Hedge Fund Havens Weigh Taxes as Caribbean’s Debt Rivals Greece
By Eric Sabo Bloomberg
From the Cayman Islands to the Bahamas, hedge fund havens are considering a surprising remedy for widening deficits — higher taxes.
The Bahamas is planning a town hall to debate a tax overhaul that may include the nation’s first income and sales tax. In the Cayman Islands, which has the highest number of hedge funds in the Caribbean, Premier McKeeva Bush vowed to increase registration fees for the industry after foreign workers balked at a tax on their earnings. Antigua & Barbuda is targeting self-employed workers for tax evasion, with the Finance Ministry calling it “high time” to go after cheats.
Hedge funds and other financial companies such as Bain Capital LLC, co-founded by U.S. presidential candidate Mitt Romney, have invested in the region to help themselves and their clients lower their taxes. Yet widening deficits and debt burdens that rival Greece are causing some Caribbean governments to reconsider the strategy they used to lure investors in the first place.
“They are in a Catch-22,” said Carl Ross, managing director of investments at Oppenheimer & Co. in Atlanta. “If they start raising taxes on expats and trying to extract more blood out of the stone, they make it much less attractive to go there.”
Many countries may not have a choice, said Therese Turner- Jones, deputy division chief of the Caribbean for the International Monetary Fund. At least five Caribbean island nations — including Jamaica, Antigua & Barbuda and St. Kitts & Nevis — have undergone debt restructurings since 2004. Grenada missed a Sept. 15 payment on $193 million of bonds before paying investors within a 30-day grace period.
“The debt dynamics are becoming quite serious for a number of these countries,” said Turner-Jones. “I don’t think anything is off the table in the current environment.”
Low savings rates relative to other emerging markets and a high reliance on external debt after the 2008 financial crisis have taken a “heavy toll” on the region, Standard & Poor’s said in a May 22 report. Economic growth in the region will reach 0.9 percent this year, up from a 0.1 percent contraction in 2011 yet less than the 3.2 percent forecast for Latin America and the Caribbean as a whole, the IMF said Oct. 12.
Cayman Islands Premier Bush withdrew his plan for a 10 percent income tax on foreign work permit holders in August after protests erupted on social networks, with opponents saying the move was discriminatory. Just over half of the 38,000 people working in the territory are foreigners and financial services account for 9.7 percent of jobs, according to the nation’s statistics agency.
In addition to serving as a base for hedge funds, the Caymans has also attracted companies such as Facebook Inc. and Medtronic Inc., which use subsidiaries based there to lower U.S. tax obligations.
“It went against everything the Caymans stand for,” said 27-year-old Casey Goff, a local who co-founded the group Caymans United to rally opposition to Bush’s so-called expat tax. “With all these major companies that are registered here, when you start taxing employees that allow that registration to be possible, why come to the Cayman Islands instead of Bermuda?”
The Cayman Islands was home to 10,979 funds as of Sept. 30, up from 9,258 in 2011, according to the country’s monetary authority. The government cites its “tax neutral” policies for fueling growth in the financial services sector. Bush, 57, is now seeking to raise registration and work permit fees to offset a fiscal deficit of about $17 million in the first quarter.
Peter Hughes, managing director of Apex Fund Services Ltd, said he staffs a small office in the Cayman Islands with local workers to avoid permit fees that cost 70 percent more than his headquarters in Bermuda.
“Cayman is a good place to do business, but it’s more expensive,” said Hughes, whose company manages $23 billion, in a phone interview from Hamilton, Bermuda. “When you’ve got to pay these big work permit fees it makes a massive difference to your cost of hiring.”
The Cayman Islands remains the preferred domicile for hedge funds because of its history of friendly regulation, helping prevent an exodus of money managers naturally averse to new taxes, said Richard Coles, the chairman of Cayman Finance, a trade group.
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