A commentator here has sent an extract from today’s Manx Independent, which says:
Assessor of Income Tax Malcolm Crouch states, “We are awaiting formal assessment of Zero/10. We are not abandoning Zero/10, it has not changed. Waiting for clarity from the EU is frustrating for everybody‚Ķ. Govt’s position is that ARI is a personal tax measure and not part of Zero/10 and as such is not an issue that it is appropriate for the EU to rule on”
As the commentator says: “discuss”.
OK, I rise to the challenge. The ARI is the “attribution regime” for Isle of Man resident individuals that means that the effective 0% rate of tax on companies resident in the Isle of Man is not available to companies that have Isle of Man resident shareholders. When such shareholders exist then the ARI scheme means that the undistributed business profits of the Isle of Man corporate taxpayer are taxed in the hands of the shareholder in question at 20% unless the company in question is a trading company, and they have only to distribute a minimum of 55% if their profit to their members on which they are then taxed — giving an effective enforced rate of 11% as a minimum for Manx resident and owned companies. A Manx resident company not owned by locals pays 0% and so it is obvious that there is a ring fence that is unacceptable under the EU Code of Conduct where the rules say local people must not be disadvantaged by a tax regime.
Now, formally, the ARI is technically applied at the individual level i.e. on the shareholder and not on the company. As a result the Isle of Man says the scheme is outside business tax — which is the issue Malcolm Crouch has referred to.
But the fact is that the ARI does, as a matter of fact create a ring fence. And it’s also a matter of fact that it replaced the earlier Distributable Profits Charge which had exactly the the same effect except it was operated by the company, not the shareholder. This charge failed the Code of Conduct in 2007, as I noted here. So, in arguing that they comply now the Isle of Man is relying on a simple admin change to argue that the ring fence is not in the business tax system but in the personal tax system bow and so the EU can’t rule on the issue.
That, vey politely, is about as aggressive as any tax avoidance scheme you’ll ever see, relying on a highly artificial construction of language to seek to get round an obligation. And in this case the fact that the Code if not law but a principles based system completely blows the Isle of Man’s argument out of the water: the principles of the Code have been violated and that’s the beginning and end of the test. In that case the Isle of Man has failed. It can argue if it likes, but the UK will have to legislate for it if it does not comply.
Now there’s an interesting scenario in the making - and one the Island will not want to confront, I’m sure. So the bluster will come to an end in due course and the Isle of Man will comply. It has no choice.
But in the meantime I refer back to the Irish Times article I noted this morning:
Known for being self-important on occasions, Thomas The Tank Engine always believes he is deserving of more respect and he gets annoyed when he does not get it.
On the Isle of Man, right now, there are a few more like him.
Could it be Malcolm was one person they had in mind?
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I’ve got to hand it to you Richard – you’re right on this. Bearing in mind that, like Ireland, jobs are at risk and the Island will go back to the bad old days of mass emigration, if our corporate tax advantages disappear, what would you suggest as a practical alternative?
@Freeborn Man
You could do what Jersey has refused to consider
http://www.taxresearch.org.uk/Documents/PlanBforJersey.pdf
There is another tax haven that has a regime colloquially referred to as “non-dom” regime. There are some astonishing advantages to be had there. Not only that, but its only available to a part of the population!
It is in one of the EU countries as well! Extraordinary!
Surely this abuse will need to be tackled as well – attempting to unilaterally impose changes selectively on some regimes ( by larger states on smaller states is bullying and abusive, surely?
The solution is straightforward.
Not convinced about Plan B for Jersey although rule No. 1 of economic development is transparency (pretty much by any economic guide). I’m not comfortable with economic hegemony – the idea of ‘competitive advantage’ at the State level, and would in fact suggests that is at the root of the concern.
Rule No.2 is surely not to irritate you’re larger and more powerful neighours by taking the proverbial (OK, I made that one up).
Tax Havens are created by uneven trade costs (e.g. trade-tariffs or restrictions imposed by large trading blocs such as the US and the EU; and economic distance – i.e. a sea crossing to get to market).
If you’ve been watching the Manx press, you’ll see a fair amount of pressure on the economic ‘distance’ – i.e. pressure on the IOM infrastructure monopolies – the IOM Steampacket?
The IOM is changing, although I suspect the ‘big’ moves will be post Election – I do fear the odd dodgy suggestion as well.
Corporate Tax will come to us all, the IOM, even Jersey and the UK non-doms.
All the same, for as long as the general price level in these places is not rising, then these ‘Haven’ policies are economically constructive, not destructive.