Isle of Man and Channel Islands move with the times … but are still under attack
Various tax changes are afoot in the UK offshore islands
IN APRIL, the Isle of Man moved ahead of its competitors when a package of tax measures came into operation. The new regime is intended to stimulate inward investment by businesses establishing on the island, and to provide a consistent treatment across all sectors of the economy.
The island also introduced a cap on personal income tax, at a maximum level of 100,000 pounds sterling per annum, irrespective of earnings. It is foreseen that this will attract high-net-worth individuals and entrepreneurs to the island. By making a tax system that is simple to understand and available to all, the Treasury said it is keen to provide a competitive advantage to the island.
The island had been under pressure from the UK and EU to stop giving better tax rates and incentives to non-residents than to residents. In response, rather than increase rates for non-residents, the Treasury opted to reduce tax levels across the board, and residents now have the same benefits as non-residents.
The Tynwald says this new budget had been achieved without creating a deficit and the measures were introduced without any increase in taxes or cut in public expenditure.
The Guardian reacted angrily to these changes. In an article entitled How low will they go to woo tax exiles, the UK paper complained: “The Isle of Man is slashing tax rates this week, sparking claims that offshore havens are pandering to the demands of the super-rich who want to avoid paying tax.”
The paper is particularly concerned about the amount of tax the UK could lose as a result of these new measures: “The Isle of Man is in a race to beat rival tax havens such as Jersey and Guernsey, which have, in recent years, slashed rates to lure the biggest share of the tax avoidance industry – money which mostly flows out of the UK …. There are additional incentives for the rich. Residents will pay a top rate of income tax at 18 per cent, compared with 40 per cent in the UK, while couples enjoy a tax-free allowance of 17,340 pounds sterling, almost double the combined individual allowances under the British system. Residents earning more than 570,000 pounds sterling a year will benefit from the cap and save thousands, possibly millions, in income tax payments.”
The paper finds it “difficult to understand why the UK government continues to tolerate tax avoidance on such a scale”. An accompanying article sarcastically suggested: “If you’ve got loads and loads of dosh, and don’t fancy paying your dues to keep schools and hospitals running, there is an offshore tax industry gagging to save you money.” While plenty of others would disagree, clearly The Guardian is not in favour of tax avoidance!
The Isle of Man Treasury responded defensively, saying the island co-operates with other regulators in the fight against money laundering, but that it will never give up the ability to set its own tax rates.
Guernsey was not impressed either. Speaking to the Guernsey Press and Star, the Deputy Commerce and Employment Minister slammed the report, stating: “I was quite disappointed to find that The Guardian article was poorly researched and flippant in some of its observations.”
The centrepiece of Guernsey’s Future Taxation Strategy is a ‘zero/ten’ rate of corporate tax, under which Guernsey’s businesses and corporate entities will be subject to income tax at nought per cent from the 2008 tax year, although specific banking activities will be taxed at 10 per cent. Personal income tax is capped at 250,000 pounds sterling on non-Guernsey income and investment income.
The Jersey government also intends to implement a “zero/ten” tax system for companies from 2009.
The governments of Jersey and Guernsey recently took action to prevent online retailers from illegitimately benefiting from a tax arrangement in place between the EU and the Channel Islands. Jersey pledged to introduce measures that will make it harder for large UK retail groups to exploit a loophole in value added tax laws to sell goods VAT-free in the EU. Guernsey announced that they would not be granting permission for distributors acting for online retailers located in the UK to establish warehouses in Guernsey.
The islands may well need to attract new business. Irish residents alone have reportedly withdrawn hundreds of millions of euros held on deposit in the Isle of Man in recent months. This is a direct response to the Irish Revenue Commission’s campaign against offshore tax evasion.
According to Ireland’s Sunday Business Post, the amount of money held on deposit in the Isle of Man by Irish residents has halved from 600 million to 300 million euros in the past year alone. Six years ago, the figure was almost one billion euros.
UK residents may react in a similar way now that HM Revenue & Customs has been given permission to force Barclays Bank to hand over client details of customers with accounts in its branches in the offshore islands. This ruling is expected to extend to all other banks in the future.
Jersey, Guernsey and the Isle of Man claimed less money had fled their banks than some commentators had expected when the Savings Tax Directive began, but with these new rulings, and the withholding tax applied due to rise over coming years, banks in these islands are likely to see deposits fall, as investors move their savings out of the EU or into more tax efficient structures.
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