Mr Couch was responding to comments made by senior tax advisers on the Island about the need to educate the general business community about the impact of any changes in tax law. The comments came in response to a consultation paper detailing a tax on company dividends. The distributable profits charge, to be introduced as part of the Income Tax Amendment Bill 2005, was covered in an article in Business News on February 15.

The amendment will seek to ensure that companies in the Isle of Man distribute 60 per cent of their profits to shareholders or face a tax on those profits. The tax will equate to 10.8 per cent of profits for trading companies and 18 per cent for investment companies.

Phillip Dearden, tax director with PKF, said the government had a public relations problem as many company directors and advisers still believed that corporate tax would be totally abolished in 2006.

In Treasury's defence, Dr Couch said: 'While we accept that evolving a tax system produces challenges for taxpayers and their advisers, it is important that the debate about such matters is based on the facts. I accept, as assessor, that a key part of my role is educating people so that they understand fully the background to what we are trying to achieve and can then work constructively with government to make the changes as effective as possible.'

He has highlighted several areas of the proposals that he believes have been misunderstood by advisers and emphasised the fact that the changes would benefit the Island and that Manx residents would not be disadvantaged.

'In the hands of shareholders, dividends are taxed now and will continue to be taxed in the future as part of the person's income. As the (Treasury] Minister announced in the Budget, we will deliver the 0/10 tax system for companies next year (from April 6], meaning that for most companies, their profits will be taxed at zero percent.'

He added that the new system for companies was designed with three objectives: 'To be compliant with the EU Code of Conduct on Business Taxation, which put simply says that all companies must be within the same tax regime, so tax exempt, international limited liability and international business companies must be phased out in due course. To maintain as far as possible the advantages of doing corporate business in the Isle of Man and to move to an even more dynamic tax environment that would encourage inward investment.'

A major reason for the new regulation will be to stop companies deferring income tax payment until they receive a dividend. Although the charge only relates to Manx shareholders, dividends payable to non-resident shareholders will be subject to tax in their country of residence.

'Treasury does not see it as appropriate for the new system to result in a position where an unincorporated trader would pay, say, 18 per cent income tax on their business profit whereas the owner of a business that puts it into a company (taxed at 0%]could defer the payment of income tax until he/she receives dividends from the company. As a consequence, the "distributable profits charge" is being introduced in the 2005 Tax Amendment Bill.

'This charge will relate to Manx shareholders, and will be available as a tax credit when they eventually receive dividends from the company. Although the distributable profits charge will not apply to non-resident shareholders (corporate or individual], it is important to recognise that dividends paid to non-resident shareholders will be subject to the income tax system of their country of residence, and we are definitely not creating any disadvantage for Manx residents with the new approach.'

He added: 'We are carrying out further consultation to assist us with designing some of the day to day aspects of the distributable profits charge system.'