According to Isle of Man Today the island is in deep trouble:
AN end to the current zero-10 corporate tax regime could devastate the largest sectors of the Manx economy according to a survey carried out of business professionals in the Island.
Jobs and business would leave the Island and go to rival jurisdictions if the Isle of Man introduced corporate tax.
As it explains:
The Island cut corporate tax to zero in 2006 for most industries to lure more business here. The Channel Islands followed suit.
But the European Union, which initially did not complain about the Manx tax arrangements, began to sit up and notice.
Some members believe the rates are predatory and are taking money away from them. The EU Code of Conduct Group is now looking at the issue.
I readily confess to having a hand in that. I have long argued (this paper is from 2005) that the Isle of Man’s arrangements are not EU compliant. I have not changed my mind since then. Just as I did not on the Isle of Man’s VAT subsidy, where my work was the precursor for change.
The IoM Today article is fascinating. They, for example, say:
If the EU comes out against the Isle of Man, the Island's complicated constitutional relationship with the UK could, in a worst-case scenario, mean that the UK could legislate over the head of Tynwald for the Isle of Man. It has not done that since Westminster banned Radio Caroline from broadcasting from a ship off Ramsey Bay by extending the Marine Broadcasting Offences Act to the Isle of Man in 1967.
Such a move, in itself, would damage the Manx economy and put back years of progress in which the Isle of Man has gained more independence from the UK.
Which is a welcome acknowledgement that all that the Isle of Man does is with the consent of the UK. All; those who claim otherwise, please note.
But the article also provides impact of by how much the island has been captured by the financial services industry:
About 36 per cent of the Island's national income comes from the finance sector. A further 20 per cent is in professional and scientific services (for example, accountancy and law). Those sectors would face the brunt of the changes. The CSP (Corporate Service Provider) sector currently employs about 1,900 people. But the impact would go much further. Since 60 per cent of the Island's banks' corporate deposits come from CSPs, they will be affected too. More jobs would certainly disappear from them.
This, as I have pointed out and John Christensen and Mark Hampton have pointed out, is the problem of being a secrecy jurisdiction without a Plan B. The scale of the problem is indicated by the findings of the surveys:
Bankers, lawyers, accountants and investment managers were asked in the survey referred to (run by the Isle of Man Association of Corporate Services Providers and the Society for Trusts and Estate Practitioners, who it should be said, are far from objective observers) what would happen to their firms if corporate tax were introduced. The survey revealed:
- 53 per cent expected that their companies would shrink;
- 32 per cent said their companies would move elsewhere;
- 26 per cent said there would be no changes;
- 16 per cent said they would close their Isle of Man operations.
In addition, 70 per cent believed the Isle of Man's status as an international finance centre would be adversely affected and 82 per cent said international business would move elsewhere.
The bankers, lawyers, accountants and investment managers surveyed said that revenue would drop by 18 per cent if a tax rate of just 2 per cent were introduced. It would mean that 17 per cent of jobs in the sector would go.
If tax were 20 per cent, they predicted revenue would shrink by 47 per cent. Then 39 per cent of jobs in the sector would disappear.
The jobs most at risk would be administration and support staff. There would be knock-on effects on all sorts of industries, in particular the legal profession who currently rely on international business.
And they predicated wider ramifications:
As people and money left the Island, the value of property would fall.
There would be fewer people travelling to and from the Island, so services would be cut and costs might rise.
Meanwhile, because the tax take would also fall, sustaining leisure facilities would be harder to do.
In all likelihood some of this is true.
But the question then becomes — so what? Why should the EU and the UK tolerate the abuse the Isle of Man facilitates by being a secrecy jurisdiction when the UK alone is facing the loss of millions of jobs as a result of a collapse in tax revenue — some of it, no doubt, the result of activity in the Isle of Man? In May 2009 I estimated that the Isle of Man cost the UK £1.5 billion a year in lost revenues. That would be enough, in itself, to prevent most of the job losses and service cuts that have been learned of at the Ministry of Justice in the UK in the last day. In straightforward terms of utility alone it is clear UK jobs in staffing prisons, providing justice and keeping probation officers at work have much more value than a loss of 1,900 staff engaged to avoid and evade tax in the Isle of Man. So the Isle of Man can expect no sympathy at all for its cause from the UK — and it is the UK that has to argue its case at the EU.
But what happens when zero ten does, inevitably, go? What next for the Isle of Man? I’ve offered Jersey Plan B and they do not want it. I’ll offer it to the Isle of Man again. And if they reject it, then I fear the mess will be as big as they predict. And yes, I do suspect that will mean that first the Isle of Man government will fail financially, second it will ask the UK to bail it out and if it will not the EU will and third it will lose much or all of its supposed independence as a result. What other options are there if it will not save itself?
And of course those options have a cost to the UK. I accept that. But they’re less than the option of saving the Isle of Man’s tax abuse, by a long way. So if that’s the option put on the table the outcome is, I suggest, inevitable.
The Isle of Man should be preparing the lifeboats. It’s going to need them.
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Richard, I think you mean £1.5 *billion* in lost revenues.
Sadly there must be zero prospect of the UK taking action under the current Government – it would be an anathema to both the Euro-phobic and tax-phobic wings of the Tory Party.
LOL you wish.
The IOM will just change to the Hong Kong system, which is entirely compliant
@Marc Daniels
Changed -thanks
Thankfully this is largely out of the UK’s hands now…
@Gutbucket
The same wishful thinking that got you into this mess…
In theory what you have is compliant – but you’ve never been able to deliver the detail because you really need to tax locally – and that’s your Achilles heal
The Hong Kong system does tax locally. Arrow removed
@Gutbucket
Profits tax is payable by every company carrying on a trade, profession or business in Hong Kong, on profits arising in or derived from Hong Kong from that trade, profession or business. Profits which have a foreign source (often termed “offshore profits”) are thus generally beyond the territorial scope of Hong Kong’s taxation system, including those derived by locally incorporated companies.
So says PWC
To make this work in the IoM you couldn’t have two rates of tax
And all those companies you claim aren’t taxable because they aren’t owned by Manx residents will be taxed – because they won’t be able to prove they undertake their trades anywhere else – which they’d ahve to do
That’s the problem of building your tax system on a lie
There would be no need for two rates of tax. Companies that don’t derive their income on the Isle of Man would not be subject to profits tax at all. The rest would (and companies with profits on and off the Isle of Man would be subject to tax on their local profits). It would be for the Isle of Man government to decide what level of “proof” it would accept that profits derived from non-IOM sources, and I don’t see how, say, a company owning a property in England, or an AIM listed company whose business was in India, would have any trouble in doing so.
@Gutbucket
That’s waht they said of zero /ten too
They said that there would be no need for two rates of tax under zero/ten?
Of course, the Isle of Man’s version of zero/ten HAS been approved by the EU, so forcing the island to adopt a new form of taxation with the same effect is neither useful nor especially ethical
@Gutbucket
No, they said it would be compliant
And it isn’t
As of today it is – the EU said so.
Richard
A territorial tax system is the obvious solution, not only for the Isle of Man but also for Jersey and Guernsey, and the corporate tax rate could very easily be 15% or even 20%.
Whether a company is owned by a Manx resident or not would be irrelevant – as Gutbucket rightly states such tax would be payable by ALL companies which generate profits with a Manx source. Interest earned on deposits with Manx banks would surely be deemed to have a Manx source. Such passive income may well be exempt from tax but if not then Manx companies would simply bank elsewhere. The Manx banking sector may well get hit, but the additional total corporate tax revenues would more than compensate for that.
A territorial tax system would be clearly compliant and would also enable the negotiation of full double tax treaties.
I think the lifebelts and lifejackets can safely be put away.
My honest appraisal of the “Isle of Man Today” article was that it was somewhat alarmist, and I respectfully believe that your own blog post shares the same failing. Certainly, there are other approaches to corporate taxation — the Gibraltar and Malta models, to name but two — that would to a greater or lesser extent fulfil the sometimes conflicting goals of being EU compliant, satisfying the needs of mobile global businesses and maintaining flows of revenue to the Manx exchequer.
I also find your conclusion that the Isle of Man will inevitably choose to be absorbed into the United Kingdom somewhat simplistic. In fact, there are a number of possible constitutional ways ahead, each with its own advantages and disadvantages:
• Maintaining the status quo as a Crown Dependency. I am not convinced this is tenable, due to the UK’s conflicted position: on the one hand, it is responsible to the EU for ensuring the ultimate good governance and compliance of the island, and on the other is paid by the island to represent its interests to the EU. Should the UK neglect its latter duty, then there is little point in maintaining a constitutional relationship with the country — this merely hamstrings the island by preventing it from arguing its case directly with the EU, or indeed enjoying any political representation in the form of its own democratically elected MEP.
• Being absorbed into the United Kingdom. This would lead to remote governance from London and a harmonisation of tax rates. Most finance sector businesses would depart, leaving the island experiencing massive unemployment and dependent upon UK government grants in the same way as the Western Isles. I would regard this as the worst of all possible outcomes.
• Declaring independence and joining the EU as a microstate. This would not affect the island’s need to comply with EU policy, but it would open up full EU financial services markets (as available to Luxembourg and Gibraltar, both of which operate finance centres from within the EU). It would also provide something of a financial safeguard in the form of EU grants if required. In this instance, I would expect the island to adopt the euro as its currency at an early stage. This is the course of action that I strongly support, and I believe that we should begin the process of legislation for an independence referendum at an early stage.
• Declaring independence and severing links with the EU. This has significant risks for a small nation, and could lead to the island becoming very politically isolated.
For what it is worth, I have always believed that your Plan B represents a viable way forward for the Isle of Man, and indeed other offshore jurisdictions: in an information-driven world, the notion that old-style “tax havens” could continue to thrive is somewhat na?Øve. Further, despite the prominent coverage afforded to us in your blog, the Isle of Man is a relatively small player in the offshore world: I believe that with this significant point of difference, we could significantly expand our international business sector.
In fact, I suspect that we may already be making tentative moves in this direction, as evidenced by the decision to ensure full compliance with the EU Savings Directive (a move significantly not copied by Jersey and Guernsey, which prefer to maintain a veil of secrecy). However, Plan B does require tax neutrality, so is this feasible when the EU is sabre rattling over zero corporate taxation?
Iliam
You are slightly behind the times. Guernsey announced in July that it is adopting automatic exchange of information under the EUSTD in 2011 (by July at the latest).
What is most disturbing here is the glee that appears to accompany these predictions. For the most part we are talking about such misfortune falling on thousands of ordinary people living on the Island most of whom are going about their daily lives unaware of the political and economic decisions being made for them. The majority of us enjoy very little economic benefit from living here apart from an economy that provides jobs and a rural lifestyle where it is safe to bring up our children. Yes, we do pay less income tax but this is negated by high food and house prices as well as high transport costs on and off the island. The majority of us are not millionaires but ordinary people whose families have been here for generations. So Richard, when you’re rubbing your hands in your seemingly relentless campaign for our demise spare a thought for Joe Public.
@Joe Public
I do
Joe Public the world over will be much better without the abuse the Isle of Man sells
that’s exactly why I campaign as I do
How noble.