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Indebted Caribbean tax havens look to tax foreign investors

Industry analysts say new fees and taxes could bring in needed money to a region where some debts are near that of Greece. But could they scare off investors?

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'The need to raise revenue'

In the BVI, Mr. Smith proposed an increase in trade license fees, which businesses are required to purchase to operate there, and to base work permit fees on salary levels, meaning higher-paid workers, many coming from large companies with multimillion dollar payrolls, would pay more. His counterpart in the Cayman Islands has proposed an increase in registration fees for hedge funds. And in the Bahamas, the government is considering a sales or value added tax as well as a broad-based corporate tax for the first time.

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“This is coming from the same pressure that is affecting other governments around the world: the need to raise revenue,” says Bruce Zagaris, a Washington-based lawyer who has advised Caribbean governments on tax matters. “Small countries, like those in the Caribbean, are more limited in the ability to raise revenue. In many, such as the Bahamas and Cayman Islands, there is no income tax.”

Places like St. Kitts & Nevis and Barbados are among the world’s most indebted governments, with debt-to-gross domestic product ratios of 151 percent and 118 percent, respectively, according to International Monetary Fund (IMF) data. Much-maligned Greece’s debt is only slightly higher at 161 percent, according to the European commission.  

Raising taxes is never easy or popular. But taxes are generally so low or nonexistent in the Caribbean that raising them comes only in dire straits.

“In the Bahamas, we’re approaching a debt ratio of 50 percent, which is not as high as some other places in the Caribbean, but it’s too high for us,” says a high-ranking member of the Bahamas Ministry of Finance whose name was withheld because he is not authorized to speak on the record. “So we have to increase the level of tax we collect to balance it out.”

The government is considering a broad-based consumption tax on goods and services, which would directly impact locals. A corporate tax, which would impact the tens of thousands of international companies registered there, is less likely, but it is “on the table,” he says.  “The IMF has always indicated to us that a broad-based corporate tax would be a remedy.”

But there is little fear that such a tax would chase away corporations.

“These amounts are so small compared to the level of money that is being made and invested,” says Andrew Schneider, president and chief executive of Global Hedge Fund Advisors, which has helped numerous hedge funds establish in the Caribbean.

Assets in the Cayman Islands total more than $1.6 trillion, while the proposed registration fees would total less than $3 million.

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