Fund Domiciles

Economy

The Cayman economy has been suffering from a fiscal crisis. It has a projected budget deficit of 12.5% (a deficit on spending of about $100 million with an annual budget of $800 million). There was a 2.3% decline in GDP in the fiscal year ending on June 30, 2009. The Cayman government is projecting that GDP will decline by 5.7% for the calendar year of 2009.

At one point in August this year the financial crisis reduced the Cayman government’s cash reserves to 63.4 days (and below the 90 day minimum specified by law). The UK government has sought a series of tax increases from the Cayman authorities in return for giving this domicile an immediate loan of CI$150 million (£39 million, $62 million). As well as demanding local tax increases the UK government has also insisted that the Cayman government reduce its spending. The UK has told the Cayman government that approval for the further CI$229m of borrowing, that has been requested, will depend on expenditure cuts and an independent assessment of the scope for direct taxation.

The Cayman economy has a high GDP per head and it is often referred to as the world’s fifth biggest banking centre. Approximately 80% of the world’s hedge funds are domiciled in Cayman.

There is no direct taxation (to date) in Cayman. But as a result of Cayman’s current fiscal crisis and outside pressure from the UK, that could well change. However at the moment there is no income, corporate, capital gains or property taxes – even though the tax base in Cayman is higher than in the US, as a proportion of overall GDP. (As a result of the current fiscal regime there are approximately 80,000 companies registered in Cayman – easily exceeding this jurisdiction’s population of 52,000.) Until the present crisis Cayman had relied upon indirect taxes such as custom and stamp duties for the bulk of its revenue.

In October Cayman's financial secretary, Kenneth Jefferson, announced a number of tax increases intended to raise an addition CI$94.9 million during the current fiscal year that runs to June 20, 2010. Most of the revenue is expected to come from increases in fee charges to companies.

Taxes on Cayman domiciled funds are likely to be increased. McKeeva Bush, leader of the Cayman government, has described the $3,000 fee levied on Cayman domiciled funds as “ridiculously low.” The Cayman government is forecasting a decline in Cayman registered funds for the year 2009 of 10%. The current total is 9,825 (October 2009).

Governmental and political system

The government is run by the UDP (United Democratic Party) who won the election that took place on May 20 2009. The UDP leader is McKeeva Bush. The legislative assembly has 18 seats (15 of which are based upon election results and 3 appointed). At the election the UDP won 9 seats and the PPM won 5. (PPM is the People's Progressive Movement, led by Kurt Tibbetts.) The judiciary is independent of the government.

Cayman is now on the G20’s “white list” (having originally been placed on its “grey list” in April 2009) as a result of the fact that it now has tax information accords with 12 OECD countries.

Up to present this jurisdiction has been highly stable but some fear that the current financial crisis could create some political friction, particularly if there is a requirement to raise taxes substantially. The Cayman Islands had no officially recognized political parties until the 1980s. Elections for the twelve elective seats in the Legislative Assembly were contested by teams of candidates, as well as by independents. These teams showed no differences in policy or ideology.

The British government has its hands full in the Caribbean sorting out problems in Turks & Caicos and Antigua. (Turks & Caicos is being taken over by UK statutory instrument and Antigua is still suffering fall out from the collapse of Alan Stanford’s financial empire.) It is therefore expected to want to intervene in Cayman’s affairs.

Nonetheless UK government minister Chris Bryant said recently that it would be unwise “to expect that the Cayman Islands’ prosperity can presume on an offshore tax haven status”. And the UK Government’s City minister, Lord Myners, has said that low taxation is not a sustainable economic model for offshore centres. “In the same way as we are having to wean the farmers of Afghanistan off the poppy and the farmers of Colombia off coca, we have to wean offshore financial centres off tax if that is the only source of competitive advantage that they offer.”

Population (approx)

46,000

Stability and infrastructure

Cayman has a well developed financial infrastructure for the Caribbean and has been economically and politically highly stable. On top of which fund registrations in Cayman continue at present to be strong and this domicile is popular with investors around the world, particularly those in Asia. Cayman is likely to remain the dominant jurisdiction for hedge fund registration for some time to come.

Threats to this domicile

There is a concern that Cayman’s fiscal crisis has occurred at just the wrong time for this domicile. One of the consequences of the crisis is that the fees levied on Cayman funds are likely to be increased. This could erode Cayman’s cost advantage and could be happening when some fund managers were already looking to redomicile their funds to other jurisdictions (often to those in the EU). If Cayman’s cost advantage is eroded it could make redomiciliation likelier to occur.

The European Union’s AIFM Directive, the second draft of which is expected to be published this autumn, could also be a threat to Cayman. But even if AIFM does turn out to be negative for offshore centres this does not mean that fund managers will leave in significant numbers. Those wishing to distribute their products within the EU may well set up parallel funds, with an EU base, for this purpose. They will likely keep their Cayman funds for the rest of the world. More will be known about this after the next draft of the AIFM Directive is published.

During his election campaign (now) President Obama singled out Cayman, in particular, and the offshore centres, in general, for criticism for running tax avoidance schemes. He accused US corporations of using Cayman to avoid paying tax. Whilst President Obama’s criticism of offshore tax avoidance has nothing to do with Cayman’s funds industry it appears to have had some impact on the overall political climate (with calls to “clamp down on the offshore centres” by various politicians) and has indirectly led to the G20’s White, Grey and Black lists. (Cayman was “White listed” in August.) The changing political climate in the US and the UK, along with long standing criticism of offshore centres in continental European countries, is not helpful to Cayman – or to other offshore domiciles. How this changing and developing political narrative develops could be a threat to Cayman, and offshore funds industry as a whole.