Associated Press

GEORGE TOWN — One among thousands of lawyers, accountants and other workers from around the globe, Paul Fordham is escaping cold weather and the taxman by working in a sunny British territory in the Caribbean. He and many others, however, worry they soon may be looking for another haven.

The Cayman Islands has lost some of its allure by proposing what amounts to the territory’s first ever income tax. And it would fall only on expatriate workers like Fordham who have helped build the territory into one of the most famous or, for some, notorious offshore banking centers that offer tax advantages for foreign investment operations.

“The discriminatory nature of the tax has stirred up so much uncertainty for people who moved here thinking they knew what they were getting into,” said Fordham, an insurance sector specialist from the London area who moved to the main island of Grand Cayman six and a half years ago. His recent attempt to sell his house collapsed because an interested buyer was spooked by the prospect of the British territory’s first direct tax.

In the seaside capital of George Town, where financial experts in casually elegant clothes unwind over beer or white wine, conversations have been about little else since July 25, when Premier McKeeva Bush declared his intention to impose a 10 percent income tax on expatriate workers as part of an effort to bail the government out of a financial hole.

Bush refuses to call it a tax, preferring instead to dub it a “community enhancement fee.” The 10 percent payroll levy, as things stand now, will be imposed Sept. 1 on expatriates who earn more than $36,000 a year.

It’s a monumental shift for the territory of 56,000 people where zero direct taxation, friendly regulations and the global money they lured in recent decades helped transform the economy of the island chain, a dependency of Jamaica until 1959, from a reliance on seafaring, fishing and rope-making.

Government data show 91,712 companies were registered as of March 2011. A total of 235 banks, including most of the world’s top 50 banks, held licenses at the end of June, as did 758 insurance companies. Assets for the registered companies totaled $1.607 trillion last September, down from $1.725 trillion a year earlier.

Bush says the tax is necessary to meet British government demands that the territory diversify its sources of revenue beyond the fees and duties it now relies on that have left his administration with a budget deficit.

“This is not an us-and-them story, no matter how many screaming headlines call this an expat tax,” Bush told a crowd of critics and supporters Aug. 1 during a four-hour meeting in a school gym where each side vented complaints against the other.

Opponents argue that a social contract may have been broken by targeting only the roughly 5,875 expatriates who are paid more than $36,000 a year, saying it could drive some away and hurt the financial services and tourism sectors that are now the pillars of the Caymans’ economy. Government reports say a majority of the wealthiest residents are Cayman citizens.

Numerous competing tax havens, from Jersey to the British Virgin Islands, impose income taxes on

workers but not on one sector of the population. Under a controversial “rollover” immigration policy, expatriates in the Cayman Islands already are required to leave the islands for a year after living and working locally for a period of seven years.

Richard Murphy, director of British-based policy consultants Tax Research LLP, thinks fears are overblown that a direct tax on expatriates will cause an exodus.

“The finance industry in Cayman exists to sell to foreigners and, like it or not, many are heavily invested in Cayman structures. They’ll bear the additional price,” Murphy said in an email.

But leading businessmen argue that indirect taxes such as work permit fees, stamp duty on real

estate deals and duties on imported goods already make the Caymans a relatively pricey place to do business. Work permit fees are typically five percent to 15 percent of salary and would remain along with the income tax, raising an expat worker’s tax costs to between 20 percent and 30 percent of salary.

Anthony Travers, chairman of the Cayman Islands Stock Exchange, described the tax plan as “probably the single greatest existential threat to the Cayman Islands in over 200 years.”

“The whole economic structure in the Cayman Islands has been based on having no direct taxation,” he said in a phone interview.

Many people complain that Bush’s proposal was made without public consultation and note that it came roughly three years after a government-commissioned report said a payroll tax combined with the work permit fees would make the Caymans less competitive in the market for skilled professionals.

And it’s not just finance types who are troubled. At a small beach in downtown George Town, local fishermen gutted glistening jacks and snappers debated the merits of the new tax. They agreed that overspending and excessive hiring by the government was behind the islands’ financial difficulties.

“The way I see it, this tax on expats is causing a division in this society and that’s not good. It’s too much spending by the government that got us here,” said fishing boat captain Dennis Downs, sitting next to a table displaying the morning catch.

Bush said he is looking for any feasible alternative for solving the government’s revenue problems and rumors are swirling that he may withdraw the tax proposal because of the heated reaction.

On Saturday, he told local TV station Cayman 27 that he was open to recasting the “community enhancement fee” on expats but only “if a solution can be found that does not affect ordinary Caymanians.”

Even if it is revoked, some believe damage has already been done.

“It has stirred up so much uncertainty,” said Fordham. “It’s hard to say if this place could ever be the same.”

Photo: McKeeva Bush