This week’s edition of ‘Mark Steel’s in Town’ on Radio 4 is well worth listening to. He was in Douglas, Isle of Man, and as he said in his opening comment:
“It is wonderful to be in a place with such a positive attitude, which even during a recession has the sense to invest in one of the few industries that is still booming - fiddling tax. “
All the rest is a footnote to that.
It’s interesting that the Isle of Man can find time to dedicate a six week trial to election fraud.
It’s a shame they can’t deal with the international tax haven fraud they openly encourage every day.
The Wall Street Journal has reported:
Standard & Poor’s Ratings Services lowered its long-term sovereign rating on the Isle of Man from triple-A, the firm’s highest rating, citing the British crown dependency’s external vulnerabilities and lack of monetary flexibility as credit weaknesses.
S&P lowered the Isle of Man’s local and foreign currency long-term sovereign ratings one notch to double-A plus, which denotes high credit quality, from triple-A, which denotes the highest credit quality. The outlook is stable.
So just as the Isle of Man is running into real trouble with a shortage of VAT, a shortage of offshore business as recession hits the world and as demand on its public finance increases so that borrowing becomes a real prospect for the first time S&P goes and downgrades it, spoiling their perpetual argument that they can always borrow their way out of their crisis (although that would require UK consent, a change in their law and decidedly gullible lenders).
Amusingly, the WSJ adds:
S&P noted the island’s ratings could come under pressure if its offshore financial sector loses business to competitors, without offsetting economic and fiscal adjustments. Isle of Man has a high income level, strong fiscal balance sheet and political stability, but the firm noted the island’s ratings are constrained by its undiversified small economy, which makes it more vulnerable to external shocks. The firm also said it expects GDP per capita growth to be lower over the next few years, in part due to lower growth in the U.K.
Or the VAT crisis has really hit home and tax haven business has little prospect for growth. I make no apologies for either if I’ve had any influence at all. And in conclusion they say:
However, the island’s ability to diversify its economy further away from financial-sector-related activities could potentially trigger an upgrade, S&P said.
Try Plan B, I say. I wrote it for Jersey, but you’re welcome to it. Looks like S&P are saying it’s time to look at it.
The reason why places like Jersey became tax havens was to raise tax revenue from third parties. The tax revenues raised were, in effect, export earnings that kept their economies afloat.
Deputy Geoff Southern in Jersey has tabled an amendment to the current Jersey budget that shatters the myth that this is still the case. As his amendment says:
Geoff is right to acknowledge there is a race to the bottom in Jersey, Guernsey and the Isle of Man. Promoted by the pinstripe infrastructure of lawyers, accountants and bankers through such coordinating bodies as the Society for Trust and Estate Practitioners (who have their single biggest branch in Jersey but who are active in all three locations) the pernicious influence of these groups has driven these three jurisdictions on a destructive path towards shattering their tax base by eliminating corporate taxes for their clients.
The result is all too apparent. The tax burden has shifted dramatically from businesses using Jersey as a tax haven to the local population who are now paying for the privilege of hosting the tax abuse industry whilst at the same time their economy is facing ruin as local politicians realise they have no idea how to plug the continuing deficits they face and are now suggesting plundering the rainy day fund – a sure sign they are on the slippery slope to running out of money, as I have long predicted.
Geoff Southern has in this case study provided the evidence of what I and the Tax Justice Network have long argued – that the ‘race to the bottom’ in corporate taxes is simply an excuse to shift the tax burden from those able to pay tax (let’s call them the 1%) on to those less able or unable to afford them (again, for simplicity, let’s call them the 99%).
This is happening everywhere but Jersey’s clearly leading the way.
This is what the Tax Justice Network is about.
This is what #occupy is about.
Beating this pernicious process is what re-engagement in democracy should be about for many who feel disenchanted by it.
And this is what beating the exploitative activities of the City of London – the most undemocratic local authority in the UK – has to be about.
The Isle of Man has been named as one of only eight countries around the world following best practice in exchanging tax information with other nations.
The recognition has come in a report on tax transparency from the Organisation for Economic Cooperation and Development, the global body overseeing standards of economic governance.
The study, delivered to the G20 yesterday (Friday), named the Isle of Man among a handful of jurisdictions with all elements of effective information exchange in place. The list also includes France, Italy, Japan and Norway.
It comes in the wake of another review by the Financial Stability Board for G20, which praised the Island for its international cooperation in tax affairs.
The report referred to is here. But there’s a problem for the Isle of Man. There’s no doubt it did well in this test on ability to information exchange. But as I’ve already noted in comments on this blog, it doing so is a bit like the student who got A* in the GCSE in making love but has yet to have a partner. Geting a good mark in theory and actually getting on with the reality are sometimes two very different things. The Isle of Man has to actually deliver now, and I’m not holding my breath.
Isle of Man Today is reporting:
COULD there be a fresh threat to the Isle of Man from Europe as finance ministers from the world’s leading economies prepare to a launch their latest assault on tax havens? The European Council has announced it wants real progress at next week’s G20 summit in Cannes on ‘combating the existence of tax havens’.This agenda item is shown completely separate from another that seeks progress on ‘identifying and publicly listing non-cooperative jurisdictions’.
And as they note, this looks ominous:
Island-based lawyer Jonathan Smalley believes this separation of the two issues is a major new development, and one which sheds a new light on the real thrust of EU policy.
He said: ‘If this is not a declaration of war, it sound very like it. It is likely that the EU and the G20 will interpret “tax havens” broadly. The term is likely to include low tax jurisdictions, offshore/international financial centres and the Isle of Man.’
‘It seems in the modern world that being a cooperative jurisdiction is not enough. We may have outmanoeuvred the EU on the zero/10 debate by abolishing the attribution system, so that the island can keep its zero per cent corporate tax rate. The EU have now changed the game. It is our existence – along with other small jurisdictions and part of the UK’s tax laws – that really concerns them and they intend to combat it.’
So you’ve realised ’smart moves’ with the EU aren’t enough? Well, welcome to the real world; the one where abuse is not appreciated and where it is realised that is all you are about.
I’m aware that the OECD is making soft noises - but as I’ll note later today, they’re now part of the problem on tax havens and it is clear the G20 is beginning to realise that the OECD toothless approach is no solution to the revenue loss EU and other countries are suffering to tax havens.
The Isle of Man is right to be worried.
And I welcome this lawyer’s frank admission that they’re a tax haven. A little honest self reflection might go a a long way in Douglas right now.
Some secrecy jurisdictions have got very upset with the Tax Justice Network about its new Financial Secrecy Index. Jersey, Luxembourg, Cayman and the UK are amongst those getting stroppy, but then they ranked highly. The universal reaction on their part? We got it wrong.
So now let’s note the reaction from a secrecy jurisdiction that saw its ranking improve quite a lot. That was the Isle of Man. Isle of Man today has said:
It’s been among the fiercest of critics of the Isle of Man as an offshore finance centre – branding us a ‘tax haven’ and ‘secrecy jurisdiction’.
But now even the Tax Justice Network has acknowledged the work the island has done in increasing financial transparency.
Tax Justice Network had produced its latest ‘Financial Secrecy Index’ which shows the Isle of Man well down the list at number 36 behind such mainstream onshore countries as Italy, Ireland, Canada, India, Austria, UK, Germany and the USA. Of our Crown Dependency rivals, Jersey comes in at seventh on the list and Guernsey at 21.
The previous Financial Secrecy index was published in 2009 when the Isle of Man was placed at 24th on the list with an ‘opacity score’ of 83.
This time the secrecy score has been reduced to 65.
Tax Justice Network adviser Richard Murphy, who was heavily involved in the construction of the index in 2009, said in his blog that the Isle of Man and Guernsey both got credit for increasing transparency.
So let’s get this clear: we get this right if you go down the ranking and we get it wrong if we go up.
I think the conclusion is obvious: of course we get this right. It’s just some do not like the answers. Being named as the facilitators of crime is I guess always going to be uncomfortable for a place. But let me assure those who don’t like it: we’re going to carry on doing it.
London features heavily in the Tax Justice Network’s new Financial Secrecy Index. Whilst the UK comes in at number 13 places for which the UK is wholly responsible also feature prominently on the Index. The overall scores for London and its satellite offices are:
RANK Secrecy Jurisdiction FSI – Value Secrecy Score Global Scale Weight 2 Cayman Islands 1646.7 77 0.046 7 Jersey 750.1 78 0.004 11 British Virgin Islands 617.9 81 0.002 12 Bermuda 539.9 85 0.001 13 United Kingdom 516.5 45 0.200 21 Guernsey 402.3 65 0.003 36 Isle of Man 230.4 65 0.001 38 Turks & Caicos Islands 218.9 90 0.000 43 Gibraltar 174.6 78 0.000 65 Anguilla 36.0 79 0.000
Pu that lot together – and that’s the fair treatment of them since ministers in the UK and these places always say their value is as conduits to the City – and London is number 1 secrecy jurisdiction in the world.
But the Treasury denies it of course. As the Guardian notes:
The UK, with the City of London and a network of overseas tax haven territories and dependencies including Jersey, Bermuda, the British Virgin Islands and the Caymans, also features prominently in the index’s dirty dozen of top offenders.
The UK Treasury said it did not recognise the picture presented in the index, adding that the UK government had demonstrated a clear commitment to tackling all forms of tax avoidance and evasion.
And as it added:
A spokesman for the Treasury defended the UK record on tax havens, saying: “At the budget this year we published Tackling Tax Avoidance, on tackling avoidance at the root. The Global Forum on Tax Transparency set up by the G20 in 2009 now has over 100 participating jurisdictions and over 600 bilateral tax information exchange agreements have been signed. The world has changed over the past three years and continues to do so, and the government is committed to keep up momentum.”
Respectfully, that’s nonsense. The document in question is a weak re-hash of what was already being done: the one thing it actually made clear was that nothing had changed at all. And much of secrecy jurisdiction activity is evasion anyway.
As for those bilateral tax information exchange agreements: as the Guardian TJN notes saying:
The problem with many of the new tax information agreements, according to TJN, is that they have taken the weakest form possible, in effect requiring tax authorities to know what they are looking for before they ask for information, rather than requiring full disclosure.
Precisely so. And that’s a choice on the part of the UK and others: a smokescreen to hide what’s really happening – as the Treasury and tax authorities well know.
Indeed, as Dave Hartnett once said to me, he thought he had to sign the deal he did with Liechtenstein because the a standard OECD style tax information exchange agreement would never have produced any data at all, and on this occasion he was right – which is exactly why the Treasury know that what they’re saying is wrong and deliberately wrong.
So for those looking to tackle tax havens in the UK the problem is near at hand – and focused in London EC3.
The Isle of Man Today web site is noting, as I have this morning, that the EU has given tentative approval to the revised tax system in that island.
It also notes:
Concerns have been raised by a former assessor of income tax Mark Solly, and the Positive Action Group, that the abolition of ARI will lead to the development of a two-tier tax system in the island.
Mr Solly, who will be guest speaker at PAG’s next public meeting at the Manx Legion Club in Douglas on Monday night, fears it will lead to a reduction in tax take and also make it possible for wealthy individuals to shelter income in companies, minimising their tax liability – and placing a further burden on the less well off.
Treasury officials insist that the ARI’s abolition will not lead to a significant loss in tax revenue as measures already in place will be sufficient to prevent tax avoidance.
Mark Solly is obviously right, and the EU know he is right, of course, which is why they sought and got assurances from the Isle of Man. Let me quote some from what the Isle of Man said to the EU this week:
In the absence of the attribution regime for individuals, taxpayers availing themselves of the legislative choice to structure their affairs such that the 0% corporate tax rate applies will be doing nothing artificial, and nor will they be seeking to escape what is normally payable.
With such clear constraints, the general anti-avoidance rule provided by Schedule 1 of the Income Tax Act 1980 cannot be used to replace the attribution regime for individuals.
And let me note the examples given by the Isle of Man:
We would now like to present a small number of examples to illustrate better how we expect to apply our tax code following the abolition of the attribution regime for individuals.
1 An existing company, with activities or investments providing an annual income of 1,000 subject to the 0% corporate income tax rate and wholly owned by an Isle of Man resident individual, pays 100 per year in dividends.
The retention of 900 per year in undistributed corporate income is not a transaction, has no avoidance motive, and so cannot be challenged.
2 The same company as in example 1 is sold after five years for a market value to an unconnected third party.
At this point the company has a retained income reserve of 4,500. However, it is the share capital which is being sold in a transaction by the shareholder, there is no avoidance motive and the sale cannot be challenged.
3 The same company as in example 1 is put into members’ voluntary liquidation after five years and its net assets are distributed to the shareholder.
This transaction does not have an avoidance motive and so cannot be challenged on that basis. However, the retained income reserve of 4,500 is an income distribution and will be subject to income tax in the hands of the shareholder.
4 The same company as in example 1 is sold after five years to a connected party.
In this case a technical enquiry will be made because, depending on the exact circumstances of the disposal transaction, there may be an avoidance motive and the general anti-avoidance rule may be applied.
5 An Isle of Man resident individual transfers investments into a company in exchange for shares in that company. The investments provide an annual income of 1,000 subject to the 0% corporate income tax rate and the company pays 100 per year in dividends.
In this case a technical enquiry will be made because, depending on the exact circumstances of the transfer transaction, there may be an avoidance motive and the general anti-avoidance rule may be applied.
In these simple examples, it can be seen that the Isle of Man Government will apply its general anti-avoidance rule in a restricted set of circumstances which bear no similarity to the operation or effect of the attribution regime for individuals. Specifically, the retention of undistributed income from year to year by an Isle of Man company will be treated in exactly the same way for tax purposes regardless of whether the shareholders of that company are resident or non-resident persons.
So what the Isle of Man Treasury officials are telling the press is just not quite true. There will be a loss to the Isle of Man. and there will be exploitation of the form Mr Solly describes.
And as the Isle of Man also told the EU:
It is possible that national revenue may fall by more than [£2.4 million], but because any additional amount will be as a result of changes in taxpayer behaviour, we cannot estimate any further cost with confidence; either as a timing difference or as an absolute loss of revenue. We will monitor national revenue statistics carefully following the abolition of the attribution regime for individuals. Should there be a severe negative effect caused by the absence of the attribution regime for individuals, then our Government would need to re-examine its policy options. But let me make it clear to the Members of this Group: any such options will not include a reintroduction in any form of the attribution regime for individuals or of measures with equivalent effect.
That does, I think, provide some clarity.
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