The future of the island’s long established zero-10 tax regime is under threat with just days to go until the G7 summit in the British Isles.

Government officials in the island are keeping a close eye on developments including a proposed global overhaul of corporation tax championed by American president Joe Biden.

Treasury Minister Alfred Cannan spoke about the forthcoming summit and confirmed the government’s tax department was monitoring the situation and said taxation is a key element of an economic strategy review that is now under way.

And, at a recent event organised by the Chamber of Commerce, Chief Minister Howard Quayle hinted that the days could be numbered for zero-10 tax for business in the island.

He also said that 'we always try to ensure that the island is as well prepared as it can be for changes in world events that affect us’.

Under the zero-10 regime, most companies pay no corporate tax, while banks and large retailers pay 10%.

Tax expert Greg Jones told the Manx Independent last week that the island faces ’collateral damage’.

Under President Biden’s proposals, multinational corporations would be prevented from shifting profits across borders to exploit the most attractive low-tax locations as their profits would be taxed at a minimum global corporation tax rate either where they are booked or headquartered.

Another well-known island tax expert Paul Hotchkiss told the Manx Independent last week: ’I think the tax office will be keeping a very close eye on what the rest of the world is doing.’

But he added that while, in his opinion, he did not think it was necessary ’for a knee-jerk reaction’ at this stage, it was important to have an open debate and ’we need to be prepared’.

Mr Hotchkiss said the ’devil was in the detail’ and at the moment he does not know what will happen.

He said: ’I think it is important to keep a watching brief.’

There has been speculation a new agreement - to impose a minimum tax on profit - could be given the go ahead before this month’s G7 summit in Cornwall.

Chief Minister Howard Quayle, in his speech at a recent ’Three Ministers’ event organised by the Chamber of Commerce, said: ’Of course, whilst we cannot shape or change world events, we always try to ensure that the island is as well prepared as it can be for whatever may happen elsewhere in the world.’

Then in a separate comment away from the set speech he hinted to the audience that the days could be numbered for the zero-10 tax regime and that the government had begun preparations to cope with the change.

These comments could fuel speculation that places such as the Isle of Man could become less attractive as a destination for businesses.

Greg Jones, head of tax at DQ, said: ’It certainly does appear that the push toward a global minimum corporate tax rate is gathering momentum and as such there’s a fair chance that the Isle of Man will suffer collateral damage.

’I say collateral because the irony is that what the mainstream tax jurisdictions are getting hot under the collar about are not the moderately well-off individuals with a bank deposit account held in an offshore company, it’s the mega corporations which shelter trillions through low-tax licensing and IP structures, and to be honest that’s not really the Isle of Man’s bread-and-butter.

impact

’However, if the G7 countries set the bar on a minimum tax rate that may impact on the guy with a simple bank deposit in his offshore company as much as it affects the multi-national corporations operating IP structures in Holland or Ireland. The devil will all be in the detail.

’It’s not so much about the rate. Biden initially demanded a global rate of 21% but the likes of Ireland and the UK may well have enough influence to drag the eventual rate well down below 21%, perhaps to 15% or even closer to the Irish rate of 12.5%.

’Even then, the finally-agreed rules may not preclude clever devices like you find in Malta, where the headline rate of 35% is actually reduced to an effective rate of 5% by the use of tax rebates when dividends are paid.

’But anything in excess of 0% could cause the Isle of Man to lose business.’

Mr Jones went on to say: ’It’s more to do with just what the rate applies to. The US proposal is that the rate only applies to foreign earnings of companies, and that each jurisdiction is free to tax local profits at whatever rate it wants.

’This seems a particularly complex concept but it would of course catch the overseas licence fees paid to the multi-nationals in Ireland and Holland. And you’d think it would enable the likes of the Isle of Man to continue to charge 0% tax to a local company which just earns bank interest.

’The risk is that this becomes too hard to implement and morphs into a flat rate of (say) 15% across the board.

’For much if not most of the business undertaken by the island’s corporate service provider (CSP) industry a 0% rate of local tax is a given, and anything higher might call into question the economic rationale of utilising an Isle of Man (or Jersey, or BVI, for that matter) company: this leads to reduced demand and ultimately a loss of jobs and the personal taxes which they generate.

’I’m not sure a global minimum rate would impact too severely on the gaming industry, which bases its headquartering decisions on a cocktail of factors, including low duty rates, and the gaming companies are already accustomed to paying point-of-consumption taxes in for example the UK.

’But I believe CSPs (corporate service providers) could see business levels fall if Biden gets his way.

’It’s unfortunate that the US president has actioned this issue so soon into his four-year term, since even the funereal rate of progress which typifies an OECD initiative may not derail it.

’So we wait with bated breath for the Carbis Bay discussions to unfoldâ?¦’

summit

The seaside resort of Carbis Bay in Cornwall will be the venue for the G7 summit between June 11 and 13.

UK prime minister Boris Johnson will host the gathering at which leaders including President Biden and German Chancellor Angela Merkel will be present.

The standard rate of corporate income tax in the Isle of Man is 0%. The 0% rate was introduced on April 6, 2006.

Treasury Minister Alfred Cannan MHK, said last night (Wednesday): ’The international tax landscape is constantly evolving, and the Isle of Man has an excellent record of recognising this and responding over the last 20 years.

’The OECD’s work on proposals for a multilateral replacement for digital services taxes in pillar 1, and a global minimum tax rate system for large multinational companies in pillar 2, has been ongoing for some time now and the assessor of income tax and her officers have been monitoring this as well as the latest initiatives from the US and the EU.

’Recent moves by the Biden administration in the US mean that a political agreement on this work is possible later this year and any G7 agreement would be an important step towards this.

’Taxation is therefore a key element of the economic strategy review being undertaken by KPMG on behalf of the Isle of Man Government.

’The review is under way, and the resulting policy development process will seek to ensure the island continues to meet international standards while remaining competitive and an attractive place to live, work and do business.’