Nestling in the captivating Caribbean Sea, south of Cuba and west of Jamaica, stretches a tiny speck of land mass, merely 76 square miles in area and roughly 22 miles long. But this piece of land, an island, is truly special. It is perceived by many as Paradise on earth. This paradise of course, includes two even more tinier islands nearby, of 15 and 10 square miles each, and together they constitute the nation of Cayman Islands comprising of the Grand Cayman, Cayman Brac and Little Cayman.
The Place
Cayman is incredibly beautiful.
Sitting on the pinnacles of a submerged mountain arising from Cayman Trench, one of the deepest parts of sea (around 25,000 feet) anywhere on earth, they are the uplifted fault-blocks having been pushed up millions of years ago, by the friction between the North American and Caribbean plates. Only the peaks of these submerged mountains are exposed and visible. Since last over 30 million years, nature has been assiduously creating this paradise by putting together and synthesizing corals, algae, shells, other living organisms and forming a crust of carbonates surrounded by green shallows and sounds; and lower down by the fathomless depths of light and dark greens and blues.
Cayman offers all that one can hope to see and experience in paradise. A climate that remains pleasant throughout the year never going below 72 degree F and rarely exceeding 88 degree F, a beach of soft silver sparkling sand surrounded by the most spectacular sea whose changing hues, emerald green to turquoise blue, from sparkling crimson to sombre grey, an azure blue sky with fluffy floating clouds, the feast to eyes is endless and un-exhausting. And the comfort offered is exceptional. Picture post card houses in idyllic verdant setting and a food that never fails to whet your appetite. Indeed, a paradise in all respects.
A Heaven
But the reason why it attracts so many and from all parts of the world, most of all rich and beautiful, mighty and resourceful, men and women of abundant and expensive habits who the island never ceases to indulge and pamper, is that they live a life unwatched and uncensored on a money that they seem to be in a hurry to spend.
Because in addition to being a paradise in physical and material terms, it is also a heaven, a tax-haven indeed. Cayman Islands has no income tax, no corporate tax, no estate or inheritance tax, and no gift tax or capital gains tax. making it a pure tax haven. It is one of the five largest offshore financial centers worldwide, and perhaps the most favoured, providing services such as offshore banking, offshore trusts, and the incorporation of offshore companies.
Instead of taxes, offshore corporations pay an annual licensing fee directly to the government.
This fee is based on the amount of authorized share capital the company has.
Privacy laws are paramount. The Caymans make it easy for individuals and business owners to shield their assets and identities from prying eyes, in other words from the tax authorities of the host countries. Strict laws protect banking privacy.
The other advantages include no requirement to submit financial reports to any Caymans government authority and no exchange controls in the Caymans restricting money transfers in any way. Offshore businesses are not required to pay stamp duty on asset transfers.
Incorporation in the Caymans is a very simple, streamlined process. Locals reveal that there is one address on this Island that is the registered office of over 1000 shell corporations, and several others where scores of such companies are registered.
How They Earn Revenue?
The revenue of the island is raised entirely through indirect taxes, most of it import duties. Practically nothing grows here and therefore every consumable commodity is imported from outside affording hefty revenues. The main industries are financial services, tourism, and real estate sales and development.
Finance and Tourism are commonly referred to as the two pillars of the Cayman Islands economy. Tourism, which the local government will like us to believe as its biggest source of revenue. is usually of the expensive and high-end variety, fetching revenues of great magnitude.
The other major sources of government revenue come from the work-permit fees from the huge expatriate workforce, apart from the transaction fees paid by those active in the financial services sector, and the fees raised from tourists entering through the port on cruise ships or those staying in local hotels.
How Do Tax Havens Work?
Tax Havens provide offshore banking services to foreign individuals and businesses that allow them to avoid paying income taxes in their countries of residence. For example, a large corporation in India might establish an offshore subsidiary in the Cayman Islands and direct all sales through the subsidiary rather than through the parent company based in India.
The shell corporation earns the company’s profits and is subject to the tax laws of the Cayman Islands rather than India. Instead of being subject to the Indian corporate tax rate, which stands at 40% as of now, and a host of other taxes as well. The company’s profits are subject to corporate or income taxes apply in the Caymans, which do not exist. This also includes interest or dividends earned on investments, making the Caymans especially popular among hedge fund managers.
Genesis of Policy
There are not many countries in the world who can afford to have a tax free regime. There is a very interesting story, surely apocryphal in parts, behind this island becoming a tax free territory.
Legend has it that one stormy night in November 1788, the Cordelia, the lead ship of a convoy of ten merchant ships returning to Britain from Jamaica went aground off East End’s shallow reef. The Ships manifest confirmed she was carrying exotic coffee beans, sugar and barrels of rum when she ran off course during a turbulent storm, which left her marooned on the reef over 220 years ago.
The Cordelia gave off a signal to warn off the other ships in the convoy, but it was misunderstood as a call to follow closer and nine more ships sailed haplessly to their fate upon the reef. The seafaring people of East End are reported to have shown great valour and bravery in ensuring that no lives were lost and legend further states that one of the lives saved was one of royalty, although no one can corroborate this. In reward King George III is said to have granted the islands freedom from conscription, while many other claims that freedom from taxation was bestowed on the people of the islands as recognition of their great efforts.
Apocryphal or real, the legend has built up an aura around this island, that is getting stronger and brighter rendering it foolish to alter this fascinating and fanciful narrative.
Tax Haven to Paradise
This tax neutral environment has given rise to a hugely successful and significant offshore financial industry, which has made Cayman one of the wealthiest places in the world. With a Gross Domestic Product of 5.61 billion US$ that translates to US$85,350 per capita and a life expectancy of 82 years, Cayman is wealthier than most developed countries including the US, Canada, Hong Kong and the UK. It has in the past few decades developed a world class infrastructure and became a niche location for opulence, luxury and style.
A country of only about 70,000 people, many of them immigrants, politically very stable and still a British Overseas Territory, its excellent law and order as well as the strict protection of assets by local government, have all played their part in creating a place offering the finest quality of life. Countless individuals who come to invest in Cayman choose to make the islands their home as well.
While a school of economists strongly disapprove of state imposing any taxes, the arguments for a tax free regime are putatively sound but questionable in the larger context. The two most vocal arguments include the ethical propriety of the state to appropriate and extort from the legitimate earnings of citizens. The other argument is an articulation of the usual ‘laissez faire’ philosophy blaming taxes for stunting enterprise and initiative.
Notwithstanding, tax havens are still an extreme form of economic system viable, possible and successful only to a particular set of circumstances
The India Connection
How has this tax haven impacted India and so many of them is a fascinating tale. The mention of Cayman Island may not ring a bell to an average Indian but it is very well regarded by the rich and influential, particularly of the shady and unscrupulous varieties. Among its visitors are businessmen and middlemen, politicians, bureaucrats and professionals, mostly on private visits.
It is intriguing and complex and a challenge to the government in many ways.
But more about it in the next article.
scribo ad LX 