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Survey paints bleak outlook for future
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.
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.
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.
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 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.
With less work, accountants and lawyers would also feel the effects.
The people surveyed felt that the British Virgin Islands would be the main beneficiary if the Isle of Man lost businesses. But they also predicted that Bermuda, Singapore, Hong Kong, Malta and Jersey would steal business from the Island.
Malcolm Couch, the assessor of income tax, said in November, when the consultation began, that the end of zero-10 was by no means a certainty. He said if it were to end it could be done gradually.
Two surveys were carried out. One for the corporate service provider (CSP) sector and one for bankers, lawyers, accountants and investment managers.
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32% of firms would move off the Island
Bankers, lawyers, accountants and investment managers were asked 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.
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.
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WHAT IS A CSP?
Corporate service providers provide the incorporation and management of a company at a request of a client, who would be the 'beneficial owner' of the company.
CSPs take care of the statutory administration of the company by providing services such as registered address and registered agent of the company, taking care of the mandatory annual filing and reporting requirements (if any), keeping and updating such books and records pertaining to the company as prescribed by law.
Similar services can be provided to offshore trusts.
They are often also able to assist with the more complicated matters of applying for a licence for the company to carry out some of the specifically-regulated activities in such spheres as offshore banking, offshore insurance, mutual funds and online gaming.
CSPs must be licensed by the Financial Supervision Co
mmission.
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FACTFILE
The Island's branches of the Isle of Man Association of Corporate Services Providers and Society of Trusts and Estates Practitioners commissioned the survey from Scorpio Partnership to gauge the effects of potential changes to zero-10 tax.
The research was for a response to the consultation process undertaken by the Assessor of Income Tax.
It was carried out in April and requested anonymous information from a database of corporate and trust service providers.
A total of 149 corporate service providers were contacted. Thirty-six per cent responded. The firms that did respond employed 48 per cent of the staff employed in the corporate service sector.
Scorpio says that the sample is well-balanced and broadly representative of the sector as a whole.
In the banking etc survey, 40 firms in the sectors were contacted.
Forty per cent responded in full to the survey.
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Hundreds of jobs will be placed in jeopardy
The key findings for the corporate service providers were:
92 per cent said the fiduciary sector would be negatively affected if a tax on worldwide income were introduced. Of this total, 73 per cent said it would be 'very negative'.
More than half said that the banking, legal and accounting sector would be very negatively affected.
75 per cent said they would have to shrink their operations and 19 per cent said their Island businesses would close.
55 per cent said some of their services would relocate to other jurisdictions, with the British Virgin Islands being the biggest beneficiary.
Even a 2 per cent tax rate would result in a 31 per cent decline in staff – equivalent to 589 jobs on the Island, with administrative and support staff most at risk. A 20 per cent tax rate would see 61 per cent of corporate service providers jobs go. That would be 1,159 jobs.
The CSP professionals say that a 2 per cent tax would cut 37 per cent of revenue. A 20 per cent tax would cut it by 72 per cent.
While no decisions have yet been made about zero-10, the consultation process itself is having a bad effect on the sector. Nearly 40 per cent of those surveyed say they have felt the impact because of the uncertainty that it has introduced.
The British Virgin Islands would gain most if the Isle of Man introduced corporate tax, CSP professionals say.
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How an end to zero-10 would affect my firm.
The survey includes some anonymous comments from people in the sector.
We're reproducing a small selection here.
'After all the KYC (know your client) regulations, Proceeds of Crime Act, licensing fees, increased filing fees, etc, this appears to be the latest idea to create barriers to clients using IoM plc. There comes a point where mobile capital will decide that it is easier to go elsewhere because of the fractional cost of IoM plc to the entrepreneurial activity will outweigh the savings.
'We are not far from the tipping point now so a grab for tax, whatever the level, will mean that we are suddenly competing against places like Luxembourg rather than the British Virgin Islands or Jersey. It will be a totally different ball game then.'
'If not carefully implemented I would expect a large proportion of clients to take business elsewhere. I imagine 50 per cent or more of CSP work could be lost from the Isle of Man with corresponding job losses and falls in tax revenue to the government.'
'The majority of CSP business would be lost and serious job losses would follow. No government or tax authority should make such a move and if they did then they and their advisers should seriously consider their position as job losses would be serious.'
'The current lack of clarity and uncertainty makes it presently very difficult to try to generate new business as you cannot reassure potential clients what the position will be in the short term, let alone the medium or long term.'
'Catastrophic. About 55 per cent of our revenues are generated from companies with business interests in countries with whom we have no double taxation treaty. Implementation of a tax system which sought to tax profits already taxed elsewhere and/or untaxed profits generated elsewhere and repatriated to the Isle of Man would lead to the wholesale migration of that business to a jurisdiction able to deliver a zero corporate tax rate solution.'
'I feel the industry in the Isle of Man would be wiped out.'
'The impact would be very serious and I struggle to identify the reasons why international clients, with no connection to the Isle of Man, would choose to incorporate in the Isle of Man.'
'The Isle of Man is already a very expensive jurisdiction to be based in. This is mitigated by the absence of a tax on corporate profit.'
'The impact would be extremely damaging. We should not commit to introducing corporate taxation unless our competitors commit to the same action.'
'We have been successful in attracting 300 entities from Guernsey. We are aware that these could easily have transferred to Dubai. There is a developing Trust industry in the region and the regulatory impact appears to be lighter.'
'Simple, the clients would go elsewhere.'
'The fidiuciary sector would vanish overnight. What is required is a "check-the-box" system that exists in the USA where a company (or anything else) can elect to be taxed as a transparent entity with the tax attributable to the shareholders. Non-resident shareholders would not be taxable on non-Manx source income.'
'Depends on scope. Impact would be less were capital gains (e.g. on property development) not taxed. However, I would expect many companies to migrate to another zero tax regime such as BVI, Cayman, Dubai etc.'
'Devastating.'
'There are several factors to consider. If the remaining offshore centres move from zero to low taxation then there will be little effect. However, if the Isle of Man, Jersey and Guernsey move to a low corporate tax rate then the Island will be severely affected and existing business will consider moving to zero tax jurisdictions and potential new business would be put off by the new tax.
'The Isle of Man would lose what little competitive advantage it is struggling to hold on to. Its competitors have far fewer barriers as matters stand.'
'A positive rate would only be sustainable in terms of being competitive if: 1, we had a network of double tax agreements; 2, (there was) an absence of whitelisted alternatives; 3. our metro-lifestyle offering was expedentially improved. While the majority of bricks and mortar rooted business may bear a positive rate their clients would not.
'Many businesses that are able to choose from where they do business are attracted to the Isle of Man by the zero or low tax regime. Accordingly, once a positive rate of corporate tax is introduced, the Isle of Man will be less attractive to many companies registered here and consequently there will be a downturn in business for the banking/legal/accounting sectors – although for the investment sector a carve-out for funds may not result in such a negative effect.'
'A positive rate would mean we would be even more firmly in competition with Luxembourg, Hong Kong, Singapore and Dublin and our lifestyle infrastructure does not match up. For every senior employee who lives the open spaces of the Isle of Man, many more prefer the lifestyle of a Hong Kong or Singapore.'
'Much will depend on whether the other juridsdictions are also being pressurised into the introduction of positive taxation. Hong Kong and Singapore will not be put under the same pressure.'
WHAT DO YOU THINK?
Send your comments to newsviews@newsiom.co.im
This has been obvious for some years now. I have written numerous items in the Examiner and Independent and done some slots on Manx Radio in a bid to warn people not to commit too many of their hopes to Island house prices. I think that a graduated change is a probable solution depending on poltical sentiment ie does the UK wish to keep the goose laying some eggs for the City boys? (Or is there an underlying trend against any so called "tax havens" coming within an EU member's sovereignty? More worrying is the recent deal that the UK has struck with Lichtenstein following the purchase of a pirated CD containing names of many UK persons having hitherto secret bank accounts. The principality has now agreed to act as a clearing house and collector for defaulting tax payers to settle their debts with the UK's HMRC (Her Majesty's Revenue and Customs). This I understand will apply to UK persons having bank accounts outside of the principality and is an example of "poacher turned gamekeeper". At the moment the Island has certain information and exchange agreements but they are limited. Also "fishing for info" is restricted unless a country's tax authorities can prove their case to the Island's Attorney General (last time looked!). This may soon change and the Corporate tax situation possibly be seen in the light of more realistic penetration of the Island in the mode of Lichtenstein. This, like the VAT clawback, might strike from the blue! I saw the writing on the wall and got off the Island two years ago. However, last time I looked, the Island did not enforce through its courts legitimate judgements from UK courts in favour of HMRC regarding tax dodgers having their persons and assets on the Isle of Man ie will not execute reciprocal judgements even though it does in the case of other civil debt where Coroners enforce collection. This is now intolerable in a place under British sovereignty and whose chief officers are Crown appointees ie Deemsters, Attorney General, Governor, Police Chief and Coroners. (appointed by the Governor at Tynwald Fair)... At the end of the day it all depends as to whether or not the Coalition Government in the UK wants to be seen defending the Island's case and whether it can afford the political damage incurred by doing so at a time when most ordinary UK taxpapers see the Island's situation as anachronistic and causing them to to shoulder a heavier burden of taxes. Thus the wind blows against the "offshores" But cheer up! You can use this ill wind to blow some good in your proposed wind turbines! It looks like you might badly need them.
BARRIE STEVENS
In the above I should have emphasised that the actions of Lichtenstein will apply to both UK persons having accounts in the principality and in addition to those UK persons having accounts in other jurisdictions with Lichtenstein acting as a sort of clearing house to those who voluntarily choose to settle their situation with HMRC on favourable terms. At least this is is as has been reported in the UK press.
BARRIE STEVENS
The only answer if that happens is to break away altogether, we should have done it back in the early 80's.
GP, Ramsey
What this survey shows is that the Manx economy is heavily dependent on the finance sector which can up sticks and move if changes are introduced that do not suit it. As I understand it the EU are reviewing the corporate tax rates for both the IOM and Jersey (Guernsey is evidently not included in this review). Clearly, at the moment we do not know what changes, if any, will be recommended by this review. However, as the IOM is not part of the EU we should be in a position, if what is recommended is not acceptable to us, to ignore any such recommendations. However, as the article states the UK government could impose any such changes on us. This therefore, once again, highlights that the close relationship that we have with the UK is not necessarily in the bests interests of the Island and is of course made worse by the control that the UK government exercise by virtue of the Customs and Excise agreement and the 1979 Isle of Man Act (an act of the UK parliament). If we take the threat as set out in the article as a serious threat to the economy of the Island, and add to this the substantial revenue shortfall for ever of 140 million per year we would find ourselves in a very par less state. The present Manx Government do not appear to be taking any of the tough decisions that are needed to refocus our economy and income stream. The UK government are making swinging cuts in both government expenditure and services and the Manx government need to do the same. How can an Island with a population of 80,000 to 90,000 justify employing (as the Government proudly states on its web site) 10,000 people!
COLIN SLINN
Dear Barrie, I'm so glad you could stay for the good times and have managed to get away in time.
Best wishes,
NW
As I passed the government offices the other day (Tynwald), I thought I saw the words floating over the buildings "mene mene tekel upharsin"!! It must be time to change the jobsworths and salarygrabbers for knowledgeable, working dedicated people who can protect The Island and its residents. If we don't the consequences will be dire.
MORBIDICK
With respect to the Survey I do not think that people should get too worked up about it. It was bound to come out with the response that it has. What people should be getting very nervous about is the Press Release put out by Anne Craine today. The opening to this says: TREASURY Minister Anne Craine MHK has today moved to allay fears regarding potential job losses in the local financial sector based on speculation over the outcome of the Island's business tax review.... The Treasury Minister stated: 'It is still far too early in the process to speculate whether the Island will amend its current business taxation system. At this stage it is not clear whether the current 'zero/ten' regime needs to change. The consultation has attracted a diverse range of views on the Island's business taxation system, and I am grateful to all those who have taken the trouble to contribute to this exercise.' Nowhere in the Press Release does it say who is actually responsible for coordinating the IOM Governments response to the formal review of our business taxation policies that is now being undertaken by the European Union Code of Conduct Group for Business Taxation. Nor does it say how it will manage its role in the consultation process or what skills and resources it will be bringing to bear on the matter. This is not something that can be dealt with by Government platitudes.
KK
You are all soooo negative. Tony Brown has previously informed us that we have a wide and varied economy, a vast manufacturing sector, the lowest unemployment in the world, a rocketing Space industry and the best benefits system in the Solar System. Check iomtoday archives if you doubt any of that. And after his sterling job at the Treasury over the past few years, who can doubt the fabulous work Mr Bell will do as Head of DED (Investors in the IOM should form an orderly queue). We are safe as our competitively priced houses.
STEVE
I don't see a downside here. We will get back a real economy. Not one based on tax dodgers, American Actors money hideaways,, outrageous legal fees, money "moving" in the vein of Trevor Baines, drug money, gun money, dodgy ship registry (Iranian ships re-registered here to escape sanctions), oh no we will still have that one! Less lawyers, less accountants, lower housing costs, lower costs of goods (reflecting less easy money). The Isle of Man is termed Predatory because of the businesses, the types of business and the people we have attracted to these shores. The international standing of the IOM is rock bottom. This might just help lift it, somewhat.
PK
This paints a picture doesn't it: The revenue men in a longboat pulling hard for the shore, lighted torches up on the cliffs, and Tony and Alan and the boys down on the shingle struggling to clear the boxes off the beach. Could be a movie in it for the Island ? An historical epic perhaps ?
OLD PIRATE
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Tuesday 07 February 2012
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