President Joe Biden’s global tax plans could have an impact on the Isle of Man’s corporate tax system and its ’sacred’ zero rate, island experts have warned.

Tax expert Paul Hotchkiss said the island could not be complacent and warned: ’The tax rate train has been coming down the line for many years. Most observers knew something would happen at some time and now it is firmly on the agenda.’

He said the island cannot ignore President Biden’s widely-publicised proposals that some commentators have claimed could kill tax havens dead and force multinationals to pay a ’fairer’ share of tax.

Under proposals submitted to tax negotiators from 135 countries at the OECD (Organisation for Economic Co-operation and Development), the Biden plan would force big companies to pay taxes where their revenues are earned, not where the profits can be shifted to. It would also establish a global minimum tax rate, agreed by the world’s biggest economies.

Paul Hotchkiss, managing director and founder of Hotchkiss Associates, told Business News that the US has ’waded in’ with its ’new’ tax idea.

should not be ignored

He said that the United States getting involved ’should not be ignored: the US usually gets what the US wants - look what happened with FATCA’ (Foreign Account Tax Compliance Act).

He added: ’The headlines are awash with speculation and Biden’s idea of a global minimum rate seems to be a popular move internationally. With countries wanting and needing to raise funds as a result of the Covid-19 pandemic, has time run out for the sacred 0% rate?’

Mr Hotchkiss pointed out: ’The Biden plan does appear to fix what is regarded as a global problem: it should stop big companies shifting profits to low tax jurisdictions and paying low or no taxes in countries where little or no consumption of services take place. This aspiration is pretty much aligned with the OECD’s wishes and indeed discussions are taking place between the US and the OECD.

’The question is what will it mean for the island and will these moves satisfy the EU, which has its own, slightly different, agenda?

He added: ’I think it would be naive to think these global changes, fuelled by fiscal constraints and growing discontent with the international role of so-called tax havens, will not impact the island in some shape or form.

’Ideally, we should be asking questions: sense checking and modelling what the future might look like and try and identify how the island might fit into a changing global economy.

’No changes need happen immediately but at least the subject needs to be on the agenda. It must be remembered that as an island we have not been immune from the fiscal impact of Covid-19 and we, along with other countries, also need funds to replenish reserves and to maintain our economy but also to build a bright future for all.

’The Isle of Man Government has recently announced an external economic review to be led by KPMG and in my view tax rates (and these global changes) need to play a significant part in this: what will the future need to look like to enable the island to be sustainable in these shifting global economic sands?

’Tax systems should of course raise sufficient funds to deliver the services an economy needs, any system needs to be seen as fair to all in society and in the current global economic system it also needs to be attractive, to encourage businesses to stay, relocate, flourish and sponsor inward migration.’

Mr Hotchkiss warned: ’The Biden plan is of course levelling the playing field when it comes to tax and for large economies this can make sense but for small economies such a trend might be problematic.

’The island is perhaps in a good place as we do have a very diverse economy already but given we are a small jurisdiction we cannot be complacent.’

He continued: ’All in all the only conclusion one can draw at this time is that ’’the writing is on the wall’’ although right now it’s a bit illegible. The gist is that something will happen on tax rates globally and it may have an impact. Our job is to watch developments carefully and most importantly, to the extent we can, anticipate, plan and be prepared: we simply cannot ignore it.’

Tax consultant Greg Jones said it was likely the US will now come to the table to agree a plan with the EU and UK to more effectively redistribute tax revenues according to where they are earned.

bad news

He believes it may eventually mean a ’wholesale restructuring of how businesses are taxed on a global basis is on the cards. That can only be bad news for the Isle of Man because hitherto our corporate services sector has been founded on local companies with an international reach enjoying a 0% Isle of Man company tax rate (or previously tax exemption).

Mr Jones added: ’The type of change the rest of the world seems to be agitating for can only mean that Isle of Man companies become more exposed to taxation elsewhere thereby eroding the value and benefits of being Isle of Man incorporated.

’Of course, this is likely to take some time, but I feel there is only one direction this is going to goâ?¦’

The Guardian newspaper reported that it appears much negotiation still remains to be done, not least on the rate at which a global minimum tax would be set.

It claims: ’After decades on the road to nowhere, global tax reform may at last be within reach.’