A commentator on this blog has written:
Having an interest in the KSF IOM affair, where we invested funds for overseas resident grandchildren (there was absolutely no alternative for a tax efficient ISA type investment for them onshore, at least that we could find), I am confused about this debate. I wonder therefore if you would be kind enough to comment on the following:
a) The EU Savings Tax Directive 2005 gave European havens the option of full annual declaration in the member state or the withholding tax option of non name disclosure and a 15% Withholding Tax rising to 20% in July 2008 and 35% in July 2011. As the Isle of Man went for the Withholding tax option does this not mean that there is a gradual increasing disincentive for EU residents (including returning residents) to follow the withholding route and make full declaration in their member state? This would be particularly so if for example the 35% rate meant that in total they paid more tax than they otherwise would in their state of residence due to available offsets.
b) I would like to know what happens to the withholding tax that IOM retain. One source I found seemed to indicate that these funds were remitted to UK, for UK citizens. Can this be right?
c) For UK citizens resident overseas outside the EU, either working or retired, who choose to remain overseas for retirement lets say, are entitled to access their funds plus rolled up gross interest for the purposes of living during retirement. Like a pension, but will be subject to taxation in their country of residence on the earned rolled up interest part of the funds that they bring in the year the funds are brought in? This situation might apply for example if they needed savings to build a house. Is this effective delay of tax correct and legal?
d) For UK citizens resident overseas outside the EU who return to retire inside the EU would not the same situation as c) above apply? We should bear in mind that apart from the UK some EU member states (I am not sure how many) have the ability to access your bank account so there is no opportunity for non-disclosure. If this is right avoidance is impossible.
If all this is true (perhaps it is not) apart from tax timing benefits, where is the big tax avoidance for UK citizens - unless one actually resides in a haven?
And one other issue I am curious about. You refer to "undermining" the UK. But I have always wondered where those offshore deposits go in terms of the loan book and other instruments. I have read that the offshore deposits in the IOM were £53bn at the end of last June, a huge amount of money. It is now emerging that much of KSFIOM's money was with the onshore company in various financial instruments as part of normal business. If KSFIOM's onshore/offshore assets ratio of 0.65 is applied to the rest of the IOM deposits in say corporate bonds, loans or whatever, we are talking about a lot of cash coming into the UK. Why is this then undermining the UK? Would there not be some funds there (non UK citizens) that would not normally reach the UK?
Your help in improving levels of understanding would be very beneficial to all. You must be in a much better position than most of us.
And because I have nothing else to do a day or so before Christmas I thought I'd comment here for a wider audience:
Preamble) You make a mistake in believing that an ISA is of relevance for children in the UK. In the vast majority of cases that will not be true. Children enjoy the benefit of a personal allowance in the UK. It is rare that the income they receive from an ISA will exceed the personal allowance limit. This may well be true in most locations where your grandchildren might be resident. If it is not, then an ISA would not have protected them from local tax liability, and nor will investment in the Isle of Man do so either if that place charges a person to tax upon their worldwide income, whether a child or not. It seems possible that you did not take appropriate advice in this respect.
a) Some European countries (Luxembourg, Austria and Belgium) refused to participate in the EU Savings Tax Directive. They did instead offer to apply a withholding tax to interest paid to all persons resident in another EU member state who received relevant income from an institution located in their country. Most of the U.K.'s dependencies and those of the Netherlands opted for the same alternative (but some did not e.g. Cayman, which does fully information exchange). The with holding tax option was far from ideal: put bluntly it facilitated the continuation of the tax evasion that the whole EU Savings Tax Directive is intended to eliminate. This is because the withholding option was introduced at a rate of 15%, is now at 20% and will in due course, admittedly, rise to 35%. However, in many cases this is insufficient to cancel the tax liability owing by the EU resident person who elects for this option. As such they continue to evade tax by its use, and there is absolutely no other reason at all why anyone should choose to use it. I make this point very bluntly and very clearly: the withholding tax option is a tax evader's charter. The tax deducted at source is not intended to, and does not in practice cancel the liability of the person receiving the income in their home state within the EU. It is merely a payment on account. There is never a reason why the tax deducted should be more than the liability that the person might pay in their home state: if it was they are always entitled to claim a refund of the difference. Many might not do so though and the reason is again entirely related to tax evasion: tax evasion is not just of the income located in and sourced from tax havens, the capital that gives rise to that income might also have been subject to tax evasion, and the source itself is therefore being disguised by the withholding option. None of these scenarios are attractive. In every case the states that participate in tax withholding are deliberately encouraging criminal behaviour.
b) 75% of the tax withheld in the Isle of Man and in the other participating states where this option is to used is sent to the EU state in which the person holding the account is normally resident. The remaining 25% is retained in the withholding state, supposedly to cover administration charges. This provides those states with a perverse incentive to continue supporting tax evasion. That is why this attention should be eliminated. It is, of course absolutely right that the payment is sent to the country where the EU resident account holder is normally resident. They are evading tax liabilities arising on their worldwide income in their place of normal residence by locating their funds in a territory where the tax withholding option is available and by then opting to use it. Since the only purpose for the EU Savings Tax Directive is to eliminate evasion it is entirely appropriate that most of the tax deducted is sent to the state that is suffering the taxation loss. Sending these funds to the state in which the account holder is normally resident does not, however, stop the taxation loss to that state. First of all 25% has been lost on the way. Secondly, it is quite possible that the amount withheld will not be equivalent to the total tax liability due in the state in which the person is resident.
c) Your question is somewhat confused, but you appear to ask whether a person who invests funds in a location such as the Isle of Man may do so legitimately if they are resident outside the EU and does not remit their funds to the country in which they are normally resident outside that territory. There is no single answer to this because it does depend entirely upon the taxation laws of the place in which they are resident, but in the vast majority of countries in the world a person who is tax resident is taxed upon their worldwide income arising during the course of a tax year whether or not that income is remitted to the country of residence or not. In other words, in most countries in the world it is illegal to not declare income earned during the course of a year arising in a tax haven. This is, rather curiously, particularly true of many of the world's tax havens. Guernsey, Jersey and the Isle of Man, for example, do tax their residents on a worldwide arising basis precisely so that they cannot use other tax havens to avoid their taxation liabilities arising in those islands. I hope the irony is not lost upon readers. It is, therefore, a fairly safe assumption to presume that leaving your funds rolling up gross in the Isle of Man or some other such location is likely to be illegal.
d) If a person becomes resident in the UK they are not (rare exceptions apart) usually liable to tax on income earned either prior to their arrival or during any period of absence - but I would stress that particular care needs to be taken, particularly with regards to capital gains tax, and do not rely upon this comment as anything other than a general observation. From the moment of arrival in the UK, and assuming that the person arriving is not non- domiciled (a criteria which can only apply in the UK and Ireland within the EU) then a liability to tax is likely to arise on a person's worldwide income. Therefore, any tax earned in the Isle of Man, whether subject to the withholding option or not, is liable to tax in the UK with tax-deducted at source being taken into account in calculating the liability. Refunds of tax deducted at source can be made.
You will notice as a consequence that tax avoidance may well be impossible if a person complies with the law. Unfortunately, places like the Isle of Man deliberately encourage people to not comply with the law, obtaining direct benefit from those who do not do so by reason of taking a share of the withholding tax. If they did not want to encourage this practice they could opt out of the withholding system. They do not, so it is safe to assume that their encouragement of tax evasion is deliberate, and seen as desirable by them. The process followed by the taxpayer however is a matter of tax evasion, not tax avoidance.
Tax evasion does undermine the UK economy.
So do places like the Isle of Man. They are used to promote tax competition: a process that seeks to force down tax rates in other countries to the detriment of their social welfare programs, to the harm of their health and education programmes, and to undermine the choices of their governments despite those governments having democratic mandates. If a direct attack on democracy is not harmful to the UK, what else is? Those organisations and firms (such as the international accounting conglomerates) who promote tax competition are, in my opinion a greater threat to the survival of democracy than many of the so-called rogue states that George Bush has turned his attention to. After all, without the ability to control taxation democracy is meaningless and yet these organisations, in cooperation with the secrecy jurisdictions, seek to deny that right to democratically elected governments.
That said, you are entirely right in one respect: financial flows from places like the Isle of Man have poured into London. The result was a massively overvalued sterling exchange rate, a housing price bubble, an over inflated role for the city of London, too large a financial services sector, and the economic crisis that has resulted is larger than any we have faced for more than 70 years. If that is of benefit please let me know what is harmful.
I hope this helps your understanding.