Income Tax

The Foreign Office is reportedly demanding that Cayman Islands and Anguilla impose

income tax on its citizens in return for permission to increase borrowing to meet October’s public service salaries.  I was interested when a correspondent sent me a link to a recent Guardian Newspaper article by Nick Mathiason.  He reports that the income tax stand-off is the main stumbling block in the way of both island-countries being granted permission to borrow.  And, borrow they must if public service salaries are to be paid in October.  The Treasury coffers are empty.  In the case of Cayman Islands, public school-building projects are already being shut down for lack of payment for work done.  Anguilla cannot be far behind in defaulting on obligations to contractors and other creditors. 

  

The British are apparently playing hard-ball and refusing permission to borrow unless income tax is introduced.  I say ‘apparently’ because our government has kept us completely in the dark as to the details of the negotiations with the FCO, and the reason for lack of any sign of progress to date.  We do not know what conditions the British have laid down to agree to more borrowing by the Government of Anguilla.

I well recall that in the year 1978 the GoA was studying options for increasing employment opportunities and revenue streams.  The then Chief Minister set up a small committee to consider the international financial services industry.  The committee strongly recommended that government should support the development of the industry. 

Government was also at the time studying the option of income tax.  That option was rejected.  Instead, that same year, the Income Tax Act which had lain dormant since the Anguilla Revolution of 1967 was amended by an Act of the House of Assembly to permanently suspend the collection of income tax in Anguilla.  I seem to recall that the Income Tax Act was subsequently repealed, though don’t quote me on that.

The economics were simple to work out.  With a population of some 6,000 persons, there were at that time probably a total of 1,000 employees on the island.  Most of them were government public servants.  It did not make sense to set up a government Income Tax Department to collect income taxes from mainly government workers.  That would be like taking money from one pocket to put it in another.

Government at that time made a deliberate decision instead to impose indirect taxes as a low-cost method of raising revenue, rather than go for the expensive and unwieldy mechanisms that would be required to police and collect taxes on income. 

Now, thirty-plus years later, a great deal has changed.  In particular, we probably now have a population of 12,000 souls, at least 2,000 of whom are employees receiving a pay-cheque from both government and private employers.  There are probably another 1,000 self-employed accountants, building contractors, carpenters, fishermen, lawyers, and shopkeepers.  

No one at present pays one penny in direct taxation.  Anguillians instead pay a host of duties, licences and fees on such a wide range of goods that Anguilla is one of the most expensive places in the West Indies to live in.  All we are missing is a tax on services.

Has the conclusion made in 1978 about the cost/benefit ratio changed in any significant degree? 

In other words, would government receive any real revenue if it were to impose an income tax on Anguillian employees? 

Would our Inland Revenue Department be able to impose and police an effective income tax on self-employed persons without a massive investment in new personnel and equipment? 

What would be the likely impact on Anguilla’s already fragile economy as residents begin to take both avoidance and evasion measures?

What would be the political fall-out when Anguillians wake up to find that all the major players in the local economy have been granted 20-year income tax holidays, while the common man is caught in the tax net?

I don’t suppose the British could care less. But, our politicians certainly do.

This time they are right to resist British pressure, even if for the wrong reasons.  It would help us all to be more confident if they would release the appropriate studies they must have had done on the ineffectiveness of introducing income tax.  They must have made such a presentation to the FCO in the last few months.  It would be the easiest thing to publish the data.  Why keep it all so secret?

They do not have the option of borrowing from the local banks without FCO permission.  The result of such an action would be an immediate falling away of public confidence in the integrity of the local banks, and a run on them that would make the run on Stanford’s bank in Antigua a couple of months ago look like a trickle.

Not that I am worried.  I rely on the Governor of the Eastern Caribbean Central Bank to speak firmly to the Chairman of the Caribbean Commercial Bank and the General Manager of the National Bank of Anguilla.  I rely also on the external auditors of all three to speak even more firmly to each of them.  Then, there are the two Boards of Directors.  There must be someone with backbone and integrity among all those prominent entities.

Related Posts:

Green Light

Approvals

Borrowing