary, up to four times the comparable cost in Bermuda.
Key employee designations are charged at the full annual work permit fee rate on top of the CI$500 “application fee”. Following on from the above example, if the company successfully applied for the individual to be key at the same time as promoting him or her, they would have paid a total of CI$35,750 in fees in a single year, 53% of the salary.
If the person then immediately resigned, the company would receive no refund whatsoever.
Comparison of Cayman Work Permit Fees and Bermuda Payroll Tax
- Albeit one that is not paid in respect of Caymanians.
- Per the Bermuda Government Tax website: http://www.taxbermuda.gov.bm/guide.htm
- It is worth noting these rates are based on increases proposed last year becoming effective in February 2010. The previous top rate was 14%, with employee contributions capped at 4.75%. Evidence of the tendency of taxes to “creep”? Yes, although the previous rates held sway for more than 15 years and were only changed as a result of global recession. I will return to this point in due course.