Cayman Islands proposes income tax on foreign workers

GEORGE TOWN, Cayman Islands (Reuters) - Known as a tax haven for the mega rich around the world, the Cayman Islands is proposing the unthinkable: a direct tax on expatriates to help fix the budget woes of the British territory.

The proposal - called a "community enhancement fee" and unprecedented in the island's history - is effectively a 10 percent payroll tax on all foreign workers earning income over US$24,000 in the Cayman Islands.

Blaming the previous administration and Britain's hard line on the island's budget for the current financial problems, the premier said the measure was the least onerous approach with the Cayman Islands already one month into a new fiscal year.

"This is a tremendous step away from the normal government budget, but (London) has the upper hand," Cayman Islands Premier McKeeva Bush said.

Barely two years ago, in the face of pressure from Britain to increase the territory's revenue, Bush stated "our position is, and will continue to consistently be, that we do not believe that direct taxes are good for this country."

While foreign workers make up about 50 percent of the labor force, there are plenty of loopholes that would exclude the majority of the top earners in the county as well as civil servants, leaving the bulk of the payroll tax burden to middle- class income workers in the private sector.

The 10 percent tax proposal has shaken up the business community in the Cayman Islands, with some calling for a public protest against "taxation without representation" on Monday.

The territory, a beach-lined group of islands south of Cuba, is home to most of the world's hedge funds and has long relied on the "no direct taxation" model as a cornerstone of its lucrative financial industry.

Experts say the amount of extra revenue the new payroll tax would bring in would not be enough to overcome the government's growing deficit problems and could drive international firms to move operations out of the territory to other competitive jurisdictions with lower business costs.

Two years ago, a government-appointed commission studied the direct tax and noted the international financial sector could easily move their operations to competing jurisdictions.

Representatives from the Cayman Finance Association said the government has not done enough to rein in government spending to justify a measure such as a payroll tax.

The British Virgin Islands, Bermuda, Ireland and Canada were actively enticing firms to relocate from the Cayman Islands, the report said.

(Editing by David Adams; Editing by Paul Simao)