Why do the Cayman Islands allow themselves to be a tax haven? What benefits do they actually get?

While tax havens like the Cayman Islands don't collect significant direct taxes, they benefit enormously from their status in other ways. First, they collect substantial fees from company registrations, annual filings, and licensing. With over 100,000 companies registered, these fees add up to hundreds of millions of dollars annually. The Cayman Islands also charge for financial services licenses, which can cost tens of thousands per year for banks and investment funds. Second, there's a thriving financial services industry that employs locals and contributes to the economy. Law firms, accounting offices, corporate service providers, and banks all establish physical presence to service these entities. This creates high-paying jobs and supports the local economy. Third, these jurisdictions benefit from the prestige and connections that come with being a global financial center. This attracts wealthy visitors and professionals who spend money locally. The strategy actually makes economic sense for small jurisdictions. A 1% tax on global corporations might generate more revenue in theory, but would undermine their competitive advantage. The current approach delivers predictable revenue without administrative complexity.

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The real benefit for the Cayman Islands isn't just registration fees - it's the entire ecosystem they've built. Banking in the Caymans is a massive industry. They have around $1.5 trillion in banking assets and $1.8 trillion in securities. Those institutions need actual offices, actual employees, and support services. Plus, their tourism industry is intertwined with their financial status. Wealthy individuals who establish financial relationships there often visit, purchase property, and spend money in the local economy. Many conferences and financial events are hosted there too. The Caymans could implement small taxes, but the competition between tax havens is fierce. If they added even a 5% corporate tax, businesses would flee to other jurisdictions like the British Virgin Islands, Bermuda, or newer players. It's essentially a prisoners' dilemma - they'd all benefit from coordinated tax increases, but whoever maintains lower rates wins the business.

I researched this topic for a economics paper last year. One thing often overlooked is that the Cayman Islands collects significant indirect revenue through their work permit system. Foreign financial professionals working there pay hefty fees (sometimes $20k+ annually) for the right to work. Also, the Caymans have a 0% income tax for everyone - not just corporations or wealthy foreigners. This benefits local residents too, who enjoy no personal income tax. The government funds itself through import duties (which generate around 30% of government revenue), tourist taxes, and the various financial sector fees others have mentioned. Another factor: reputation matters. If they suddenly implemented taxes after decades of being a tax-free jurisdiction, it would seriously damage their credibility in the financial world. The damage to their reputation would likely far outweigh any short-term tax revenue gains.