By Cameron Lee From The Market Mogul

The Cayman Islands are somewhat a tourism paradise. There are crystal blue waters and golden beaches, but the fate of the economy is often overlooked. For years the country has been sustaining itself on the financial services industry, but with the impending issue of tax avoidance in global media, could we soon see this paradise turn into hell.

The economic facts

The truth is that while everything looks good on the outside, there is an alarm clock waiting to go off, and unfortunately it could soon be time to wake up. For the past 50 years the economy has grown tremendously, in fact for an island 15% the size of London, there are some pretty impressive macroeconomic results: GDP at $3.08bn and revenues of $423m to name a few. The country also has the 14th highest GDP per capita, and the Cayman Islands Dollar is pegged to the USD, supporting further stability.

Over-reliance on the financial services industry

Underlying the whole country however is tax avoidance, and the multinationals that tread their revenue through the islands. The figures are astounding, 55% of the national GDP is attributable to the financial services industry, 40% of all government revenue and over 36% of all employment.

With international public backlash over companies avoiding tax, these islands are becoming a less attractive place to do business. It is illogical to continue tax heavens in these places, if there is a net loss, due to the negative media perception. Such to this effect, businesses have attempted to shed light on their avoidance tactics, in a way to promote the ethicality of their behavior. To their detriment however, the most ethical solution appears to get rid of these shell subsidiaries completely. With UK corporation tax rates now set the lowest of the G20; once highly taxed jurisdictions are becoming increasingly appealing.

Economic consequences

From the view of banks, the Cayman Islands will provide no tangible benefit for them if the issues highlighted above were to happen. Therefore the withdrawal of such banks appears likely, and the closure of such institutions would be a catalyst for a much more severe economic meltdown. With the islands historically and still a British territory, it may be the UK government picking up the bill to repair the fallen economy.

How likely is this to happen?

The likelihood of the above happening may not appear an issue today, but poses a possibility in the next 5-10 years. With international tax avoidance on most countries agendas, the conversation of prohibiting the use of tax heavens is a definite reality. The outcome of the discussion is one I’m not certain of, but with increasing public pressure one can see a large amount of volatility occurring in these tax heavens. If one bank decides to leave, then a domino effect may occur, and the economic hell of the Cayman Islands will be unleashed.

For more on this story go to: http://themarketmogul.com/cayman-islands-tourism-paradise-economic-hell/

IMAGE: www.grand-cayman-wanderer.com