30 July 2010

REVIEWING THE ISLE OF MAN’S BUSINESS TAXATION SYSTEM

CONSULTATION RESPONSE

A Public Response Document

Issued by:

Income Tax Division 2nd Floor Government Office Buck‟s Road Douglas IM1 3TX

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

Contents Page

INTRODUCTION...... 1 HOW SHOULD THE ISLE OF MAN CHANGE ITS BUSINESS TAXATION SYSTEM?...... 2 WHAT ARE THE OPTIMAL CHANGES?...... 11 WHAT DIFFICULTIES OR BENEFITS COULD ARISE IF THE ISLE OF MAN MOVES AWAY FROM ITS CURRENT BUSINESS TAXATION SYSTEM?...... 13 WHAT ALTERNATIVE BUSINESS TAXATION SYSTEMS WOULD YOU CONSIDER TO BE THE MOST BENEFICIAL AND LEAST HARMFUL TO THE ECONOMY?...... 27 WHAT IS THE MINIMUM TIMESCALE IN WHICH YOU CONSIDER CHANGES TO THE ISLE OF MAN BUSINESS TAXATION SYSTEM COULD BE MADE WITHOUT COMPROMISING THE ECONOMY?...... 38 OTHER COMMENTS...... 43 The Fiduciary Sector...... 58 Scorpio Survey...... 59 Appendix 1...... 63 Appendix 2...... 64 Appendix 3...... 71 Appendix 4...... 100

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

INTRODUCTION

On 25 February 2010 the Income Tax Division of the Isle of Man Treasury published a consultation document: „Reviewing the Isle of Man‟s Business Taxation System‟. The consultation document is reproduced at Appendix 2 of this response.

The consultation explained the reasons for the review. In particular, the Isle of Man Government had been informed by United Kingdom officials that the member state representatives on the group monitoring compliance with the European Union Code of Conduct for Business Taxation (“the Code Group”) had concerns that the Island‟s zero-ten company taxation system may now be considered as a form of harmful tax competition.

Since the publication of the consultation document the Code Group has determined that the Isle of Man‟s business taxation system should be subject to a formal assessment; and the Government understands that this process will commence in September 2010. Paragraph 26 of the consultation document said that the Government intended to make public its policy decisions during the second half of 2010. In view of the Code Group assessment process and its timetable, it is now expected that business taxation policy decisions will be made public by the Isle of Man Government somewhat later than originally anticipated; and probably not before the end of this year.

A list of the people, businesses and organisations that have responded to the consultation is shown in Appendix 1. The Treasury would like to thank all respondents for the time and effort that has been put into commenting on the questions in the consultation document.

This document is simply a collation of the responses which have been submitted: grouped according to the questions in the consultation itself. We have made anonymous the responses of individual people and businesses, but not those of organisations. The consultation asked:

 How should the Isle of Man change its business taxation system?

 What are the optimal changes?

 What difficulties or benefits could arise if the Isle of Man moves away from its current business taxation system?

 What alternative business taxation systems would you consider to be the most beneficial and least harmful to the economy?

 What is the minimum timescale in which you consider changes to the Isle of Man business taxation system could be made without compromising the economy?

 Other comments

Issued: 30 July 2010 Page 1

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

HOW SHOULD THE ISLE OF MAN CHANGE ITS BUSINESS TAXATION SYSTEM?

1

There should be low tax rates on profits, with exemptions and reliefs. These should reflect the most attractive regimes in other EU member states, for example exemption for fund activities, no transfer pricing, deductions for intangible assets and financing costs (including notional deductions for equity and non-amortised intangibles, as in Belgium and the Netherlands, and for profit participating loans). There should be an efficient ruling regime to provide certainty on these matters.

By way of comparison, Cyprus offers a tax rate of 10%, but Malta actually offers a lower rate through its refund regime. A Maltese company pays 35% tax on its profits, with the majority of this refunded to a shareholder (whether resident or non-resident) when a dividend is paid, resulting in an effective rate of under 5%. This system is clearly acceptable to the EU and should be considered by the IoM (compare this to the Estonian system of 0% tax until a dividend is paid, which is not acceptable).

There should be exemption for dividends, gains and interest (from subsidiaries / other group companies), with few or no conditions attaching to it.

There should be no withholding tax on dividends, interest or royalties.

2

We do need a zero tax vehicle – we already effectively have it in the form of an IOM trust for non-resident settlors and non-resident beneficiaries, just IOM trustees.

We should introduce 10% corporate tax across the board – we need the money!!

In order to avoid duplication of tax – where companies are managed by licensed CSPs and are also wholly owned by Trusts managed by a licensed TSP, then the Trust will be taxed rather than the company. In other words the company is looked through. Companies managed by CSPs are singled out because this particular industry is regulated so it is an area where the information is readily available and reliable; it would be impractical to apply this to all companies across the board.

3 Fund Management Association

Any move away from the current business taxation system would be detrimental unless every other competitor jurisdiction was to move in an identical direction.

4

Main concern that non-resident companies with established retail businesses on the Island do not pay Manx tax on the profits generated by trading on the Island…the Manx public outraged that these substantial trading companies do not pay Manx tax, especially when public sector expenditure is under close scrutiny with the implied reduction in staff and services.

Issued: 30 July 2010 Page 2

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

5 Association of Chartered Certified Accountants

Manx Tax Residence

In addition to the current taxation of banks, companies that are Manx tax resident would generate a tax charge on their assessable profits.

Manx tax residence should not be determined by jurisdiction of incorporation, but should be determined by where profits are generated.

Any companies that make substantial sales from an IOM base of operations to IOM based users/consumers would be liable to the Manx tax charge.

The definition of a base of operations would need to include shops and other outlets effecting sales (and therefore generating profit) but would exclude sales made to non- Manx residents who are not currently on the IOM.

This would specifically encourage the growth of overseas sales from Manx businesses.

The definition of a base or operation could be aligned with the UK HMRC‟s definition of UK source trading profits

To ensure that previous “ring fencing” issues do not rear their head again, the locations of activities are what would determine a charge to tax and not necessarily the activity itself.

To fit in with international accounting standards and to allow for additional tax relief on Manx resident individuals who receive dividends from Manx resident companies, this tax charge should be an income tax charge and not a corporate tax charge.

Income Tax Charge

The income tax charge should be levied on assessable profits.

Assessable profits would need to be precisely defined and would not allow internal management charges to be deductible.

The income tax charge would be set at a rate that would not be greater than the top rate of income tax for individuals (20%).

It is proposed that the tax rate on corporate profits be set at 10%.

Any amounts of dividends paid out by Manx companies would carry a 10% tax credit that could be deducted from any IOM based personal income tax charge.

If the dividends were paid out to another company that is IOM tax resident it would be a taxable stream of income but the tax credit could be used to reduce the overall tax liability of the recipient company.

This would ensure that the use of groups of companies would not be disadvantaged.

Issued: 30 July 2010 Page 3

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

Any dividends paid out to IOM resident personal tax payers would also carry a 10% tax credit that could be used to reduce their personal tax liability or result in a repayment of tax.

The 10% tax credit on dividends paid out to non-IOM based tax payers would not be reclaimable.

The Attributable Regime for Individuals (ARI) should cease.

National Insurance Issues

Class 1 primary contributions on individuals have not been included within this paper as they are paid by and suffered by employees. They are seen as a stealth tax on incomes rather than a business tax.

Class 1 secondary and class 1A contributions are paid and suffered by the business.

This is a tax on operations and not on profits. We feel that such a tax is not equitable as businesses pay business rates and other taxes for any local services that they use.

A tax that is not based on profits or value added cannot stimulate business. We would propose to reduce this tax over a short period of time to a more reasonable level of, say, 5%.

This could stimulate business to hire more staff and remove the current small unemployment problem and could result in an increased tax take as business has the ability to hire more staff.

Business Property Tax

Two of the biggest problems of doing business in the IOM have historically been high personnel costs and high property costs.

The current economic conditions and the fact that we now have a small amount of unemployment has helped to reduce the staffing cost issue. However property costs are still inordinately high.

The rents charged by landlords on the IOM are stifling business. Their reluctance to reduce rents and estate agents refusal to encourage reductions has an impact on every business.

Business rates are a tax imposed on every business that uses property.

We would propose to dispense with business rates but to assess landlords to tax on the lower of the:

o The amount of the last previous let

o Current value of the let (as long as the property is occupied)

Issued: 30 July 2010 Page 4

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

This would be an income tax charge at a rate of 20% i.e. no personal allowance or lower rate band would be made available to them.

This would encourage estate agents and landlords to reduce rents and remove one of the biggest obstacles to entrepreneurs.

6

The Group has three main areas of interest in the Isle of Man: 1. A locally based operation - A 2. A Group vehicle - B 3. Companies to assist in the Group's tax management

Assuming that any reform to business taxation does not place the Isle of Man in an uncompetitive position when compared to say Eire or the UK it is hard to envisage reform having any impact upon the current trading operations of A. A has successfully served the local Manx market since 1928 and is located on the Island for purely commercial reasons - we simply believe our customers are best served by a local presence. In its 80 year history rates of tax have varied without significantly impacting operations and it is difficult to imagine that current activities would be impacted by an increased tax rate. It should be noted, however, that the Group currently enjoys the low tax return on the capital employed in A and is currently investigating whether A should begin to promote and write [other] business - business that is currently written by UK entities. The after-tax return will be a significant factor in determining whether [business] should switch to A and whether investments in capital and expertise are made.

B currently writes a small amount of intra-group [business]. B is regarded as a UK CFC and as such its profits are effectively subject to tax at 28%. Again assuming that any reform of Manx tax does not push rates higher than the UK rate it is unlikely that B's operations would be effected by change.

Over the past few years the Isle of Man's tax regime has assisted the Group to manage its taxes:  In 2001, following a change in Delaware partnership law, the Group migrated two Irish companies (holding companies of [our] US Group) to the Isle of Man  In 2008 the Group contributed interest receivables to an Isle of Man company. Although this company was regarded as a UK CFC and effectively subject to UK tax at 28% its presence allowed the Group to defer interest deductions and therefore manage its UK losses in an effective manner.

In both sets of transactions the decision to use the Isle of Man was due to a combination of a low tax rate, a transparent and predictable tax regime and local Group Infrastructure.

Although an increase in tax rate would serve as a disincentive to structure transactions through the Island, assuming that the rate is reasonable and the Island also introduced a wide and simple exemption for dividends and capital gains arising on subsidiary undertakings, given [our] local infrastructure, it is difficult to see a more attractive location for the type of activity detailed above.

Issued: 30 July 2010 Page 5

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

7

It is submitted that the Isle of Man is in the enviable position of being able to ·cherry- pick" the best parts of the various existing tax systems that have been adopted by holding company jurisdictions in the EU and to incorporate these into a new business taxation system that meets all of the key criteria identified in paragraph 21 of the Consultation Document, namely: (i) meets the requirements of the EU Code of Conduct; (ii) meets the needs of as many domestic businesses as possible; (iii) contributes to competitiveness - allowing existing business to continue to grow and attracting new businesses to establish on the Island; and (iv) potentially increases the attractiveness of the Isle of Man as a location for business in economic sectors not currently widely represented, if at all, on the Island.

8

When considering the two crucial questions of paragraph 20 of the Consultation Document it seems that the optimal changes would have to fulfil at least two criteria. The new business tax system would need to:

1. Maintain/improve the smooth functioning of economic relationships with the international community and specifically with the EU and its member states, and 2. Continue to support a balanced national budget based on consistent economic activity by avoiding to deter (large) parts of the local economy.

In other words the desired business tax system should be tailored to the Island's economic circumstances and interests. [We] believe that this can be best achieved by initiating an analysis with regard to the areas of industry that Isle of Man would like to focus on as being in the best interests of the local economy and thus would like to maintain/attract/excel at contemporaneously with (or even preceding) the analysis about changes in the business tax system:

The new business tax system would thus be aligned with the best practices of the individual EU member states (including potentially the introduction of a generic business income tax rate) and would additionally include a number of specific features that are specific to the economic position and situation of the Isle of Man and would achieve the retention of editing economic activity.

[We] would like to propose below certain measures that could be contemplated and that can be found in many national tax systems of EU member states. It should be noted that in the following paragraphs we will only provide a high level conceptual description. Each individual measure can be tailored according to a varied number of parameters to serve the mutual interests of Isle of Man and its private and corporate residents.

1. Codify in the new tax law and actively promote through-out the international tax arena, the opportunity for (prospective) tax payers to seek advance tax rulings (ATR's) and Advance Pricing Agreements (APA's) in the Isle of Man. For any company, certainty (with regard to its tax position and risks) has a very high value. Many EU member states offer the opportunity of some sort of advance assessment by tax

Issued: 30 July 2010 Page 6

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

authorities. Specifically Luxembourg and the Netherlands were/are renowned for the accessibility and sense of economic reality of the local tax authorities. In [our] opinion this is a powerful tool, giving 'colour" to the jurisdictional tax policy and fine-tuning that policy for individual cases can hardly be underestimated.

2. At the introduction of a tax system change, provide for step up in tax basis to Fair Market Value for the full enterprise of existing tax payers. The Tax System Change could well be considered as (or deemed to be by way of legal assumption) changing the status of previously tax exempt companies: they become Tax Payers. The logical consequence of the new status is that existing resident Tax Payers must submit an "Opening Tax Balance Sheet". The valuation methods allowed under the new regime to establish the Opening Tax B/S may have a tremendous impact on the tax position of Tax Payers as the values of business assets can be used as the basis for tax deductible depreciation. This method can have a purpose in providing a smoother entry for existing resident tax payers into the new business tax system.

3. Accelerated or flexible depreciation/amortization on selected assets. For capital intensive industries, depreciation of business assets can result in a considerable deduction for income tax purposes. Nominally, the depreciation term of an asset is equal to the 'economic life' of that asset. Many tax systems in the world allow tax payers an acceleration of the depreciation period based on various systems (fixed number of years. declining balance method etc). This method leads to (sometimes important) timing (= cash flow) differences but does not decrease the overall tax burden as a function of total taxable profit and statutory tax rate.

4. Methods for the avoidance of double taxation for certain assets that are not located in the Isle of Man. Most taxation systems base the scope of the tax liability upon one or more nexus or tax residency concepts: for example i) incorporation in accordance with local law ii) effective management within the territory iii) activities and or assets within the territory etc. As nexus concepts between jurisdictions may overlap, double taxation may occur. Certain countries have adopted unilateral or bilateral measures for the avoidance of double taxation. Specifically for a [business like ours] with assets that are 'in space' and therefore not geographically linked to a jurisdiction. A specific method for scoping the domestic tax liability may have a large impact on its ultimate tax charge.

5. Investment tax credits on investments in selected areas of industry. Luxembourg implemented in 1986 a tax credit system in favour of industrial businesses for qualifying investments made in Luxembourg. In substance, in order to qualify under the Luxembourg Investment Tax Credit ("ITC") regime, the investment must:

1. be physically implemented in Luxembourg. 2. consist of depreciable tangible fixed assets (other than buildings. software and cars).

In summary, the Luxembourg ITC regime is subdivided into two ITC systems:  one flat ITC of 2% calculated on the qualifying capex and  one incremental ITC of 12% calculated on the increase of qualifying capex compared to the arithmetical average of the same capex over the 5 preceding financial periods (capped to 12% of the new qualifying assets of a given year).

Issued: 30 July 2010 Page 7

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

6. Active pursuit of concluding Double Tax Treaties with jurisdictions that are economically important to (residents of) Isle of Man.

7. Different tax rates for different industries are not necessarily highly recommended by [us] because of perception issues with members of 'higher taxed' industries and the international community.

8. Finally, as mere 'food for thought ' an example of how another small island (party of an EU country) found a creative solution to attract international business within the EU framework:

 Regime in place and approved by EC until 2020. Officials are currently negotiating an increase of the thresholds (see below) with EC. Final outcome should be known in June 2010. Next round of negotiation for after 2020 is scheduled to take place in 2013.  Statutory corporate income tax rate: 20%.  Reduced tax rate of 4% (2010-2012) and 5% (2013-2020) applies on taxable income depending on the number of employees (see below for the definition of employee) according to the table below: Job creation Taxable income to which reduced tax rate applies 1-2 2 MEUR 3-5 2.6 MEUR 6-30 16 MEUR 31-50 26 MEUR 51-100 40 MEUR Over 100 150 MEUR

 Reduced tax rate may be divided by two if the company has fixed assets on the Island and / or is conducting / introducing innovative activities / new technology on the island. You need to apply for that additional tax rate reduction from the local tax authorities. Investment into satellites could definitely qualify for such innovative activities.  Employment conditions are met if alternatively the company has (i) local employees (ii) hires services of local management companies or (iii) has employees abroad provided that these employees have a working contract with the local company. Directors of the company may also qualify as employees.  DTT signed by -the mainland- apply to -the island- (with the exception of OTT with US and Brazil).  EU directives apply.  No WI-IT on interest, royalties and dividend, wherever the beneficiary of  the income is located.  Tax regime passed the OECD and the European Code of Conduct for Business Taxation tests. The island is protected under EU Treaties as an ultra-peripheral region.

9

Issued: 30 July 2010 Page 8

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

[We] broadly support the Government's intention to ensure that the Isle of Man taxation regime, as this applies to the life sector, remains within the spirit of international 'best practice', although it is our understanding that the existing core regime has until recently been regarded as acceptable within these best practice guidelines. For this reason, we urge against a 'quick' change, as there is no apparent benefit to be obtained for the Isle of Man in terms of first mover advantage on this issue.

Removal of the existing zero tax regime, as this applies to the life sector, would constitute removing what is arguably the only remaining advantage that the Isle of Man has over 'newer' jurisdictions, especially Dublin. It is important that Government recognises that decisions about establishing new operations or investing further in existing operations are typically made by parent companies which are driven primarily by direct financial considerations, which of course includes taxation.

Anything which further dilutes the competitiveness of the Island could materially affect the growth of the life sector and the overall contribution it makes to the Island's economy. Traditionally, the life sector has not needed to seek direct assistance from Government agencies, allowing these agencies to concentrate on growing other strands of the economy. This situation should not be taken for granted.

10

[Our] position is that the Isle of Man Government should do everything within its power to resist any changes to the current business taxation system. [We] believe that any rate of positive business taxation would lead to a very high proportion of our clients leaving the Isle of Man and [our relocating] to jurisdictions that continue to offer a zero rate. This would lead to a significant downsizing in our business including a large number of staff redundancies. Turnover, levels of expenditure and profit would also be severely affected having a detrimental 'knock on' effect on [our] suppliers and the taxation revenues paid to the IoM Government. We have provided financial information on [our business] to the Isle of Man Government's business advisors, Deloitte, in response to their questionnaire.

[We] appreciate the need for the Isle of Man to be compliant with international standards to ensure its long-term stability and viability; however any increase in business taxation would have a major negative economic impact on the Island whilst other competing jurisdictions continue to offer a zero rate of business taxation. The economic impact would be Island wide due to the fiduciary sector being the largest licensed element of the finance industry which itself 'feeds' many other sectors such as transport, retail, leisure, property and construction.

11 Manx eGaming Association a) No Change (Preferred Option) The Government is well acquainted with the current supporting arguments for not making any changes so we do not feel that we need to expand here. If this is not a sustainable long-term option it may be possible to commit to an International Standard Tax Rate over the next 10 to 20 years should such a consensus ever be achieved.

Supporting arguments would include:

Issued: 30 July 2010 Page 9

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

 We are committed to information exchange with other countries as demonstrated by our track record;  Any fundamental change to our businesses‟ fiscal environment would take many years to implement or could have major social affects (see Cayman Report) hence the extended time period;  It allows all small nations to adjust to known timetables and so removes an arbitrage threat where nations move at different speeds, by maintaining the status quo until the agreed implementation date. b) Removal of Corporate Taxation Regime Corporate taxation produces less than £30 million per annum and is a relatively minor contributor to the exchequer. Lost revenue could be replaced with a mixture of increased personal taxes, company levies, charges for work permits and similar.

Supporting arguments would include that the Isle of Man:  Has never been reliant on a corporate tax regime and prefers to use low business taxation to stimulate economic activity;  Needs to encourage employment opportunities and this aim is only achieved when business investors choose to locate here;  Already has a full range of taxes and this option is easier to monitor and regulate;  Is committed to information exchange and transparency so TIEAs, DTAs and (possibly) visibility of dividend and interest payments made available to the investors‟ fiscal authorities would secure international acceptance of such a regime.

We accept that this may be antagonistic to the EU political agenda but suggest that the argument is actually centred around transparency and mitigating the “fear” of lost revenue. c) Blended International Equivalent The Isle of Man may be able to select the best elements from tax regimes elsewhere that have been adopted by holding company jurisdictions in the EU and to incorporate these into a new business taxation system that meets all of the key criteria identified in paragraph 21 of the Consultation Document, namely:

(i) Meets the requirements of the EU Code of Conduct; (ii) Meets the needs of as many domestic businesses as possible; (iii) Contributes to competitiveness – allowing existing business to continue to grow and attracting new businesses to establish on the Island; and (iv) Potentially increases the attractiveness of the Isle of Man as a location for business in economic sectors not currently widely represented, if at all, on the Island.

Issued: 30 July 2010 Page 10

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

WHAT ARE THE OPTIMAL CHANGES?

12

The tax system should incorporate the following features:

Corporate Tax System: The optimal approach would be to blend the Cyprus and Malta tax systems, so that the Isle of Man would have a 10% corporate tax rate with a full refund system in respect of foreign source income. In computing the tax base on which corporate tax is levied, the UK test should be applied for the deduction of interest (both inter-group and bank interest) and other expenses incurred. If this were done, it would be unnecessary to deal with other issues such as the participation exemption, treatment of inter-group payments, foreign tax credits and thin capitalization.

The local banks (and other local companies) would pay tax at 10% because the refund mechanism would not apply to local income. This approach would also resolve the foreign exchange gain problem, although to simplify the compliance burden, we would recommend that companies be able to choose their functional currency, rather than be forced to use Sterling.

No capital gains tax or limited capital gains tax: There should either be no capital gains tax or a limited capital gains tax (sale of non-residential property). Alternatively, if there had to be a capital gains tax, there should be a full refund mechanism for foreign source gains under the imputation system.

No capital taxes, stamp duties on capital issues and transfers and no net worth taxes.

Withholding taxes: If the Maltese imputation were adopted, then there would be a withholding and refund mechanism.

13 Manx eGaming Association

Company Tax The optimal approach would be to blend the Cyprus and Malta tax systems, so that the Isle of Man would have a +% corporate tax rate with a full refund system in respect of foreign source income (IOM source income in a Gaming sense is income from Players who live in IOM – servers located on the Island should not be construed to be IOM income). In computing the tax base on which corporate tax is levied, the UK test should be applied for the deduction of interest (both inter-group and bank interest) and other expenses incurred. If this were done, it would be unnecessary to deal with other issues such as the participation exemption, treatment of inter-group payments, foreign tax credits and thin capitalization. The local banks (and other local companies) would pay tax at 10% because the refund mechanism would not apply to local income. This approach would also resolve the foreign exchange gain problem, to simplify the compliance burden; companies could be given the ability to choose their accounting currencies.

No capital gains tax or other tax on capital: The ability to promote the Isle of Man as having no capital taxes is very useful and the imposition of capital taxes should be avoided in future. However, if forced into introducing

Issued: 30 July 2010 Page 11

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response capital gains tax, there should be full refunds for foreign source gains under the imputation system.

Withholding taxes: If the Maltese imputation system were adopted, then there would be a withholding and refund mechanism.

Issued: 30 July 2010 Page 12

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

WHAT DIFFICULTIES OR BENEFITS COULD ARISE IF THE ISLE OF MAN MOVES AWAY FROM ITS CURRENT BUSINESS TAXATION SYSTEM?

14

My company C currently doing approx. £15M a year in revenues, growing at 15%-20% p.a. and is profitable. Since a large part of the staff are employed in subsidiaries in the UK and […] (mainly since the IoM does not offer enough skilled staff in the IT sector), we are already paying taxes in those jurisdictions for that part of the value added. If the IoM introduced a business tax, we would be affected in two ways: 1. The tax advantage of having the headquarters on the IoM would diminish at an incremental tax rate beyond 5%. We would most likely relocate the headquarters. 2. My shares are held through a holding company D, also an IoM company. Currently it is taxed on the IoM and in […]. If a non-zero tax were introduced without the simultaneous introduction of a Double Taxation Treaty between […] and the IoM, I would be forced to invest my funds (> £10M) via a non-IoM vehicle. So please, if you want to increase taxes, make sure you have a double taxation treaty with all major European countries. If that were the case, we would not see an issue on the holding side.

15

Movement of investment funds, in particular cash deposits, to other low tax jurisdictions, which could be less well regulated, and with less information exchange.

Uncertainty of policy will delay investment decisions, or move them away from Isle of Man.

Business strategy becomes more complex as decisions could influence the amount of tax paid in a greater way.

16

Difficulties

 Should there be an increase in tax for non-banking revenue which currently attracts a rate of zero percent then clearly this would reduce our post tax income and the relative contribution that is made from our IoM incorporated business to the wider group.

 In addition to the direct impact on the taxation of the company, we believe the greater concerns lie in the effect that any change would have on sections of our client base in the Isle of Man, particularly intermediaries.

 There is a potential down-streaming impact if companies either exit or choose not to bring their business to the Isle of Man. Increased tax would make the Isle of Man less attractive to companies. This would directly impact the level of business seen within the Corporate Service Provider (“CSP”) sector, from which are significant value of balances is placed with us.

Issued: 30 July 2010 Page 13

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

 The knock-on effect of reduced business to CSPs will be a reduction in deposit balances placed with the island‟s banks, thereby indirectly impacting on all [of our] entities located within the Isle of Man.

 Both banks and CSPs will therefore see a potential reduction in the levels of their income and will be paying less tax in the long run to the government. Coming at a time when the Isle of Man Government is dealing with the impact of the changes to the VAT agreement with the UK and having to make significant cuts in departmental budgets, a net potential reduction in tax revenues would significantly impact on future economic plans.

 Any change may lead to other jurisdictions, such as the Channel Islands, BVI, Dubai or the Cayman Islands becoming a more attractive centre to establish business. The Isle of Man may lose its competitive advantage in the offshore environment. This may also prompt some businesses to review location on non-tax driven factors.

 There is a general consensus that increased tax rates in the Isle of Man are expected to lead to a net outflow of business and so detailed analysis of the expected impact is required.

 The current zero-ten regime is also straightforward. There is a risk that any new system may lead to a more complicated system increasing costs for both government and business when trying to ensure correct compliance.

 There may be a further knock on effect to employees in the Isle of Man. If a reduction in business levels is significant then there would be an expected loss of jobs associated with this. Fewer employed people in the Isle of Man would lead a reduced level of personal income tax being paid to the government.

Benefits

 By reviewing and amending the tax rates in the Isle of Man we would be able to demonstrate to the international community that the Isle of Man is an internationally and socially acceptable tax regime as approved by policies prescribed by a recognised international organisation, being the OECD. It would show that the Isle of Man is a cooperative and transparent jurisdiction.

 The Isle of Man could still remain a low tax jurisdiction even with a change in tax rates. This may be sufficient to retain and attract some business, e.g. the corporate business.

 The Isle of Man could retain competitive parity with other offshore jurisdictions such as Jersey and Guernsey thereby reducing any mismatch between tax regimes and avoiding any political tensions, or seek to differentiate by a more aggressive and attractive taxation regime, if supported by the political and commercial willpower to do so.

Issued: 30 July 2010 Page 14

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

17

It would be very harmful to the Island economy if the total tax that companies/shareholders pay increases, whether this is via personal tax only (ARI) or via some sort of income/corporation tax on the company profits plus personal tax on dividends. The more taxes increase, the less attractive the Island appears. There are already significant disadvantages in running a business here; not least finding good and skilled staff, good suppliers, the cost of shipping etc. so any further disincentives would be unhelpful in the extreme.

Raising the top rate of personal income tax to 20% is already of concern but we believe that any further increases will be counter-productive for the economy of the Island.

18 Manx Insurance Association

Difficulties

 Significant competitive advantage is removed particularly in relation to Ireland which has a strong offshore Life Sector and jurisdictions who have a zero tax regime.

 Kaupthing Singer and Friedlander has significantly damaged the Isle of Man's reputation as a Financial Centre in the market place and any change in the taxation regime would further adversely impact perceptions of the Isle of Man as an Offshore Financial jurisdiction.

 Any taxation change raised in the Isle of Man would have a significant adverse impact on the embedded / market value of a Life Company a key measure.

 Potentially changes in the status quo could lead to a strategic review of Life Companies operations by Head Offices and reduced competitiveness of the Isle of Man as a jurisdiction could lead to a move away from and Isle of Man base or reduce its commitments here - these strategic reviews are not formulated in the Isle of Man and decisions are taken elsewhere based on financial appraisal with little or no regard to impact that the decision may have on the Isle of Man economy.

 The imposition of corporation tax would be an additional direct cost for the Isle of Man companies as many dividends remitted up to parent companies are received free of tax.

Benefits

 From a Life Company perspective a move away from the current taxation regime would deliver no benefits - the only potential benefit is that not changing may result in the Isle of Man being reclassified from a 'White List' to a 'Grey List' jurisdiction, however, this might be viewed as a price worth paying.

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19 Isle of Man Chamber of Commerce

As with many industry areas ICT companies arrive here for a range of reasons and have complicated and sometimes bespoke tax profiles. Any change in the current tax strategy will have no effect on some and a significant effect on others. As the saying goes the devil is in the detail and as we do not have options to contemplate, the members we represent would like to respond in detail once we have a consultation on proposed options.

We are however aware that the CSP market is very sensitive to corporate tax. For instance a great number of trust companies are essentially asset holders and generate very little income, therefore not having to deal with taxation that would be minimal or non-existent is an administrative advantage. The CSP industry is also a huge driver to the economy as a whole - employment, professional services, band deposits and associated spending yet is by its nature highly portable. Any unfavourable change could cause a snowball move to say Hong Kong where they are in a strong enough position not to comply with world regulatory desires.

A vibrant economy including financial and legal advisers is essential for the development of contacts and the ensuing new industries such as our ICT sector.

20

Difficulties

 Significant competitive advantage could be removed particularly in relation to Ireland, which has a strong offshore Life Insurance Sector, and other jurisdictions which retain a zero tax regime.

 Kaupthing Singer and Friedlander has significantly damaged the Isle of Man's reputation as a Financial Centre and any change in the taxation regime would further adversely impact perceptions of the Isle of Man as an Offshore Financial jurisdiction.

 Any taxation charge raised in the Isle of Man would have a significant adverse impact on the embedded value of [our] subsidiary incorporated here, and on the stock market value of [the holding company] itself. This will impact employees, policyholders and investors alike.

 Any changes to the current "gross roll-up" environment would materially prejudice policyholder expectations and impact on future business levels.

 Changes to the current arrangements could lead to a strategic review of Life Companies' operations in general and perceived reduced competitiveness of the Isle of Man as a jurisdiction could lead to a Group relocating from an Isle of Man base or reduce its commitments to the jurisdiction. Typically these strategic reviews are not formulated in the Isle of Man and decisions are taken elsewhere based on financial appraisal with little or no regard to impact that the decision may have on the Isle of Man economy.

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 The imposition of corporation tax would be an additional direct cost for the Isle of Man companies as many dividends remitted to parent companies are received free of tax.

Benefits

 From a Life Company perspective a move away from the current taxation regime would deliver no benefits, unless the negotiation of that change were to lead to better access to markets for Isle of Man-resident companies.

21

An increase in the business taxation away from the current 0% would significantly impact [our] competitiveness; the organisation already bears costs disproportionate to our other manufacturing entities in the UK as a consequence of its location on the Isle of Man. We have calculated that the current taxation system broadly offsets the impact of this higher cost base providing a cost neutral environment as regards the UK.

[Our] Isle of Man based operations are heavy energy users with total energy bills at circa £900,000 per annum, based on usage this cost is £325,000 (57%) higher than the equivalent in our UK companies. When this is coupled with the increased cost of transportation of material and manufactured product, increased cost of building works and increased cost of skilled labour the additional cost burden of the Isle of Man is equivalent to a 28% tax burden if the operations were located in the UK.

Our cost of employment is higher than for our sites in the UK as we have to offer higher pay packages in order to attract skilled individuals to an island with a relatively expensive cost base. The lower levels of personal taxation in the Isle of Man compared to the UK do not adequately compensate (particularly at middle management and below salaries) for the higher cost of housing as compared to that in the Midlands and Northern England where we typically recruit, the higher cost of living generally, and the high cost of travel to and from the UK to visit families.

As part of the […] industry, we are under constant pressure from our customers to reduce costs. In recent years we have invested heavily in new plant and machinery in order to restore [our] profitability and to build competitiveness. If other cost pressures arising from being based in the Isle of Man are not addressed, a further reduction in [our] cost competitiveness will undermine the merits of further investment and undermine our ability to expand the business to support our customer programmes as they develop.

22

Unless the new business taxation system incorporates the key features summarised above, a real risk exists that [we] would need to consider migrating to another more favourable holding company jurisdiction.

23 Isle of Man Bankers’ Association

There would appear to be probable downside risks from moving away from the current business taxation system. Chief amongst these is the potential loss of economic activity to the Island, which might be expected to migrate away to other jurisdictions which continue

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The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response to offer nil or negligible tax rates. We understand this risk to be a particular concern within the local CSP industry. However, the knock on effects of contraction of economic activity carried out in or from the island upon supporting industries, including Banking and indeed the wider economy, could be far reaching.

At this point in time, it would appear the only benefit of a move away from the current system would be to avoid international pressure/blacklisting and which IOMBA acknowledge must be avoided if at all possible.

24 Captive Association

The views below represent the views of the Captive Association regarding the possible impact of changes to the business taxation on the captive sector.

The impact of any such changes to the captive sector is extremely difficult to assess. There is extremely fierce competition between the large number of domiciles which provide captive legislation. With often little to differentiate between competing domiciles, the impact of any advantage or disadvantage is greatly magnified, especially in those domiciles, e.g. Guernsey, Bermuda, Cayman, which most closely resemble the Isle of Man from a captive standpoint.

The captive sector in the Isle of Man, and also across Europe, has shrunk somewhat in recent years. The reason for this is primarily due to the external insurance market experiencing prolonged "soft" conditions which means that insurance buyers are receiving extremely favourable terms from the external market and thus there is less reliance and less need for self insurance and thus less need for captives, so any business lost as a result of changes to the business taxation system would be extremely difficult, if not impossible to replace, certainly in the short to medium term. Having said that, we believe that the captive sector is still an important one for the Isle of Man with close to 150 captives currently licensed here.

The Captive Association has identified the ultimate owners of 140 of these captives and these owners are located in 23 different jurisdictions worldwide. As such, it is extremely difficult to assess the effect that different tax regimes would have on these captives and also the attractiveness of the Isle of Man to prospective captive owners.

The main territories by owner are as follows:

UK 71 USA 14 Other EU 13 South Africa 13 Rest of World 12 Russia 7 Japan 5 Ireland 5

As stated above, a large number of territories now offer captive legislation. This combined with the large number of territories where captive owners are located makes it is

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The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response extremely difficult to assess the comparative advantage or disadvantage, from a tax standpoint, of the various captive domiciles compared to the Isle of Man.

Looking closer at the captive sector, we estimate that the sector directly employs approximately 150 full time staff with an estimated total payroll of £9m (incl. employers' NIC and pension fund contributions). The captive sector has assets under management of approximately £5bn most of which is routed through Manx banks and in excess of £1bn is retained within the banking sector in the Isle of Man.

The captive sector also pays approximately £18m annually in expenses locally. This includes fees to captive managers; audit fees; resident non-exec fees; legal fees; regulatory fees; actuarial fees; investment manager fees; bank fees (including letter of credit costs.)

The captive sector is a low risk sector for the Isle of Man. Captive owners tend to be large blue chip organisations, e.g., 7 IOM captives are owned by FTSE 100 companies, 13 are owned by FTSE 250 companies and a further 27 are listed on other major stock exchanges. Also, 20 IOM captives are owned by G1500 companies. Some of these major companies also set up non-captive businesses in the Isle of Man. In addition, captives tend to be run very conservatively and a captive failure is a highly unusual event making captives very safe, attractive business for the Isle of Man.

In addition, the travel and hospitality sector benefits from the captive sector with senior executives from the parent company regularly visiting the Island for board meetings. As stated above, strong competition from other captive domiciles means that the Isle of Man captive offering must, in all aspects including taxation, be highly competitive if the sector is to survive and thrive.

25

Any move away from the existing system is considered by [us] to be harmful to its business model with no identified benefits.

In general terms [we] believe that any tax regime must be:  Simple in its application e.g. must not follow a UK basis and  Tax neutral no matter what headline rates may be required so there is minimal impact to our competitiveness when considered against other jurisdictions.

We would anticipate that the reviews you are having conducted by Deloitte will highlight a number of alternatives, however as potential alternatives we would suggest that a review be conducted of the 'territorial approach' adopted in Hong Kong or the Malta regime where a headline rate is accompanied by a deduction for distributions made to non resident companies in those jurisdictions.

Difficulties

 Significant competitive advantage removed particularly in relation to Ireland which has a strong offshore Life Sector with access to the UK and EU markets and other jurisdictions which offer a zero tax regime.

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 Any taxation change in the Isle of Man would have a significant adverse impact on the embedded value of the Company, its value to its shareholder and, potentially, its ability to remit profits to its parent.

 Potentially, changes in the status quo could lead to a strategic review of this Company's operations and the reduced competitiveness of the Isle of Man as a jurisdiction could lead to a move away from an Isle of Man base or a reduction in the Company's commitments to the Island - these strategic reviews are not formulated in the Isle of Man and decisions are taken elsewhere based on financial appraisal with little or no regard to the impact that the decision may have on the Isle of Man economy.

 The imposition of corporation tax would be an additional direct cost to our Group as dividends remitted to our parent are currently received free of tax.

Benefits

 From [our] perspective a move away from the current taxation regime would deliver no material benefits - other than a potential retention of "White List" status. [We] would not be interested in operating in a "Grey" jurisdiction.

26 Chartered Institute of Taxation

We have found it particularly difficult to respond to the questions posed as it is not absolutely clear what the main concerns of the EU code of conduct group are (or indeed those of any other interested party). We recognise that a change in opinion directly results from harsher economic and fiscal conditions, but it is generally felt that it is not evident where the pressure to make changes is coming from.

One member has commented that the government "should ascertain exactly what it is that is not considered to be code compliant about the current 0%/10% company tax regime with ARI for individual shareholders, which was given the green light by the EU only a relatively short time ago."

From responses we have received, the general consensus is that the introduction of a positive rate of tax will be immediately harmful to the island's businesses. Many also consider that any announcement to this effect will result in a significant and immediate loss of new business. It is also likely to result in existing clients taking steps to re- structure their business affairs. This may result in more work in the short term, but after restructuring, Isle of Man businesses are likely to suffer a further loss of business.

Members of the Chartered Institute of Taxation are employed in a number of businesses across the island. Many are employed by accounting and tax firms, but a number are employed by corporate and trust services businesses, insurance companies, banks, legal practices and other trading or investment businesses. We do consider that all areas of the finance industry are likely to be immediately affected and this will inevitably affect other industries on the island.

A number of independent reviews of financial centres have taken place (most recently by Michael Foot). These reports generally highlight the Isle of Man as a well-regulated

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response jurisdiction which facilitates the liquidity of the UK financial market. Some of our members consider that in the event that business migrates from the Isle of Man, it is likely to move into jurisdictions which are not easily pressured by the UK or EU. Such jurisdictions may be subject to less stringent regulation and it is perhaps less likely that the investment would flow back into the UK or elsewhere in Europe.

27 Isle of Man Society of Chartered Accountants

[Verbatim feedback from members on this question]

„I can't see any particular benefits from moving from the current system.‟

„Taxation on local businesses is probably not a great issue given that it becomes a balance between take from businesses or take from owners - though the interaction with the tax cap needs to be considered. However tax on international businesses is key to the Island economy, particularly the comparisons with the Caribbean, Mauritius etc. who we are actually competing with. The Government strategy of encouraging good quality financial services worked fairly well and we have been in the vanguard of forming well regulated low tax jurisdictions. Now with the push to forcibly introduce tax rates which will negatively differentiate us from our competitors we cannot afford to be leading that movement. I have been surprised at the number and scope of businesses who are actively making plans to exit the Island if these measures are enacted and damage ensues.‟

„What pressures are our competitors being put under?‟

„While other nil taxation regimes exist around the world we would expect clients looking for nil tax/neutral tax structures to relocate entities to the remaining nil tax jurisdictions even if these jurisdictions were only to remain nil tax for a limited period. Our view is that the knock on effect of the loss of the fiduciary sector in the Isle of Man would be drastic in terms of business that is referred to local lawyers, accountants, banks, airlines etc. We see no advantage in introducing a positive tax rate that affects international clients earlier than other jurisdictions such as BVI, Cayman, Dubai etc.‟

„Provided the Isle of Man creates similar flexibility in its tax system to certain either EU jurisdictions (including Cyprus, Malta, Ireland and Gibraltar) there ought not to be any detrimental effect where clients are Manx companies in entirely legitimate manner.‟

„Loss of many "new" businesses such as E-Gaming/space etc - good employers.‟

„Short term business will be significantly affected, however some business will remain, e.g. property investment due to OTR or where structures do not involve Isle of Man companies. Long term the affect will be very damaging as it is unlikely new business will look or be attracted to the Isle of Man as it will be "off the radar" of those using offshore companies and trusts.‟

„The tax rate is unimportant; the critical question is whether that level is the lowest common denominator. It could be enough to persuade clients to move if other jurisdictions offer 0%.‟

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„Whilst other jurisdictions offer more competitive rates of tax, companies will migrate with significant detrimental effects for Isle of Man.‟

„There will be no benefits. There will be significant negatives on other areas of the economy such as banking and housing with an increase in unemployment. There will be a lack of employment opportunities for young people.‟

„Where there is a lower tax rate in another part of the world some existing work will move there. More important where there is a lower/nil tax rate in another part of the world new work will go there and the Isle of Man will not be a first choice.‟

„We would lose management/tax work/audit if a 10% charge was introduced. Probably not as bad as 5%.‟

„It is foolish to think that work will stay in the European time zone area if tax is involved Europeans would use different jurisdictions e.g. Far East.‟

„1. First we should research the position of other EU jurisdictions such as Malta, Cyprus, Luxembourg and the Netherlands and compare with our current regime. 2. We should highlight the Foot report summary that successful IoM (and CI) jurisdictions are beneficial and enhance and improve UK business and inwards investment flows. 3. We should maintain at all costs the "level playing field". 4. What purpose can be served by the EU forcing a change that will inevitably drive business out of the EU's sphere to more remote centres with zero rate environments like Singapore or Hong Kong? Why chase business out of locations where the EU currently has significant influence and where the activities of the service providers are closely monitored and well regulated, to places where the EU has no influence and no ability to monitor?‟

„Any rate of tax will severely harm the former exempt companies i.e. 25,000 IoM companies and between 20,000 and 60,000 foreign companies. This will have a knock-on effect for banking, legal, accountancy etc. Reduced scale of economy will then affect everyone.‟

„It is difficult to see any benefit which could accrue from a flat 10% "across - the- board" rate. The 0% regime is a very significant factor in attracting corporate business to the Isle of Man, otherwise business may as well go onshore to Ireland with its 12.5% rate.‟

„The current ARI system is difficult to explain to local clients. Most overseas see the zero rates as almost unbelievable.‟

„Main problem I envisage is the need to have accounts prepared in time to file tax computations.‟

„The introduction of 10% would see the Island move back to the pre - DPC regime, but at the cost of losing much international business. Although we are not affected (our international business is non-trading) I am aware of many who would be.‟

„Reference to above (see questionnaire part B): (a) Minimal effect. (b) Subject to an audit being able to be passed through.

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(d) As in (b) above. (e) Depends upon where it moves to.‟

„Anything other than a 0% rate will kill off a large proportion of the CSP sector that accounts for 60% of bank deposits and a large amount of work for local professionals and a direct work force of around 1,200 staff.‟

„The Isle of Man's economy over the last 20 years or so has really depended on a zero tax regime for non-residents who own or participate in Isle of Man structures. The economy will be devastated if corporate tax was introduced across the board. The Isle of Man should seriously consider scrapping corporate tax and focus on tightening up personal tax e.g. any payments received from corporate vehicles such as loans, income or whatever should be taxed.‟

„I doubt that the Isle of Man tax system would have much effect on our direct clients, wherever based, because I assume that mutual funds based here would continue to be treated as tax free until the proceeds were in the hands of the investor. This is the way it is virtually everywhere. As many of the funds we sponsor are resident elsewhere, the Isle of Man tax regime is irrelevant.‟

„A far greater problem is the protectionism inherent in the Alternative Funds proposal being promulgated in Europe which is blatantly designed to cut out non EU entities from that market place. This is far more likely to pose a threat to our business remaining here.‟

„On Tax specifically, our concern is that any flat tax, without any asset management carve out, will increase our costs. There are also other complications involving parent/subsidiary relationships. However moving elsewhere would probably see us paying higher taxes in the long run so this is a question of balance. Obviously the lower the better.‟

„Concerned that any new taxes will make the Island less favourable compared to other offshore jurisdictions.‟

„Please change system back to [prior year basis].‟

28

If the tax rate was higher than that of other similar jurisdictions, the IOM would lose out to those jurisdictions as the place for entrepreneurs to locate tax-efficient international business and wealth management structures.

This could lead to a loss of existing trusts and companies forming part of international business and wealth management structures.

It would also limit the ability of the IOM to attract new international structures and limit the future growth of the island‟s economy.

29

If the tax rate was higher than that of other similar jurisdictions, the IOM would lose out to those jurisdictions as the place for entrepreneurs to locate e-businesses.

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This would limit the future growth of the island‟s economy.

It would also have a negative effect on other related sectors of the economy, e.g. CSP‟s.

30 Association of Corporate Service Providers and the Society of Trust and Estate Practitioners

The view of the working group, which was enhanced by the survey of members, is that the current regime is the most beneficial to the current Isle of Man Fiduciary Sector. That is not to say that the current regime is the most optimal for all Fiduciary Sectors or that the current regime will always be optimal for the Isle of Man. The Fiduciary Sector in the Isle of Man has developed to capitalise on the particular characteristics of the Isle of Man‟s tax regime. The current customers and service providers are on the Isle of Man because the tax regime suits them. Isle of Man Fiduciaries have spent many years and significant effort in obtaining business that is appropriate for the Isle of Man‟s tax regime.

If the regime were to change, business that is here may leave; it may be possible to obtain new business based on the new system of taxation but that cannot be considered until a new regime has been promulgated. Even if a new tax regime were thought to be a viable proposition there would be a significant and painful period of adjustment, clients would be lost, new clients would need to be found and new skill sets would have to be developed.

It is actually the view of this committee that the damage would be significantly greater than the survey suggests. The provision of zero-taxed companies is a major component of the Isle of Man‟s offering as an Offshore Finance Sector. If this offering were no longer provided we believe the Isle of Man would, generally, fall from the perception of business referrers so that even business which is still viable would go elsewhere.

In summary, any change is likely to have a significant and negative effect on the viability of the Fiduciary Sector. As explained above, the Fiduciary Sector is part of a larger interdependent Finance Sector so that any change is also likely to have a significant and negative effect on the economy as a whole.

31

In order to fully assess and address this issue, it is necessary to consider the potential impact of any increase in the headline rate of corporate income tax (ie in excess of 0%) on what we consider to be the key industry sectors currently operating within the Island. We believe those key industry sectors are as follows:

 Corporate Service Providers  Life Assurance and Captives  Fund Management and Administration companies  e-Gaming

Banks are, of course, also vital to the continuing wellbeing of the Finance sector and therefore to the Island‟s economy as a whole, but of course banks already pay income tax at a blended rate approaching 10% (depending on their various income streams) and we

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response have not therefore included banks within the above list. However, deposits placed by entities managed within the Corporate Service sector do form a significant proportion of the deposit base of some banks on the Island (typically, this might be 20%) with deposits from life companies also being substantial. Clearly, therefore, the Banking sector and therefore tax receipts derived from banking profits, would suffer if Corporate Service Providers and life companies reacted unfavourably to an increase in the tax rate.

Dealing with each of the key industry sectors in turn, our observations are as follows.

Corporate Service Providers

Our informal feedback from discussions from within the CSP industry is that, whilst at a corporate level, CSPs would not be unduly concerned at having to pay 10% tax on their profits, any increase whatsoever in the tax rate applicable to client managed entities would be potentially disastrous. Dating back to the era of tax exempt companies (introduced in 1984), the CSP industry within the Island, in common with those in the Channel Islands and elsewhere, has prospered through a complete absence of income tax on profits (nor, of course, is there any tax on capital gains). Currently, the Island (once again, together with the Channel Islands, and other well established and respected offshore jurisdictions such as the Cayman Islands) is a natural home for private client and other tax driven structures which demand tax neutrality as a prerequisite. To this extent, the Island operates within a totally different market to the likes of eg Malta, Cyprus, the Netherlands and Ireland, all of which are tax positive jurisdictions but which offer tax planning opportunities in specific scenarios, typically those where a double tax treaty (DTT) relationship is required. The Island cannot compete in these latter situations, due to a general absence of DTTs (notwithstanding the recent sterling efforts of the Manx Government in concluding treaties with Estonia, Malta and Belgium) and because the Island is not part of the EU (and therefore cannot benefit from the parent/subsidiary directive). If, therefore, the Island could not properly compete within its own private client/tax neutral marketplace, nor in the more EU/DTA driven market occupied by Cyprus, Malta etc, then we could potentially be left with no market at all. Such business as we currently undertake would go to places such as the Cayman Islands, BVI etc.

However, if we were to introduce a headline rate of (say) 10% but define the “nexus” which joins a company to the Manx tax system by reference to (for example) having a permanent establishment or place of business in the Island (which we understand is a route which Jersey is exploring) then it may well be that most of the current CSP business could be retained, albeit that any increase in complexity, if not in tax, would discourage some new business.

Life Assurance and Captives

This industry has stagnated in recent years, and cost cutting now appears to be permanently on the agenda. Unique selling points, or USPs, are desperately sought, particularly within the Captives sector and any increase in tax over and above 0% would be, at best neutral, and at worst likely to cause some businesses or entities to consider relocation, if not complete shutdown.

As a bare minimum, it would be vital to ensure that the return on policyholders‟ funds is always excluded from the life company‟s tax computations (as is the case, we believe, in

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Ireland). Even at the level of corporate taxation, however, and based on our informal discussions with industry representatives, we believe that the imposition of a positive rate of tax would only serve to incentivise existing life companies based on the Island to look elsewhere for a corporate domicile.

Captives which are CFCs of “small” to “medium” UK parent companies are least likely to be affected, except in those situations where the parent has no tax capacity due to being loss making; in these latter situations, and in the case of a dividend paid to a “large” UK parent, any tax in the Isle of Man would be an additional cost.

Fund Managers/Administrators

Provided funds themselves can be carved out, ie be completely exempt from income tax (once again, a route which both Jersey and Guernsey will be adopting, having been encouraged to do so by the findings contained in the Deloitte report annexed to Michael Foot‟s review) then it may be that the Fund Management/Administration industry could “live” with a positive rate of tax, although for non-local owned businesses this could represent an unacceptable increase in their cost base. However, it is worth noting that it has been a clear strategy of the Funds industry to attract fund managers to the Island, which in turn results in fund administration business and the establishment of funds on the Island through the loyalty/goodwill created. The imposition of a positive rate of tax as high as 10% would be a significant deterrent to this business. It is probably also true to say, however, that a bigger threat to this industry sector is the EU Alternative Investment Fund Managers directive, which if enacted in its present form could have a disastrous effect on the Island‟s Fund industry. e-Gaming

This is a highly mobile sector which could easily relocate to a more tax friendly jurisdiction if the tax cost of operating in the Isle of Man became burdensome. By all accounts, this sector employs around 500 people at an average salary of £50,000, which represents a considerable amount of ITIP and spending power. Ongoing love/hate relationships with the Island‟s regulators and the impact of VAT (which is a cost not borne by operators in Gibraltar) are all factors which test the resolve of the Island‟s e-gaming companies. The imposition of a positive rate of tax might in some cases be sufficient to persuade some companies within this sector that the Isle of Man does not “want their business” and compel them to look elsewhere for a trading base.

In this particular regard we are aware that internal negotiations have been taking place within Gibraltar and tax concessions for e-gaming companies in that jurisdiction may well be on the agenda.

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WHAT ALTERNATIVE BUSINESS TAXATION SYSTEMS WOULD YOU CONSIDER TO BE THE MOST BENEFICIAL AND LEAST HARMFUL TO THE ECONOMY?

32

Increasing VAT would be least harmful for businesses like [us] which derive > 90% of their revenues outside of the UK VAT zone. Also higher fees for registration, accountants, etc would be acceptable.

33

Exemption or incentives for specific activities important to the Isle of Man, including insurance, intellectual property ownership and management, and the provision of alternative energy. These could be conditional on the development of office and employment on the Island, but in a manner that permits the use of specialist advisers and CSP‟s.

Must be acceptable internationally, to permit full tax treaties, e.g. Belgium, which benefits the corporate infrastructure of an industrial group.

34

The preferred result would be to remain as close as possible to the current position, but obviously this must pass the review tests of the EU and the OECD. As noted in the consultation document, the current regime may be found to be harmful when reviewed and so there may not be scope to retain the zero band of tax.

Any change should be contingent on there being a full analysis of the effects of the change and that there will not be a material exit of business from the Isle of Man.

Consideration should include those companies that are required to be located in the Isle of Man for tax purposes and those that are mobile and are looking for the low/nil tax costs.

35 Manx Insurance Association

Any move away from the existing system is considered by the Life Sector to be harmful to their business model with no identified benefits. It is also difficult to comment in this respect until it is known what is found to be unacceptable about the existing tax regime.

In general terms from a Life Company perspective any tax regime must be:

 Simple in its application e.g. must not follow a UK basis i.e. not impact policyholder gross up provision. Ireland tax computation fulfils the requirement of simplicity in calculation but not that of being tax neutral and  Tax neutral - no matter what headline rates may be required there is no impact on competitiveness.

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We would anticipate that the review you are having conducted by Deloitte will highlight a number of alternatives. However as potential alternatives we would suggest that a review be conducted of the 'territorial approach' adopted in say, Hong Kong, or the Malta regime with a headline rate, but allowing a credit for distributions made to non resident companies.

36 Isle of Man Chamber of Commerce

We believe it is generally agreed that it is wrong for a company that absorbs income locally (such as Tesco) not to have a local company and pay local tax. This would not be seen as a disadvantage to these companies as they will be able to deduct this at a corporate level in the UK. However, the UK may of course adjust the VAT revenue sharing agreement to negate any real value from such a change.

Brain storming suggestions from the committee for your consideration included:

 We would suggest that the opportunity of a review of corporate taxation also considers how investors in IOM companies (particularly 'angel investors' or investment companies acting in this mode) can be given tax breaks on this investment that would benefit them both here and potentially in their home jurisdiction. IT industries are significantly influenced by the need to raise funding to exploit new ideas and the IOM does not appear to have a proposition to make the IOM attractive in this area.

 If a company is part of a group with a parent resident in a country when tax relief is given for local taxes, any imposition of tax would have a neutral effect on cost. Perhaps companies not in this position could be give some form of start-up or developing exemption. The de-facto definition of a company not qualifying for such exemption being one for whom double tax relief takes care of any additional burden.

 Perhaps pure asset owning companies could be re-defined as dormant which in turn could exempt them from any tax considerations.

 On the basis that the Isle of Man is being picked on for being small and able to be bullied perhaps the DTAs could be used to piggyback off a stronger nation? Perhaps with countries like Estonia or Malta we could protect or add value to the IOM proposition - maybe tax applies to companies unless there is agreement to be taxed within an EU state, profitable Manx companies set up an Estonian/Maltese parent then Estonia sets up a nil band for profits not generated in Estonia etc.

 Consideration might also be given to more disclosure rather than increased tax or perhaps zero tax applies unless we have a DTA with EU countries under which information is exchanged rather than levy a tax.

We support the Government‟s move to build a list of all the special exemptions, tax incentives and other measures taken by individual EU member states (and further afield) and evaluate them for value to us. Perhaps we should also try and establish a model for such exemptions - why are they deemed acceptable, what are the triggers for acceptability etc.

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37

Any move away from the existing system is considered by the Life Sector to be harmful to their business model with no identified benefits. It is also difficult to comment in this respect until it is known what is found to be unacceptable about the existing tax regime.

In general terms from a Life Company perspective any tax regime must be:

 Simple in its application e.g. must not follow the UK basis, and  Tax neutral (no matter what headline rates may be required) so there is no to impact on competitiveness.

38

As mentioned above if the Isle of Man has need to impose a rate of tax on company profits this rate should remain competitive with its European peers. Reform should also include some of the wide reaching reliefs and exemptions seen in other major EU economies. Reform should include the introduction of a dividend exemption, an exemption from capital gains on subsidiaries (or maintenance of no tax on capital gains) and full relief for interest expenses.

It may also be worth considering general insurance specific measures that some EU members employ (or have previously employed) within their regime. Sweden offers relief from taxation if companies chose to build their capital base by allocating earnings to a Safety Reserve. This fund forms part of a company's non-distributable reserves. A tax deduction is available in proportion to the size of the annual allocation. Should the reserve be released to retained earnings tax becomes payable at the prevailing rate. Denmark used to allow a similar deduction. Utilisation of the Swedish and Danish reserves allowed [our Group] to build its capital in Scandinavia in a tax efficient manner. We would like to work with you to investigate whether a similar regime would be beneficial to the Island's insurers.

39

If the principle of the Code Group is to ensure no anti-competitive advantage is conferred by virtue of the tax regime then the review of the business taxation should not be undertaken in isolation to the competitive position of being located on the Island versus the European Union. The business taxation regime currently in existence does nothing more than balance our cost base in comparison to the United Kingdom for a manufacturing business.

Any change in the tax system will therefore need to recognise that the system may confer different advantages to a service business as compared to a manufacturing business. Sector specific tax regimes are, in our opinion, likely to be required.

We would suggest that as part of the review, road price equivalence is applied to the cost of transportation to and from the Island and energy/utility cost equivalence is applied to the cost of manufacturing present on the Island. The impact of this equivalence should be

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response regarded as a material element in establishing a tax regime that preserves the competitive position of the Islands valued manufacturing sector.

40

If the current business tax system cannot be retained, then a blend of the Cyprus and Malta tax systems would appear to be likely to be the most beneficial and least harmful to the Island's economy.

41 Isle of Man Bankers’ Association

In terms of most beneficial / least harmful changes, simplistically speaking these would involve making the minimum level of change necessary to neutralise the negative pressures which are being experienced by the Isle of Man now or are anticipated in future, as a consequence of the current taxation regime. Of course, the tremendous difficulty we all face is that without a clear understanding of what exactly the perceived 'problem' with the status quo is, we cannot reasonably propose a definitive solution.

One option may be a territorial form of taxation which may therefore allow some currently non taxable activities to continue on that basis. Please bear in mind however that were the Island to consider adoption of a 'territorial tax' type regime, such should be structured so as to ensure that there was no differential in terms of tax liability between IOM- sourced bank interest and off-Island sourced interest. In such a regime, some sort of exemption or carve out would be required for Island banks, in order to avoid damages to our sector.

42

In terms of considering alternative taxation systems, any replacement regime should be simple to operate (unlike, for example, the current UK system) and should ideally be 'tax neutral'. There appears to be precedence in the international tax arena for an appropriate 'headline rate' to be combined with certain deductions (e.g. for distributions made to non Isle of Man resident entities, as in the case of Malta). Similarly, there may be some merit in a territorial model, similar to Hong Kong.

43 Chartered Institute of Taxation

Whilst we are of the view that a change to the tax regime will be immediately detrimental we also acknowledge that external pressures do have to be given due consideration. To that end we have considered some of the various options available as an alternative to the 0/10 regime. The regimes we have considered include

 A positive tax rate of 10% with no exceptions  A positive tax rate of 10% with various exemptions and deductions such as an exemption for investment income and a deduction for dividends paid immediately or those expected to be paid in the future  A positive tax rate with an election to apply a 'look through ' procedure  Automatic 'look through'  Automatic exchange of information to enhance the current 0/10 regime  Amend residency criteria for corporate entities

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 Grace periods, tax holidays and/or a transitional period  Territorial system with no exceptions  Territorial system which treats income from businesses with non-Isle of Man customers and bank interest as a non Isle of Man source  Zero rate all companies

This is not an exhaustive list of all alternative tax regimes. We have identified difficulties with all of the alternative regimes considered, but our view is that a move to a positive rate of tax (with or without exemptions) will be the most harmful to the island's economy.

44

In relation to alternative business taxation systems, these should only be considered if there is a 'level playing field' whereby competing jurisdictions no longer offer zero rates of taxation. In this instance a territorial system of taxation could be considered as an alternative to Zero/1O. If the level playing field is unrealistic the Island could consider removing the Business Taxation Regime in its entirety thereby removing any objections.

45 Isle of Man Society of Chartered Accountants

[Verbatim feedback from members on this question]

„A zero rate for all companies would be the preference followed by a territorial system (although this has many practical complexities and unless properly implemented clients would take the view that it is more prudent to simply locate to a nil tax jurisdiction.‟

„But doesn't (c) take us back to what we went away from 3 years ago?‟

„I would couple this with a change in the taxation of banks and financial institutions where (for non Island income) they should have a license fee calculated so as to achieve the same returns as previously obtained from this sector.‟

'Territorial might work it depends on what our competitors do and who moves first. '

„We have to remain competitive.‟

„We need to define what is meant by "territorial". If a flat rate - say - 10% regime is forced upon us consider re-introducing dividend relief, but with no withholding tax, as at present. This would simplify taxation for local businesses, although there would be a tax cost in dismantling ARI for investment companies - possibly replaced somewhat by the charge on all local business - including retailers? For foreign owned businesses the choice would be simple - pay dividends or suffer a 10% charge. Dividends could be re-invested by way of loans or share capital. In the case of companies owned by trusts we should retain the current approach and system of only taxing local interests. It would almost be a selling point to the EU that the Isle of Man is forcing repatriation of offshore profits.‟

„Continue 0% is best (possibly with removal of ARI- the non-code compliant bit). Territorial might work but detail is tricky.‟

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„I think that if the Isle of Man is ultimately obliged to make changes, then a territorial regime, in which the 0% rate is retained for non-local source income, has to be the way forward.‟

„Territorial corporate tax regime initially seems attractive; but I do not see how we could justify then taxing resident individuals on worldwide income. If individuals were taxed on local income only this would result in substantial loss of revenue (and upset UK/Eire who have only just relinquished tax on pensions).‟

„Let's get something out of Tesco!!‟

„If control was from within the Island then all income (worldwide) would be taxed.‟

„Remove corporate tax altogether attribute profits to the Isle of Man residents. Also introduce a new hybrid vehicle - a limited liability trust - a trust with company like qualities that will be taxed as a trust.‟

„The least harmful is to keep the current system or abandon business tax.‟

„A territorial corporate tax regime with low tax rate (e.g. where tax is only levied on local source income).‟

„A flat very low or zero corporate tax rate (5% or below).‟

46

To remain competitive in attracting international business and wealth management structures, the IOM could retain zero tax for specific types of companies which typically form part of tax-efficient international business structures, e.g. holding companies, group service companies, marketing companies, IP-owning companies. Tax concessions for specific areas of business they wish to promote are commonly used by Governments the world over.

Trusts with non-resident beneficiaries should be subject to zero tax, even if companies were taxed. This would protect wealth management structures. Again this could be seen as a specific concession for a vital industry sector.

Turnover and profit thresholds should be used, below which trusts and companies would not be liable for tax. These should be set at high levels. This would contain administration cost to both the Government and business, and could go a long way towards maintaining the IOM‟s competitive position in relation to attracting international business and wealth management structures.

47

To remain competitive in the e-business sector, the IOM could retain zero tax for sales over the internet, or for sales arising from leads generated via the internet. Tax concessions for an industry which they wish to promote is a mechanism commonly used by nearly all Governments. worldwide, e.g. gold mining industry in S.A.

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A double or triple deduction for tax purposes of internet marketing costs (e.g. Google AdWords costs), hosting costs, website design costs, etc. would be another way of reducing the incidence of tax on e-businesses. If the extra deductions were high enough, this could have virtually the same effect as a zero tax rate. Again this is a strategy commonly used by many Governments to promote different industries or economic objectives.

If tax on non-resident owned e-businesses is introduced, there should be a threshold turnover and profit level, below which companies would not be liable for tax. This would contain cost to both the Government and businesses, and could go a long way towards maintaining the IOM‟s competitive position in relation to attracting international business.

48 Association of Corporate Service Providers and the Society of Trust and Estate Practitioners

This is a very difficult question to answer given the amount of information available. The current regime is efficient and effective for the Fiduciary Sector as it stands and there is no driver for change within the sector. We understand that there may be external pressure applied to the Isle of Man to change its tax regime. We are not sure of the nature or source of such pressure. We therefore have no internal driver for change and we are not sure of the nature of any external driver for change. Until the reason for requiring a change, if any, becomes clear we will not be able to determine what would be a beneficial tax regime to introduce. In short, until we know what the problem is, we will not be able to determine the answer.

When, and if, the nature of the external pressure is identified we would be pleased to assist in exploring how a new regime might both meet any commitment the Isle of Man felt obliged to satisfy and also remain competitive.

49

Before considering this question in detail, a number of factors require to be addressed in assessing the suitability or otherwise of alternative tax regimes.

Carve outs

As indicated above, you will be aware that both Jersey and Guernsey propose to “carve out” their fund industries from any new regime. In other words, funds (as per the OECD definition), and all special purpose vehicles (SPVs) serving as eg securitisation vehicles, will be exempt from tax under any new regime. In proposing this, Jersey and Guernsey are doing no more than taking a lead from the suggestion set out in the Deloitte tax report section of the Michael Foot review. It is clearly important to assess whether a case can be made for claiming exemption in respect of any one or more vital industry sectors; clearly, funds are one of these, and we should therefore adopt the same strategy as Jersey and Guernsey. In this regard, we should make it clear that the term “fund” includes all structures through which collective investment is undertaken, ie both open- ended and closed-ended vehicles. We also need to consider whether (a) this exemption could be taken further so as to include eg fund management/administration companies and (b) there are other types of industry sector (perhaps e-gaming?), in respect of which an arguable case could be made.

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In addition, it might be that certain income streams could be exempt, eg all income from “qualifying investments” as happens in Gibraltar. We might therefore wish to define the expression “qualifying investments” as widely as possible.

Finally, within this consideration, there might be certain types of entity which could be regarded as tax transparent for IOM tax purposes. In this regard, we would look to the Dutch Co-op as an example.

Interaction of personal tax liability cap

If the Isle of Man introduced a minimum corporate tax rate of, say, 10% this would clearly, albeit indirectly, increase the maximum personal tax burden for IOM resident individuals. For example, at present, an Isle of Man company which makes, say, £10m of profit pays tax at 0%, with the shareholder suffering a maximum personal tax charge of £115,000. Under a 10% corporate tax regime, the maximum tax burden would increase to £1m. In this sort of situation, we would recommend that consideration be given to a refundable tax credit enabling the total tax cost to be restricted to something closer to the personal tax liability cap.

Taxable entities

We may need to reassess what it is that links a business, or a body corporate, to the Isle of Man tax system. At present, income tax applies to any income arising or accruing to “any person residing in the Isle of Man”. In order to minimise the impact of a general (say) 10% corporate income tax rate on key industry sectors, it should be considered whether or not in future corporate income tax should be applied only to:  companies incorporated in the Isle of Man; and/or  companies which are centrally managed or controlled in the Isle of Man; and/or  companies, wherever incorporated/resident, which carry on business in the Isle of Man through a “permanent establishment” (to be defined, but necessarily including staff and premises); and/or  all companies, wherever resident, in respect of income derived from, accrued in or received in the Isle of Man, ie a territorial basis as is operated in Gibraltar.

Taxation of life assurance policyholder funds

Any introduction of a positive rate of tax on life assurance companies should enable profits arising to policyholders‟ funds to be stripped out in the income tax computation. This is what happens in Ireland, although not in the UK. Any move to a fully fledged UK system of tax for Isle of Man life companies would probably hasten the demise of this particular industry sector within the Island.

Mutual benefits

Clearly, the Isle of Man, as a small non-sovereign jurisdiction, is not in a strong bargaining position, but to what extent can we suggest that our cooperation in this exercise should go hand in hand with:

 an urgent and extensive increase in our double tax treaty network; and/or

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 the right to market services directly into Europe?

It is clearly not fair that the Island should be expected to adhere to mainstream EU standards in terms of minimum tax levels, whilst at the same time not enjoying the market access and DTA network benefits which competing jurisdictions in, for example, Cyprus, Malta and (to a lesser extent) Gibraltar currently enjoy.

Taking all the above factors into consideration, therefore, and mindful of the need to become, and remain, compliant with the spirit of the EU Code of Conduct, we would suggest modifying the Isle of Man‟s tax system as follows.

1 Replace 0/10 regime with a flat rate of 0% for all companies In our view, this is the modification which would most satisfy the “most beneficial and least harmful” requirement and which could indeed not only help preserve our key industry sectors but also generate considerable additional business.

There are two possible objections to this proposal:

 Can we as an Island afford it?  Will it be politically acceptable to the international community?

Can we afford it? It would appear that the annual cost of this measure would be of the order of £20- £25m. It is clearly not a good time for the Isle of Man to suffer an additional loss of this scale. However, if we can devise other, possibly short term, ways of generating revenue to plug this gap, the expense could well prove to be a worthwhile investment for the future.

(As an aside, on the question of alternate revenue raising measures, if a one-off levy of £1,000 were charged in respect of each work permit currently in issue in the Island, this would raise an additional £9m.)

Would it be politically acceptable to the wider international community? We do not see why it should not be. The complaint which has been levelled is that our tax regime is not within the spirit of the EU Code of Conduct. This initiative is concerned with differential/harmful tax regimes, as earlier explained; a flat corporate income tax rate of 0% is not differential and therefore cannot be harmful. The Cayman Islands, BVI and Bermuda do not impose income tax on businesses, and are under no international pressure to do so. We do not see why the Isle of Man should be any different.

It is accepted that neither the Cayman Islands, BVI or Bermuda have any form of direct taxation at all. We of course would retain our system of personal taxation. However, we note that Monaco has no personal taxation but a relatively high (33% or so) rate of business tax; why should we not have the reverse?

One matter which the UK/EU may raise is the attribution regime for individuals, or ARI. It would seem to be the position of the Manx Government that the ARI is a personal tax measure, and is not therefore a matter which needs to be considered in the

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context of the business tax review. However, it is conceivable that the UK/EU may take a different view, and regard the ARI as simply a mechanism or device by which a harmful business tax regime is facilitated. The next question then is, if the EU/UK permitted a reduction in the headline corporate tax rate to 0% solely on the basis that the ARI were abolished, could we afford to do this? We suspect the answer is no, unless the ARI were itself replaced by revenue raising measures which did not constitute an ARI equivalent, for example:

- increasing the headline rate of personal income tax even further, perhaps to 25%; - a tax on company ownership, perhaps expressed as an alternative minimum tax on deemed distributions; and/or - a tax on actual or deemed disposal proceeds from company share sales (although it is accepted that this proposal would make Government budgeting difficult).

2 Headline rate of 10% with multiple carve outs

If a reduction to a flat rate of 0% is not acceptable or affordable, we would suggest that the general rate of corporate income tax be increased to 10%, but subject to the following.

 Funds and all SPVs used as securitisation vehicles should be exempt from income tax (see above discussion). We should also try to see if fund managers can be exempted.  Manx corporate income tax would apply to any company, wherever incorporated, which has a “place of business” in the Island, as defined. “Place of business” should necessarily include having trading premises, staff, business infrastructure etc. The definition should be expressed so as to exclude from scope all “managed” entities.  “Qualifying investments” should also be exempt from tax. This should include: - Dividends from group companies (eg a form of participation exemption) - Bank interest - Other?  Companies which otherwise would be tax paying in the Isle of Man can elect to be tax transparent by filing a US style “check the box” election. As a result of making this election, the company‟s profits would be deemed to accrue to the shareholders. The Isle of Man would not pursue any Manx income tax liability arising to a non-resident (individual?) shareholder.  IOM based life assurance companies would not pay Manx income tax in respect of policyholders‟ funds.  A company which starts up in business on the Isle of Man will qualify for a five year tax holiday (ie the provisions at present contained in Section 2A Income Tax Act 1970, perhaps with modifications to reflect modern day industrial trends). We recall that this measure was not deemed to be harmful by the Code of Conduct Group. Of course, in recent years, the 0% rate has meant that this provision has not been required; it might therefore be possible to begin the five year period, for suitable applicants (eg gaming companies etc) from the date the 10% (or whatever) rate is brought into force.

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 A deduction from income tax for dividends paid, with no withholding tax on distributions to non-resident shareholders. This would ensure that only local resident shareholders paid tax on company distributions.  e-Gaming and insurance (both captive and life assurance) companies would be entitled to a “special reserve” against their otherwise taxable profits. This might be 20%, so as to correspond with the old insurance companies‟ “statutory reserve”.  To the extent that revenues are otherwise generated by the 10% rate, betting/gaming duties could be reduced.  Companies would be entitled to a tax credit equivalent to, say, 10% of their payroll costs.

Some of the above measures will serve to limit the damage caused by the introduction of a positive rate of tax, and may ensure that many, if not most, of our key industry sectors are protected.

However, it would appear inevitable that some increases in tax will result and these will be accompanied by an enhanced level of complexity for companies filing in the Island. It is for this reason that our preferred solution is the introduction of a flat 0% rate of income tax, applicable to all Manx companies.

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WHAT IS THE MINIMUM TIMESCALE IN WHICH YOU CONSIDER CHANGES TO THE ISLE OF MAN BUSINESS TAXATION SYSTEM COULD BE MADE WITHOUT COMPROMISING THE ECONOMY?

50

I would think a notice period of at least one calendar year is necessary.

51

Taxation rules should not be seen in isolation from company law, accounting and regulatory rules. Private groups wish their affairs to be private, with public disclosure only where there is a clear public interest policy.

Business structures, and their effect on the corporate and Manx infrastructure, will need a minimum of two years planning.

52

Careful consideration is required in such a complex area with multiple variables and therefore setting a timetable is difficult.

It is essential that the OCED and EU are included in the process so as to avoid later issues. There must be sufficient time set aside to draft proposals, allow full consultation, redraft proposals based on the initial results and then have a final consultation period. There should also be post implementation reviews to ensure that the arrangements are working as planned. This all points to a timetable of perhaps 18 – 24 months.

There may be scope to hold off on making any changes to see the results of the Jersey and Guernsey process first.

It must be appreciated that the questions raised affect many areas of the Isle of Man economy, not simply the companies that will pay the revised tax but also associated service providers and employees. Further clarification is required as to what would be an acceptable new tax regime with the parties driving the change, namely the EU and OECD, rather than interested parties suggesting solutions that may be rejected when scrutinised.

53 Manx Insurance Association

An overriding assumption relating to timescale for changes is that as the Isle of Man Government has publicly stated there is no short term requirement for imposing tax as a means of 'plugging the VAT funding gap'.

This being the case as the zero/ten regime is so fundamental to the Isle of Man jurisdiction operating model it is essential that the Isle of Man is not 'first to market' but gets it right - there is no competitive advantage to be had by increasing the costs of operating in the Isle of Man.

In respect of minimum timescales this will, of course, depend on external pressures but given the fundamental nature of the issue it is considered that a minimum period of

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response consultation and review of 2 - 3 years are required with a target date of implementation of any changes within 5 years.

It is interesting to note that the new UK Government has announced a review of its own corporation tax regime so as a minimum the Isle of Man should not finalise its review before the UK has completed.

54 Isle of Man Chamber of Commerce

The Isle of Man should not be leading the way on business taxation changes. We should wait to assess the impact of the change of Government in the UK and to see if Guernsey and Jersey do announce corporate tax reforms later this year as publicised. We perceive no advantage to being first but we are aware that uncertainty could affect investment in the Island and too long a delay could result increase the danger of being blacklisted.

We believe that it is very important that consultation is carried out in detail on any proposal with existing businesses before any final decision is made – perhaps with industry working groups who can evaluate how any proposed change might affect them (including all sectors not just finance). Perhaps options could be debated in a behind closed doors working party day as was previously held at the Golf Links hotel.

55 Association of Chartered Certified Accountants

We feel that businesses always react badly to any uncertainty and that any changes must be processed as quickly as possible.

However it is important for any potential changes to be open for consultation for a period of say 2 months before being enacted by Tynwald.

We feel that any proposals should be in place for tax year 2011/12 wherever possible.

56

A hugely beneficial feature of the Island's current regime is its transparency and predictability. It is our experience that we can manage change well when we know our expectations are accurate. We would therefore recommend that any reform to the Island's tax system be open to consultation at every stage of development and that reform should not occur within a year of finalised proposals.

57

As noted in the responses to questions 1 and 2, a change to the business taxation system that results in a higher cost base will influence investment decisions and decisions as to where we place work within the group. The timescale chosen should therefore be one that is appropriate for the Island to manage the changes in patterns of employment that result from it.

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58

The phasing in of a new business tax system over a period of three years seems reasonable. This should allow existing businesses to make and implement the necessary changes in order to comply with the new business tax system.

59 Isle of Man Bankers’ Association

Again much will depend on the nature of the perceived threat as to the immediacy with which any revision should be implemented. In an ideal world, a protracted period of several years would be desirable, to allow both Government and business time to adapt from both a process and business model perspective. If a key component of any new business tax regime were to involve an increased use of DTAs it would accordingly seem essential, in order to protect the Island's financial community and to ensure a smooth transition between regimes, that any timeline for migration to such a new regime should allow for the development of a suitably large tax treaty network.

60

Clearly, the objective for attaining an internationally 'compliant' taxation system must not be influenced by any short term objectives within Government to plug gaps in the overall Government tax take (VAT included). In the absence of any obvious internal time pressure, therefore, we would suggest a minimum consultation of two to three years, with implementation no sooner than five years. As a minimum the Isle of Man should not finalise its review before the UK has completed its own review.

61 Chartered Institute of Taxation

Any change in tax policy must be carefully considered and the timing of any change is also a key factor in the extent of the damage to the economy. It is appreciated that other jurisdictions with which we compete for business are suffering similar pressures, but the implementation or announcement of changes in advance of those other jurisdictions will only serve to increase the harm to the island's economy.

It remains to be seen exactly what viable options are available and from our initial review, each of the options present certain disadvantages. We would welcome the opportunity to comment further after the findings of the consultation are made public. We re- iterate the necessity not to be too hasty in making changes to the Isle of Man tax regime as the impact of such changes could have a significant detrimental effect which once done cannot be undone.

62

In relation to timescale, the Isle of Man must be careful not to rush to make changes whilst competing jurisdictions retain a zero rate of business taxation as to do so would lead to a massive loss of business. In [our] view the Island should be seen to be carefully considering the matter and importantly seeking to establish the reasons why Zero/10 is considered to be harmful.

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63 Isle of Man Society of Chartered Accountants

[Verbatim feedback from members on this question]

„It depends on whether the changes are damaging or not. If they are damaging, then any change would compromise the economy. If a harmful change is introduced it will prevent any new business coming to the Island. The timescale of its introduction will determine the speed it leaves.‟

„I would expect a 2-5 year implementation for whatever potential measures - but most changes discussed above I see as compromising the economy unless there is true global implementation. Any time prior to competitor jurisdictions such as BVI, Cayman and Dubai would compromise the economy. Clients will remain at the last stop and therefore if for example we introduced tax five years earlier than Dubai then all companies would move to Dubai and then even after Dubai introduced tax it is likely that by this point the companies would remain in Dubai as the industry would be pretty much gone in the Isle of Man and in any case there would be no real incentive for clients to transfer business back to the Isle of Man.‟

„International tax seems now to be subject to the political whims of the US/EU and blows hot and cold depending upon current political opinion. Promising today and delivering in 5+ years gives the Island needed flexibility whilst probably keeping it outside the meddling clasp of non Island politicians.‟

„Whilst certainty is useful we consider it better to bide time and simply make positive noises to authorities without change to the present system.‟

„It depends on what the changes are and what alternatives (income wise) the Isle of Man can find to fill the missing gaps.‟

„Depends very much on what the rest of the world is doing.‟

„But the Isle of Man needs to make a very strong statement ASAP that 10% is not an option whilst other jurisdictions have lower rates uncertainty is already frightening new business away.‟

„Effectively as long as possible.‟

„If adverse change is expected, advisors will start moving business straight away.‟

„No matter how long it takes imposition of a 10% flat rate will affect us unless all offshore centres move to the same system simultaneously.‟

„Depends upon what is changing and international pressures.‟

„Provided the right changes are made then they should be introduced straight away, i.e. ASAP.‟

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„It will take a lot of time to design the system, work out what the consequences are and then make appropriate changes to the business model. You cannot expect to do that in less than two years. At the same time, if change is being forced by external considerations, a time scale of over five years simply won't fly.‟

„Any increase in taxation could affect the economy.‟

64

Any change increasing the tax burden should be phased in over a number of years to minimise disruption of the economy.

Any negative changes should be timed to ensure that the IOM does not move to introduce higher tax rates before its competitor jurisdictions, e.g. Jersey, Guernsey, etc. If certain competitor jurisdictions remain at zero tax (e.g. Dubai, BVI, Mauritius) the IOM should consider retaining zero tax until there is a completely level playing field.

65 Association of Corporate Service Providers and the Society of Trust and Estate Practitioners

The answer to question Q3 is related to answer to Q2. No change would currently be preferred. If there is a problem which requires a change of regime, we would need to fully understand that problem both to consider what the solution might be and the timescale for implementing any solution.

66

In our view any planned changes should be deferred for as long as possible. This will allow:

 short term business to flourish; and  longer term business to take a measured view as to whether more tax efficient alternative locations should be considered.

It is clearly, we would suggest, not in the Island‟s interests to implement changes in the short term. In particular, if there are to be changes involving a positive rate of tax, we see it as important that we do not position the Island ahead of Jersey and Guernsey in this respect, so that the Isle of Man is not seen to be “leading the way” in rolling back its 0% regime. We would therefore recommend that no changes be introduced prior to, say, 6 April 2014.

Indeed, we are mindful of the lengthy “rollback” period which has been permitted to certain EU jurisdictions with favourable tax regimes (Madeira, Cyprus, Malta etc). If possible, therefore, we would suggest that planned changes be phased in over, say, a ten year period beginning in, say, three years‟ time.

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OTHER COMMENTS

67

Manx investment companies which receive UK dividends…continue to pay double tax e.g. 20% deducted in the UK which is irrecoverable and then 20% is payable here on the 80p remaining. Clearly this is excessive relative to the overall rates payable on other sources of income.

68

Is a quid pro quo of complying with the Code of Conduct is improved access to EU benefits? For example, the benefit of Parent Subsidiary Directive and the Interest and Royalties Directive, and the freedom to provide services. This would make the IoM competitive with other EU member states which offer similar regimes, but which also qualify for these benefits. Otherwise we could find clients in a position where they have a choice between locating activities in either the IoM or in the EU - with the same tax result but with these added benefits in the latter case. An expanded tax treaty network would also assist.

The IoM must continue to offer a competitive regulatory regime - we have a number of clients in different sectors who have chosen the IoM for both the tax benefit, and the regulatory regime - for instance in the online gaming sector.

It should also be acknowledged that in many cases the IoM is less competitive than Jersey or Guernsey because of the VAT regime. There are many reasons why a company would want to be outside the EU VAT regime - irrecoverable VAT on reverse charged services, low value consignment relief on imports for example.

69 Fund Management Association

The representatives of the Committee felt that greater consideration should be given to ways in which a broad 'zero' tax could be maintained; accepting that there are various political forces at work which might make this impossible, the view was that these pressures were not fully understood but that this option remained the most attractive.

Accepting that a rate of tax may have to be introduced, it was agreed that this rate should be as low as possible (and in line with other similar jurisdictions).

That if any rate of tax is introduced, the fund industry would request an exemption for IoM collective investment schemes that included the Exempt International Schemes.

That consideration be given to this exemption being extended to cover all 'closed ended' funds including listed structures.

If a rate of corporation tax is introduced there is no prospect of all competitor jurisdictions adopting the same rate; as a result, such a move would be broadly detrimental to our competitive position.

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That if a rate of corporation tax is introduced and there was a specific 'carve out' made available to collective investment schemes incorporated and administered in the Isle of Man - this may create an even playing field with other jurisdictions, but is unlikely to be a 'selling point' for Isle of Man incorporated funds.

The Committee believes that the Isle of Man should implement a zero rate of corporate taxation. It is understood that this will lead to a drop in tax revenues, but this could provide the platform from which various sectors of the Manx economy (including the funds industry) would be able to achieve meaningful growth.

We believe that the economic modelling being undertaken by Deloitte (for various rates of tax) should concentrate on a corporate rate of zero and that their discussions with industry should seek to quantify what level of benefit could be derived from this position.

70

We are NOT in the EU and we need to differentiate ourselves from it and the USA world drivers - rather than trying to emulate it or to suck up to them – so we can gather trade or we merely become the same as the EC and USA but without the rights and privileges – I know this is NOT the consensus view and my views will not prevail but I make the point – only time will tell and my predictions are that the IOM and other such places will gradually financially deteriorate – while places in the middle and far east I am now more familiar with who are differentiating themselves will prosper.

71

The IOM is being badgered into moving tax rates up and I think you must know how detrimental this would be to the island apart from breaking faith with all those who have uprooted to come and live here.

Whilst I understand that Ministers want to achieve reputation with the EU the fact is that you never will. Regardless of your efforts so long as your tax rates remain a modicum under their rates you will be held to account.

Fact is that the island does not need to raise more tax and is not the inhabitants‟ fault that the major countries have followed policies that have exasperated their own budgets causing taxes to rise. In short they have not been prudent.

There is another factor for your consideration. The UK government regularly pays Ford £5m to maintain the plant at Halewood. They paid Toyota to build at Derby and Nissan Sunderland. The French subsidise their horseracing system through taxation as do the Irish. Such state aid equates to the same function as a low tax area except government is in control of spending.

I am a consultant to the […] industry. Ten percent of Corporation Tax would prevent companies coming to the IOM as we are already disadvantaged by VAT and none EU access.

From a business perspective you are outside the melting pot of ideas and innovation. You learn of changes too late to make an investment and profit.

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If taxes rise we will go elsewhere: probably back to the UK.

72

Stability of the business taxation system is crucial to us. We relocated our business here from the UK in 2004. The never-ending stream of legislative and taxation changes in the UK was a significant factor in our decision to relocate our business here. Therefore, we are extremely concerned that the business tax system here has changed a number of times in the past few years. Firstly there was the ill-thought out DPC, then the ARI.

Changing the business taxation system repeatedly impedes our ability to plan for the future, and the effort of keeping up with the changes reduces the attention we can give to running our business effectively. We believe that emulating such a negative aspect of the UK environment risks making the Island a less desirable place from which to do business.

The consultation document makes the following two statements: "17. It is important that the Isle of Man Government should take account of the views of the EU in relation to the Manx tax system." "19. The Isle of Man Government wishes to be in a smoothly functioning economic relationship with the EU and its member states, and must, therefore, take seriously the matters set out in this paper.

However, changing the tax system of a country is not something to be taken lightly and it is not something that can be done overnight."

The original DPC regime was created to satisfy the EU's requirements, but failed in that attempt. The ARI similarly was introduced and it appears that this has also failed. The benefit of continuing to capitulate in this matter to the desire of the EU to eliminate competitive tax regimes therefore seems highly questionable. We believe that the Government should take a firm stand and resist such unreasonable and self-serving pressure by the EU.

The benefit of continuing to capitulate in this matter to the desire of the EU to eliminate competitive tax regimes therefore seems highly questionable. We believe that the Government should take a firm stand and resist such unreasonable and self-serving pressure by the EU. Even if another scheme were to be introduced, what guarantee is there that it will be acceptable? Might not the EU then find some other objection forcing the Island to endure further years of harmful uncertainty?

It is important that the Island not be coerced into raising unnecessary barriers to business. We believe that the Isle of Man should be robust in defending its interests, and in particular its commitment to maintaining a simple transparent and business-friendly regulatory and tax environment. Only in this way can the Island continue to attract and retain additional business.

These considerations are all the more important for smaller, owner-managed businesses who wish to become resident. Entrepreneurs are particularly wary of the burdens of bureaucracy both in terms of management time and the costs of obtaining specialist advice.

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We cannot stress too highly the attractiveness of the Island's hitherto simple and transparent approach to taxation. The Island should not be undermining its significant achievements in this area.

We would like stability in the business taxation system. Whilst we appreciate the need for the Government to raise revenue and ensure the continued viability of the Island as an offshore centre for large financial institutions, we do not want a continued string of new proposals. Stability is key to the Island being an attractive place to run a business.

Co-operation with the Channel Islands

It would seem sensible for the Isle of Man, Guernsey and Jersey to work together on the issue of taxation. Any of the islands alone does not have much of a voice, but together that voice would be considerable, especially given the amount of cash that flows through the Crown Dependencies.

Although the Channel Islands are competitors to the Isle of Man in the offshore market, the different islands have different advantages and disadvantages so the competitive effect is limited.

73 Manx Insurance Association

To sum up the MIA membership views in relation to the consultation:

 The current I0M tax regime is seen to be compliant and as proposed by the Isle of Man Government the rationale for non compliance should be established before anything further is formally progressed.

 The Life Sector in the Isle of Man, perhaps because it has been established for a number of years and is well established in the offshore market place, tends to ignore the cost of operating out of the Isle of Man. Serious consideration would need to be given whether there was a long term future in being based here given the limitations of access to certain markets if taxation was introduced.

 Any proposed tax will be a direct cost for MIA members and in today's environment of cost focus will result in cost reduction from other areas to compensate - staff costs are the most significant cost for companies.

74

Approval of zero/ten

We note from paragraph 11 of your consultation document that in 2003 both the Code Group and the EU Council of Finance Ministers approved the current zero/ten regime and from paragraph 12 that, following a finding by the Code Group in 2007 that the DPC was not in conformity with the Code, the DPC was withdrawn.

The Code has not changed since then and neither has the Island's business taxation system. That system was in conformity with the Code and therefore, still is. The logic of

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response this conclusion is irrefutable notwithstanding any reports by HM Treasury officials regarding the evolution of opinions within the Code Group. Unless and until the Code Group finds that any specific features of the Island's current business taxation system are not in conformity with the Code; the system is and remains in conformity with the Code.

As a result, nothing should be changed unless and until there is a clear and specific reason given for the change. This should be the cornerstone of any discussions the Isle of Man government has with any external party.

Economic consequences

The Island's economy has continued to perform well over the last five years, even through the current depression that is affecting most EU Member States. This performance is down to a number of factors but the zero/ten regime is arguably the most important of them.

We are of the view that any change to any positive general rate of corporate income tax would cause substantial damage to the Island's economy. We have not sought to substantiate this view, partly because we believe it is self-evident and partly because we expect a number of the Island's industry bodies will provide this substantiation.

The Island's current business taxation system has been and continues to be good for the Island's economy and the Isle of Man government should not change it unless and until there is a good reason to do so.

Possible future developments

It is conceivable that at some point the Code Group could find certain aspects of the Island's business taxation system to be not in compliance with the Code. If and when this happens, the Island's government should address the Code Group's concerns and deal with them whilst preserving, to the greatest extent possible, the essential features of the current system.

Possible attack on ARI

ARI imposes a level of taxation, albeit at shareholder rather than entity level, on the business profits of locally owned Isle of Man companies that it does not impose on the business profits of foreign owned Isle of Man companies. It could, therefore, be seen by some as not compliant with the Code. If the Code Group were to decide that ARI is not compliant with the Code then ARI should be withdrawn. In order to protect revenue, it will be necessary to introduce certain personal income tax provisions that would achieve substantially the same result and be similar in concept to, but more widely drawn than, the UK's section 720 ITA 2007.

The basic thrust of the legislation would be to require any Manx resident individual or trust (other than a non-liable trust) to disclose significant shareholdings in any company (Manx or foreign). If that company does not meet certain minimum distribution requirements the legislation would then charge that Manx resident to tax on an appropriate proportion of that company's retained profits.

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It will be necessary for Income Tax Division to put a special effort, at least in the early years, to enforce compliance with this provision. However, we understand that the Division intends to increase enforcement activities in the near future anyway. General attack on zero/ten

As stated above, the current zero/ten regime is Code compliant and has been recognised as such by the relevant EU bodies. Any assertion by any participator in the Code Group that it is not would therefore be politically motivated. We recognise that the current depression is causing a great deal of finger pointing within the international community and offshore jurisdictions are getting a disproportionate share of the blame for what has happened. A politically motivated attack on the Island's zero/ten regime needs to be seen on this basis, i.e. as an attack on the Isle of Man for its own sake rather than having anything much to do with the zero/ten regime.

A political attack justifies a political response which would mention the Island's white listing by the OECD, its position relative to a number of EU Member States in the list of secrecy jurisdictions published by Transparency International and the hurt felt at the unjust way in which a number of such Member States continue to black list the Isle of Man in their domestic tax legislation. As any such response would need to be communicated via HM government in the UK, it should also point out:  The generally favourable report on the Isle of Man in that government's own Foot  Review;  The substantial capital flows into the UK generated by the Isle of Man as recognised in that review; and  The recent Commons Select Committee criticism of HM government for failing to represent the Island's interests internationally whilst interfering in its domestic affairs in ways that do not recognise its essential independence.

As stated above, we are of the view that any change to any positive general rate of corporate income tax will cause substantial damage to the Island's economy.

Furthermore, there is no reason to suppose that any changes the Island makes to its tax system will satisfy the politically motivated attackers. If the Island is, by definition, at fault then nothing it does will be acceptable.

Because of this, we believe that the Isle of Man should continue, for as long as possible, to maintain the position that the zero/ten regime is Code compliant and unless and until the Code Group finds that any specific features of the Island's current business taxation system are not in conformity with the Code, there is no reason to change it.

Even if this position is not eventually sustainable, holding it for as long as possible should pressure the Island's critics into being more specific about what they perceive to be wrong with the current system. Once specific concerns are raised, they can be addressed. For example, if the split rate is the problem, the Island could move to a flat zero rate (whilst drawing attention to the split rates that exist in various EU Member States). Whatever is done, however, should not alter the basic principle of a general zero rate for corporate income tax. To do so would cause substantial damage to the Island's economy.

Long-stop position

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It is possible that there will be nothing the Island can do to appease its attackers. If this is the case, the only course of action open would be to scrap corporate income tax altogether. Whilst this may not satisfy the attackers, the logic is appealing; if the Island does not have a business taxation system at all it cannot have a business taxation system that is in violation of the Code. We see this as a last resort because of:  The increased acrimony it might bring into a discussion that is, after all, supposed to be about the "spirit" of the Code;  The inherent difficulties in reinstating corporate income tax if the climate changes in the future; and  The money-laundering and regulatory compliance consequences if Manx companies are no longer required to report their profits to any government body.

Although this should be seen as the last resort, it may ultimately turn out to be the only resort left for the Isle of Man to flee to.

Revenue considerations

Whatever the outcome is, it is likely to result in a loss of revenue to the Isle of Man government that will need to be replaced. Early implementation of the new taxes on banks proposed by the IMF might go some way towards filling the gap but further measures will probably also be necessary. One possibility would be a broad package of measures that, taken as a whole, could be presented as "green", i.e. taxes on the consumption, destruction and occupation of the Island's resources and on damage done to the world's oceans and atmosphere. This is likely to include some sort of tax on the ownership or occupation of commercial property in the Isle of Man. The environmental credentials for these taxes could be enhanced by including them within a broader package including various non-fiscal measures for environmental protection.

75

Beyond this, I would specifically wish to draw out the risk to the Isle of Man Insurance Industry if any change to the tax regime does not maintain advantage over Ireland as a jurisdiction of domicile.

At present, the Isle of Man has significant advantages over Ireland in terms of perceived financial stability and technical quality of the resource pool, as well as tax. However, from [our] perspective, I am particularly conscious that Ireland can boast:

 EU domicile, making passporting (although not simple) possible.  VAT advantages in respect of Discretionary Management fee classification.  Access to a larger labour pool.  Access to grant funding.  In Lloyds Banking Group's case, the availability of a significant existing presence and infrastructure.

My only other […] specific comment would be to ensure that the review considers that Isle of Man companies can be part of complex corporate structures, (for example, we are owned by a […] Company), as a result of which any plans to negate impacts upon UK owned companies will not be broadly applicable within the jurisdiction.

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76

It is my view that a properly managed move to 10 within the period is achievable without loss of the critical mass of international mobile business within the economy.

Firstly however it should be acknowledged such a move would be materially damaging to the CSP/TSP and Fund Administration and other sectors that service Third Party Business. It would also materially damage sectors such as Space and operations where the parent entities are domiciled in onshore/offshore jurisdictions such as Hong Kong and Luxembourg.

Some sub-sectors such as price sensitive CSP/TSP operations would inevitably be unable to continue.

Secondly, without expeditiously placing ourselves in a position better to challenge the onshore/offshore jurisdictions, the sourcing of replacement and new business will prove a considerable challenge.

Having said it is achievable, I believe that a longer timeline than the Period is still required (if politically possible) in order for the Isle of Man to evolve without significant risk of a material loss of business without reasonable certitude of such business being replaced. Such period would be, in my view, 10 years or 2020.

77

We write in response to the recent consultation document on the review of the business taxation system in the Isle of Man and would comment that we have found a response difficult.

As referred to in the consultation document the meetings in September 2009 indicated that the zero/ten regime could be considered harmful. However, in the absence of further information as to exactly why it is harmful, it is difficult, if not impossible, to comment on an appropriate strategy for change. We are of the opinion that it would be unwise to make changes unnecessarily should it be concluded that the regime is compliant.

If it is considered harmful an aggressive stance by refusing to comply further would appear to be a sea change in attitude by the island that has worked hard at establishing the significant number of TIEAs and DTAs now in place. Why would such a change in attitude be considered at this stage?

The outcome of the economic analysis is crucial in identifying the island's main sources of business and potential growth areas across both industry sectors and geographic markets. It should provide valuable input into the future business strategy for the IoM whether or not changes are required to be made to the business taxation regime.

We have spoken informally with a number of clients, CSPs, banks and lawyers with whom we work and the initial response has been overwhelmingly to leave things as they are together with a general concern over the potential introduction of a flat positive rate of corporate tax.

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It is an obvious comment that losing the current tax advantages offered by a neutral regime would result in much of the island's existing business being lost to jurisdictions that remain unaffected by the changes.

However, a damaged reputation in the EU (by refusing to comply) would be particularly harmful to the island's yacht and aircraft business which would have an impact on the CSP business anyway.

Should a positive rate of corporation tax be considered appropriate, clarity should be sought over the potential for the use of carve outs for existing industries and where any limitations in this strategy may lie. Ideally, certain industries such as fund management would be excluded whilst a positive rate, applicable to existing UK retail business operating on the island, could contribute significantly to the islands economy.

The IOM must use this as a positive opportunity to promote the island's strengths and demonstrate why it is a good place to do business for reason other than a neutral tax regime.

In conclusion, we believe it is necessary to have more detail as to why our existing regime is considered harmful before any remedial action can be, or should be considered and the timescale will be driven by this.

78

I am extremely concerned that the introduction of a rate of corporate tax or any changes to the existing corporate tax regime, that is not similarly reflected by our competing jurisdictions, would negate or damage the Island‟s tax neutrality for new business entrants, and destroy one of the cornerstones of the Island‟s core competitive advantages in UK and International markets. We believe that the introduction of a rate of corporate tax will have a disastrous effect on the Island‟s ability to attract new business and this in turn will severely undermine our Group expansion strategy which is predicated upon there being a fertile stream of new business entrants to the Island now and in the future.

79

To sum up [our] views in relation to the consultation:

 The current IoM tax regime is seen to be compliant and, as proposed by the Isle of Man Government, the rationale for non-compliance should be established before anything further is formally progressed.

 The Life Sector in the Isle of Man. perhaps because it has been established for a number of years and is well established in the offshore market place, tends to discount the cost of operating out of the Isle of Man. Were there to be additional costs imposed by taxation, consideration would need to be given as to whether there was a long term future in being based on the Island given the limitations of access to certain markets.

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 Any proposed tax will be a direct cost for this Company and in today's environment of cost focus will result in cost reduction from other areas to compensate - staff costs are the most significant cost for companies.

80 Isle of Man Society Chartered Accountants

[Question from the Society is followed by verbatim feedback from members]

The Consultation Document invites responses on the basis of the Government's stated policy of being 'accepted by the International community as responsible and cooperative.' It also 'wishes to be in a smoothly functioning economic relationship with the EU and its member states…' Do you agree with this policy?

„There are degrees of acceptance by anyone country and the "international community" is very large - we can't necessarily expect them all to be happy if our tax system gives us certain real or perceived economic advantages.‟

„Yes, providing we have a level playing field.‟

„We need our own functioning economy so there has to be recognition that we need to make our living and that our competitors are not necessarily EU based - currently I do not see the EU and Britain in particular as having a cooperative relationship with us. This message needs to be put across plainly, clearly and forcefully.‟

„Subject to the overall impact of such policies on the Isle of Man.‟

„I am not enthusiastic on being enthralled to the EU in any way.‟

„Provided all other EU states deal with us in an even-handed and equitable manner.‟

„In that interference with Isle of Man affairs by EU is not to the Isle of Man's detriment.‟

„The Isle of Man needs to be viewed as cooperative and responsible however that should not be at any price. The Island should not accept points which are severely detrimental just so we can be seen as being cooperative. This appears to have been our stance previously and being ahead of the curve does not appear to have been particularly beneficial.‟

„This has a significant detrimental effect on the competitiveness or the finance sector in dealing with non EU markets.‟

„Whilst there isn't a level playing field on taxation within the EU international community; why should the Isle of Man be dictated to?‟

„We should always be responsible and cooperative but care needs to be taken as now the doctrine of "level playing field" appears to have been abandoned one fears that without protectionist measures the attack on crown dependencies will lead to work moving to other lower/nil tax jurisdictions such as Singapore and Hong Kong with thus a loss to IoM (sterling) and Europe - as happened with the marine personnel sector.‟

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„However recognising the Isle of Man's status within Europe as a separate independent, self-governing nation.‟

„Yes but not supine.‟

„I don't think there is any choice and any other way, at the moment, but it ultimately depends on what the co-operation entails.‟

'I consider the Government's policy to be wishful thinking unless we introduce a primitive tax regime, as with the rest of Europe, there will always be a stand-off.'

„I don't believe that it is in the Island's best interest to always be "first" to give in to EU bullying tactics.‟

„Yes agreed but subject to the Island retaining a viable economy together with an acceptable environment for its residents.‟

„The Isle of Man should question whether the international community requirements are fair and reasonable and applied to all countries.‟

„The Isle of Man Government needs to draw a line which in advance it will not go beyond. The Isle of Man cannot continue to accept moving goal posts. This current review must be the last and even within this review a line must be drawn beyond which the Isle of Man does not go. For example, a tax regime accepted in another EU jurisdiction should be accepted for the Isle of Man. The Isle of Man must take a firm line and insist on level playing field.‟

„The Island needs to take care to ensure that by being "accepted" it does not slip into simply accepting that the International Community can force everyone to common (and high) tax levels due to their own profligacy. This is really a version of protectionism.‟

„Concerned that we should not be adopting too may EU regulations for the sake of harmonisation.‟

81 Isle of Man Society Chartered Accountants – further comments

„It is very difficult to comment on what, if any, changes should be made because it is not clear what characteristics of our existing system are considered unacceptable or exactly who it is that considers them to be unacceptable.‟

„I would suggest that in order to achieve an environment that would have little impact on existing fiduciary business but could meet INTUEU requirements, we could adopt a UK style "check the box" regime. In this way we could introduce a corporate tax rate of say 10% but allow companies to opt to be treated as transparent for tax purposes so that profits are deemed to be those of shareholders. Not that dissimilar to current ARI rules but in line with those of a major G20 country. We would also be to determent which companies could not make this election - i.e. banks, insurance etc. Similar again to US "PCRSE corporations".‟

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„Clients and their advisers who require a zero taxed company will not locate the company in a jurisdiction which either gives rise to taxation or where there is complexity in achieving a nil tax position. Existing companies will in many cases either be closed or the statutory seat transferred to a new jurisdiction. With regard to "substance" companies with staff etc. setting up in the Isle of Man, the evidence in recent years is that even with zero taxation to take up is not sufficient to replace the fiduciary and associated banking, legal and accounting industry while at the same time acting as a disincentive to new substance companies.‟

„Clients are commercial, if the cost of moving from the Isle of Man to a zero rate jurisdiction is lower than the potential tax payable then will they stay. Good luck to the last zero rate regime left standing.‟

„The process so far has been very confused. We are told IOM regime might not be EU code of conduct compliant but we are not told what element is non-compliant. Until we know the problem, we can't identify the solution. Step 1 should be a query to UK Treasury or EU call group to politely ask "what is the problem". Once the problem is identified we can attempt to deal with it.‟

„1. I don't think that the Isle of Man should be too concerned about the perceived tax benefits of flat 10% rate viz-a-viz future D.T.As. This is irrelevant the Isle of Man will never be fully accepted in that regard. 2. The Isle of Man must continue to use the Foot report as proof that the Isle of Man is not harmful to this global economy, to try and refute all other claims to the contrary. 3. If necessary, the Isle of Man should refer to annexe of Foot Report (The Deloitte report) in which it sets out a "best practical" tax model of a territorial -type system and use that report to justify moving to a territorial regime. I would be very surprised if the now Deloitte report suggested anything else.‟

„We regard to the present zero-ten strategy, I am uncertain as to the justification for taxing rental income at 10% (in particular residential). A non-resident individual is tax at 20%. If he transfers properties into a company he is taxed at 10% - even if all net income is distributed to him. (I believe Guernsey still tax rental income at 20%).‟

„Please wait until we are put under pressure to do something. Then wait a while longer for everyone else - including Delaware - to pull into line.‟

„We must continue to offer a 0% vehicle to keep the CSP sector alive. We must also continue offering low personal tax rates. The tax cap should reduce over time, not increase from £100, 000 to £115,000. The Government should reduce to less than £100, 000 and commit to never increase or in line with inflation at most. Obviously Government must tackle the huge wasteful overspending and inefficiencies that continue.‟

„Whilst it is accepted that the Isle of Man is an insignificant player on the world stage, a more aggressive stance should be adopted whilst showing to be a willing partner in international harmonisation. For example, the Isle of Man could propose a regime but with a "subject to" clause being for example level playing field with international jurisdictions such as Hong Kong, Singapore, BVI and Bermuda. The EU seems intent on handing yet more power to the East when it should be protecting its interests and fighting its corner from within.‟

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„Reduce NI for employees & employers‟

82 Isle of Man Chamber of Commerce

1) One Common Theme

Undoubtedly, there is one consistent assertion: Let‟s not move first. I for one have great admiration for the occasions whereby the Isle of Man has used first mover advantage successfully (I was located in Jersey when the 0/10 announcement was made several years ago). There will be times when this tactic will again work for us, albeit not on this occasion. Perhaps of interest is that there appears no aversion to making announcements simultaneous to other Crown Dependencies; such announcements do not of course need to be consistent in their delivery- nor should they be.

2) A Thorough Comprehension?

Perhaps it is as a consequence of the fact that the Private Sector do not (or at least have not) live and breathe the absolute detail of the facts surrounding this Consultation that there remain questions and uncertainties across businesses. Inter-alia;

- Has a minimum requirement already been set (at say, ECOFIN level) albeit confidentially? Hopefully not, albeit if there are inevitabilities perhaps we can address and anticipate collectively. - Given the existing and significant „carve outs‟ across the EU itself viz Corporate Tax, can we take comfort that such opportunities will be embraced in our own decision- making process? I personally have every confidence in our own strategists that this will indeed be the case. - Was the scope and structure of the Deloitte Consultation sufficiently far reaching to provoke an all embracing response? Was it more of a stepping stone? Certainly the Finance Committee met with Deloitte on the eve of the „Process‟ – I was present- and hopefully good steerage was provided at the time (by us). Chamber has had no direct engagement with the parties consequently albeit full co-operation was offered.

3) Sectoral Impact

As aforementioned, both intra and inter sector responses will differ. Each business is unique (be it ownership structure, rationale for IOM presence, modus operandi). Such diversity is very welcome as is the drive toward further diversity of Isle of Man plc. It is therefore endorsed that the broad spectrum of responses be considered.

More specifically though, certain sectors and sub-sectors create a ripple effect upon our economy. Certainly our Fiduciary business is a case in point. Good local employment at varying levels is directly created, professional Services such as Accountancy and Law Firms are also central to this sector, whilst much welcomed liquidity also filters through the Banks on the Isle of Man (ironically, this in turn tends to provide value to the City of London). More indirectly still, the vibrancy of these individual components of the Manx economy serve to promulgate activity within other key arenas such as Retail and Hospitality.

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

All of the above is mentioned in the vein that notwithstanding our continued pursuance of diversity, the Finance Industry still has a dominant direct impact upon island GDP. As an integral cog, the Fiduciary Sector has, perhaps, the most at stake in terms of the Corporate Tax Consultation process. As a business model it is also relatively portable and therefore susceptible to the attractions of alternate locations (UAE for instance). We are, therefore, mindful as a pan-industry representative body of the knock-on effect that any decisions leading to any competitive diminution could ultimately have on the overall economy.

83

Due to the mobility of e-businesses, a key aspect of my company‟s ability to attract e- businesses to relocate to the IOM is a favourable tax regime for non-resident owned companies. The fiscal benefits in the IOM should be at least as attractive as those of any other option that international e-business owners may have for locating their businesses. Presently this means a tax rate of zero.

84

As already identified by the IOM Govt., the e-Commerce or e-Business sector is a major opportunity area for the future development of the economy of the IOM.

In my opinion, this sector represents by far the greatest future growth opportunity for the IOM economy, for a number of reasons:  The internet is still at a very early stage of its development as a marketing and sales channel for any business selling goods and services in international markets  Today we have various e-business models that are successfully exploiting the internet, e.g. online tourist bookings, e-gaming, digital products and services such as software and music, etc. In future, in addition to the growth in these wholly online businesses, we will also see virtually every mainstream international business having to develop its web marketing and sales channel to remain competitive.  As business use of the internet grows, it will not only be the large businesses that will derive benefits from selling over the internet; there will also be major opportunities for smaller businesses with niche products or services.  Every e-business or web marketing and sales function of any traditional business could in future potentially be advantaged by locating on the IOM.  This means that the market for the IOM as a competitively-advantaged jurisdiction for locating e-business or web marketing/sales functions will be huge and continually growing for a very long time.

With this in mind, the IOM should continue striving to be the preferred jurisdiction globally for the location of e-business. There are many aspects to making the IOM the preferred jurisdiction for e-businesses; however, due to the mobility of e-businesses, one of the most important factors is the tax regime for e-business. If the IOM is forced to move away from the zero tax rate for non-resident owned companies, the IOM must ensure that it moves after or in tandem with (but not before) other low tax jurisdictions competing to be the location of choice for international e-businesses.

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The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

85

The Isle of Man does need to be the master of its own destiny as far as possible in taxation matters. Whilst this is espoused policy, I appreciate that we are still some way from that goal, and that external influences on the Island‟s tax strategy continue to provide challenges to that ambition.

There is a general consensus in the business and political community that we should continue to comply with the broad principles of international standards. However, now is possibly the time to pause and take stock of where we sit in the relative league table of compliant nations. We need to assess what has happened to those who have lagged far behind the curve in raising their game to this standard. It is a good time to ask whether the white/grey/black list system is working in order to really differentiate between those committed, and the lowest common denominator that will sweep up residual business without the real threat of economic, political or other form of sanction.

In applying the spirit of the international standards against which we measure ourselves, it is perhaps also worth reviewing the varying interpretations that have emerged in dealing with these standards. We should not always react to those whose intent is, and always will be hostile.

We have made great play of leading the pack over recent years, to possible commercial advantage or disadvantage. As a result we have rightly displaced some less reputable business to other jurisdictions, but may well have lost good quality business on the back of that, combined with the additional regulation that has come along as a result. There will be those in the offshore sector who will move to the place of least regulation for the easiest life, yet there does not appear to be significant moves to curb their ability to do so. We should therefore be very careful not to introduce further regulation to generate a competitive disadvantage when we are already acknowledged as a leader in probity.

The Island‟s tax base since the birth of our finance industry has effectively relied on a two tier tax system. The domestic economy is effectively coupled to the domestic income tax system, whilst international elements are either decoupled (0%), or selectively coupled (10%). Whilst making this distinction clear in law would be unhelpful in light of the European Code of Conduct on Harmful Taxation Practise, its retention is essential. We do however, need to ensure that we get the right businesses in the right groups. At present, I believe that there are around 100 firms especially in the retailing sector that are currently not making exchequer contributions besides NI/ITIP. This is a cause of concern, […]. Whether this is addressed directly via the taxation system, or via business registration, planning or other restrictions remain avenues to be considered, and I would welcome Treasury‟s commitment on this matter.

We do need to extract fair revenues from those companies that choose to operate here, whilst retaining a competitive edge with many industries to forge synergies such as clustering and other „knock on‟ benefits. Therefore, there remains a compelling case for fiscal neutrality for certain sectors whilst they bring concomitant economic benefit. These need to be indentified and specifically targeted, whilst sidelining those businesses that also benefit from 0% taxation without providing similar contribution to the Treasury.

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

Our guiding principle […] should be to provide the greatest standard of living with the least population and building growth. Exponential growth in population and development has created dramatic success, but economic growth cannot be an end in itself. It is from making the most of our people, by giving them the best of skills and opportunities that we raise their earning levels, their tax contribution and as a result the services Government can provide. I fear in recent years Government has had that progression back to front, and Government service growth has been the target. Overall, the target needs to be for higher marginal benefit jobs, with assistance in removing barriers to entry to the Island, but conceivably placing barriers to exit.

The concentration of my remarks have been largely on the business income (corporate) tax system, as per the consultation. However, it must be borne in mind that National Insurance rates, domestic and corporate rating as well as „soft‟ factors all combine to make the Isle of Man package.

One the whole, we have our corporate tax regime right. We may however choose to tinker with other aspects of our offering.

86 Association of Corporate Service Providers and Society of Trust and Estate Practitioners

The Fiduciary Sector

The fiduciary sector represents the majority of the finance industry on the Island, with over 170 licence holders carrying out corporate and/or trust services. At the trade level the industry is represented by the ACSP and on an individual level membership of STEP is available to practitioners within the sector. Current figures indicate that the ACSP represents 75/80% of all licence holders in this sector. At the last count, ACSP membership firms represented 1,839 employees. If the average size of ACSP members is similar to the average size of non-ACSP licence holder members, then the industry as a whole on the Island employs in excess of 2,200 people. Many of these licence holders are small firms and, in contrast to businesses in many of the other sectors in the finance industry, the vast majority of fiduciary sector business owners are Isle of Man residents so that most Fiduciary Business profits are components of both GDP and GNP.

The high level of Manx ownership of these businesses leads to a higher degree of Manx tax take through the taxation of the owners‟ dividend receipts (or attribution) than is the case elsewhere in the finance industry where profits can be earned and dividends distributed to non-resident shareholders without any income tax benefit accruing to the Isle of Man Treasury.

Despite the size of the fiduciary sector being discernible through the numbers of licence holders, there is little available information in the public domain as to the value of the fiduciary sector to the Isle of Man economy. The Working Group‟s starting point was to ascertain exactly what might be at risk should any change to the Island‟s business taxation system be introduced. Our starting point was therefore to undertake a survey of licence holders in order to understand:-

(a) what their contribution to the Manx economy is; and

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

(b) to get a feeling of their understanding of what a change to our current Business Taxation Regime might mean for their businesses.

The fiduciary sector is not an isolated sector in that it does not do business simply for and on its own behalf; it does not operate in isolation. For each company or trust administered by a fiduciary services licence holder on the Isle of Man, there is usually other business brought to the Island by way of banking, accounting, legal or other sectoral benefits. We therefore also sought to approach businesses in these other related sectors to get a feeling for their understanding of what might happen to their business should the fiduciary sector be undermined.

In order to encourage disclosure of commercially sensitive information by the relevant licence holders, the Working Group retained the services of the Scorpio Partnership – a highly respected financial services consultancy based in London and familiar with the Isle of Man through previous work undertaken on the Island. Scorpio were asked to undertake a survey of licence holders in order to ascertain both qualitative and quantitative data relating to the present contribution of the industry to the Island‟s economy and the likely consequences of any change to the existing Business Tax Regime.

Scorpio Survey

We attach at [Appendix 3] the results of the survey undertaken by Scorpio in respect of the fiduciary sector. We attach at [Appendix 4] the survey undertaken by Scorpio in respect of the related sectors; banking, accountancy and legal.

The respondents to the fiduciary sector survey represent 48% of all employees in the sector. These responses are therefore very significant.

As far as the fiduciary sector survey results are concerned, the key messages are:

 92% of respondents believe that their business will be negatively affected by any change to the business taxation system which introduces a positive rate of tax.

 73% of respondents believe that such change will be very negative for their business.

 The responses indicate that even if a 2% rate of tax was introduced, the job losses on the Island could be nearly 600. This grows to nearly 1,000 jobs should the rate of tax introduced be at the current level for banks and property companies of 10%.

 The annual revenue to the fiduciary sector in the Island is approximately £190m.

 The sector employs in excess of 2,000 members of staff on the Island.

 These members of staff pay in excess of £9m of ITIP annually.

 These members of staff contribute over £11m of NI.

 Over £12m of VAT is contributed by the fiduciary sector annually.

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

 Over £20m is paid by way of dividend distribution to Manx resident shareholders, resulting in over £4m of additional Income Tax payments.

 Company filing fees and FSC licence fees contribute in excess of £6m.

As far as the related sector survey results are concerned, the key messages are:-

 79% of respondents believed a tax charge would have a negative effect.

 Most respondents believe that all sectors would be adversely affected with the worst hit being legal, real estate, banking and government.

 Most businesses believe that they would have to downsize with up to one third considering relocation.

The overall message from the surveys is that both the Fiduciary Sector and all related sectors believe that the imposition of a positive rate of tax on Isle of Man companies would have a very significant negative effect on both the Fiduciary Sector and other related sectors.

It is clear that the consequences of introducing any positive rate of taxation for companies resident in the Isle of Man are significant. There is likely to be a major loss of jobs within the fiduciary sector, with a consequent loss of ITIP and National insurance contributions to the Isle of Man Government. The total potential loss to the Isle of Man Government would appear to be in the region of £30m should the sector all but disappear and, whilst this is unlikely to happen in the immediate short-term, follow on consequences of significant damage to the banking, legal and accountancy sectors seem unavoidable.

Given that the reasons for the Island to change its current system of business taxation have not been made clear to us by either the EU Code of Conduct Group or by the UK Government, thus rendering any change that we might make subject to further objection in due course, and in light of the significant negative consequences likely to occur from any introduction of a positive rate of tax within our business taxation system, it is the recommendation of the Boards of the ACSP and STEP that the Isle of Man Government do everything within its power to resist any change to the current business taxation system. If it is not possible to retain the existing system then in our view the Business Taxation Regime in its entirety should be abolished, as where no regime exists there can be no objection by the EU Code of Conduct Group.

We understand that the EU Code of Conduct Group may shortly consider whether the IOM tax regime is code compliant. If this is the case we would suggest that the current consultation process is put on hold, including the Deloitte review, pending the result of the code group review.

87

Whilst the Government is keen to diversify the economy of the Isle of Man, it is our view that where this has been successful, for example with regard to the e-gaming industry, to a large extent this has been due to or heavily reliant on the zero tax regime. Without the

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The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response zero tax regime it is likely to be increasingly difficult to persuade new businesses to relocate/set up in the Isle of Man.

It is also important to note that in our view there is absolutely no benefit whatsoever of Introducing a positive rate of tax prior to other similar jurisdictions. Whilst moving to a positive rate of tax ahead of other jurisdictions may be welcomed by the likes of the OECD, the EU Code of Conduct Group and other international organisations, it is important to note that these organisations are not the 'customers' of the Isle of Man and we need to provide a fiscal regime which is attractive to our international client base, and more importantly their professional advisers. Where a professional adviser is tasked with locating a tax neutral jurisdiction for his client he will not recommend a jurisdiction where there is a positive rate of tax.

In our view there is no market for entities to be located in a jurisdiction with a low, but positive rate of tax unless it is an appropriate on-shore jurisdiction with the relevant infrastructure, etc. It has also been proposed that the introduction of a positive rate of tax would allow for the signing of more double tax treaties which would then enable better use of Isle of Man entities in international structures. Please note that it is our view that further double tax treaties would not necessarily lead to an increase in the use of Isle of Man companies. Firstly there are already a large number of well tried and tested on-shore jurisdictions with good treaty networks, for example Luxembourg and the Netherlands. Secondly it is worth noting that increasingly double tax treaties do not provide the benefits they once did due to increasing anti-treaty shopping legislation, anti-conduit legislation and the increasing use of limitation of benefit provisions.

We are aware that the Government is very concerned with not appearing on 'blacklists', however, the Isle of Man has been Included on domestic 'blacklists' of individual jurisdictions for many years already and it is quite likely that irrespective of what is done that the Isle of Man will continue to remain on many of these blacklists. Jurisdictions such as Cyprus and Malta despite being in the EU and having a number of double tax treaties are still often blacklisted by some jurisdictions. It will be preferable not to be on 'blacklists' but avoiding being included on these lists should not take precedence over other factors.

In summary, if the Isle of Man wants to be an international finance centre it needs a zero tax regime. Without a zero tax regime it is our view that it will be very difficult for the Isle of Man to maintain its position as an international finance centre. If it is not possible to form companies in the Isle of Man subject to a zero tax regime we would expect existing companies to migrate and future companies to be formed elsewhere. We also believe that it is quite possible that where foreign companies, e.g. BVI companies, are administered from the Isle of Man that we could see these migrate as well, as professional advisers may not want to take the risk that these entities will be treated as tax resident in the Isle of Man. We require a certain number of employees to administer corporate entities, as the number of corporate entities under management reduces so will our staffing needs. In our view this will be the position for all CSPs. Also it is our understanding that a large number of employees at banks and law firms on the Island work nearly exclusively on CSP business. If this CSP business relocates to other jurisdictions then so will the accompanying bank and legal work. Therefore it is only natural to assume that there will be equivalent job losses in these sectors as well.

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Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

With a greatly reduced banking and legal sector it is difficult to see how the Isle of Man's position as an international finance centre could be maintained.

Two additional knock on effects of these changes are firstly potentially the Island will start to lose its transport links as a lot of the demand for flights is driven by CSPs and the business they pass to banks and law firms. [We] alone in 2009 spent over £240,000 on travel with the bulk of this being flights on and off the island. It is debatable as to whether the non CSP connected travellers on flights to and from the Isle of Man would provide sufficient demand to keep the existing number of flights in operation in the long term. Secondly whilst some staff may seek to retrain there are likely to many who instead choose to relocate to jurisdictions where their current skill sets and contacts can be utilised. Even those who seek to retrain may find that there are insufficient opportunities in the still to be created new sectors that would replace the CSP industry. With an outflow of people one can expect stagnation or drops in the housing market which will potentially put financial strain on remaining residents due to the negative equity position many could find themselves in.

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The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

Appendix 1

The following people, businesses and organisations responded to the consultation.

ACCA Ralph Kunz - Tyntec Ltd Association of Corporate Service Providers RLC Engineering Group

Andreas Parish Commissioners Royal Skandia Life Assurance Ltd Anglogold Ashanti Holdings RSA Group

Araxis Rushmere Capital Aston International SES Satellite Leasing Ltd AXA Isle of Man Simcocks Trust Ltd

Ballaugh Parish Commissioners SMP Partners

Barclays Society of Trust & Estate Practitioners

Cains Tooley Investments Canada Life International Warwick Bartlett

Capital International Group Webmarketing International

Captive Association Charted Institute of Taxation

Clerical Medical

Clive Fletcher David Cannan MHK

David Wilcock Dept of Infrastructure

Ernst & Young

Fund Management Association

Grant Thornton Hansard Global plc HPB Assurance Ltd

IOD

IOM Chamber of Commerce

IOM Society of Chartered Accountants Isle of Man Assurance Ltd Isle of Man Bankers Association Juan Watterson MHK Jurby Parish Commissioners KPMG LLC Kronospan

Lee Benson

Manx eGaming Association

Manx Insurance Association

Marown Parish Commissioners MHT Corporate Services Offshore Corporate Services

Patrick Parish Commissioners Paul Helps PricewaterhouseCoopers

Issued: 30 July 2010 Page 63

Appendix 2

25 February 2010

REVIEWING THE ISLE OF MAN’S BUSINESS TAXATION SYSTEM

A Consultation Document

Issued by:

Income Tax Division 2nd Floor Government Office Buck‟s Road Douglas IM1 3TX

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System

Contents

Introduction ...... The EU Code of Conduct for Business Taxation ...... The Isle of Man’s Response ...... The Recent Work of the Code Group ...... The Isle of Man Government’s Position ...... The Isle of Man Government’s Intentions ......

Issue Date: 25 February 2010

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

REVIEWING THE ISLE OF MAN’S BUSINESS TAXATION SYSTEM

Introduction

1. As a small island country with limited natural resources, the Isle of Man needs to attract inward investment and economic activity in order to maintain a healthy economy; which in turn provides employment and revenue of various kinds. That revenue funds public services, and as in any country the Government needs to decide what types of taxation (and at what rates) should generate that revenue. The Isle of Man‟s tax system has been an aspect of our competitiveness for many years, and as such has contributed to a prolonged unbroken period of economic growth.

2. On 20 October 2009, the Isle of Man‟s Chief Minister, Hon. Tony Brown MHK, made a statement to Tynwald on changes to the Customs & Excise Agreement revenue sharing arrangements between the Isle of Man and the United Kingdom (UK) and on international developments.

3. As part of his statement, the Chief Minister said:

“We have also been watching the way international sentiments and standards have been moving in response to the global economic crisis, and especially the speed with which such matters have been changing and the potential effect they may have on our economy.

The UK‟s views on this area have been helpful to us in confirming our own understanding of the situation. This will allow us to develop and position the Island and its future tax regime, so the Island can continue to remain competitive and at the same time be accepted by the international community as responsible and co-operative…

I can confirm that Government will be initiating early discussions with relevant businesses and representative bodies, and other parties, to assess the potential impact of any changes that the international community may be promoting, or may make that could affect the Island.

Government will also be actively looking to identify what new opportunities can be taken to secure further business within the Island with a view to continuing to diversify our economy and increasing our income.”

4. Since the Chief Minister‟s statement, officials of the Isle of Man Government have given a number of briefings to organisations representing Manx businesses and professions, and to other interested parties. The aspects of those briefings related to the business taxation system are reproduced in this paper. The Government wishes to ensure that all interested parties are made fully aware of international trends and are able to contribute their views in relation to the Isle of Man‟s future position.

5. The Isle of Man Government has a number of key responsibilities, one of which is to maintain, grow and diversify the economy. At the same time, the Government will continue its long-standing, publicly stated policy of positive engagement with other Issue Date: 25 February 2010

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

countries and with international organisations such as the European Union (EU) and the Organisation for Economic Co-operation & Development (OECD), and demonstrating that the Isle of Man is a responsible and co-operative economic partner.

6. It is essential that the Isle of Man Government takes account of international developments and adapts the Isle of Man‟s taxation regime as necessary to fulfil the key responsibilities outlined above.

The EU Code of Conduct for Business Taxation

7. In the 1990s the EU and the OECD started to consider the difficult question of whether economic competition between countries by way of their tax systems could be harmful. The OECD work is not covered further in this paper, which concentrates on developments in the EU.

8. In December 1997 the EU adopted a Code of Conduct for Business Taxation (“the Code”), and shortly afterwards set up a working group to carry out work related to the Code (“the Code Group”). The Code covers business taxation only, and specifically those measures “which affect, or may affect, in a significant way the location of business activity.”

9. The Code Group carried out a review of the Isle of Man‟s tax system and, in its 1999 report, took the view that six Manx taxation measures were harmful, namely: international business companies; exempt non-resident companies; exempt insurance companies; international loan business; offshore banking business; and, 75% exemption for fund management. In total, the Code Group considered that 66 measures across the EU and the member states‟ dependent and associated territories were harmful.

The Isle of Man’s Response

10. In May 2002, the Isle of Man gave a commitment, via the UK, to abolish the measures found harmful by the Code Group and to introduce a generally-applicable zero-ten system to replace them. In addition, it was indicated that measures would be brought in to preserve the income tax base in respect of individuals.

11. This commitment was then built into reports which were presented to the Code Group by the UK‟s representative on the Group. In March 2003, in response to these reports, and those of other countries, the Code Group stated, “The Group agreed that none of the proposed revised or replacement measures were harmful.” The EU Council of Finance Ministers agreed with that finding in June 2003 and in addition noted that, “…the proposed revised or replacement measures are adequate to achieve rollback of all the harmful features of the 66 measures.”

12. The Isle of Man duly abolished the measures considered harmful by the Code Group and introduced the generally applicable zero-ten system in April 2006, on the understanding that it was compliant with international standards and the Code. The new measures to preserve the income tax base in respect of individuals became the distributable profits charge (DPC), and this was itself subject to the Code Group‟s

Issue Date: 25 February 2010

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

review. In October 2007 the Code Group found that the DPC was not in conformity with the principles of the Code. The Isle of Man Government had already held friendly and collaborative discussions with UK and EU Commission officials, and immediately announced abolition of the DPC and the introduction of a replacement system to be known as the attribution regime for individuals (ARI). Both measures had been introduced to prevent Manx-resident individuals incorporating their wealth in companies taxed at 0%. The problem with the DPC was that, in the absence of a distribution of profits, the payer of the charge could be the company owned by the resident, and hence that charge could be considered to be a business tax. The ARI seeks tax only from individuals, and the Government considers that it is therefore outside the scope of the Code.

The Recent Work of the Code Group

13. The Isle of Man ARI, being a new measure, was also subject to review by the Code Group, and was considered in 2008 and 2009. During this period, the Isle of Man Government kept in touch with UK officials, and provided explanations and information which enabled the UK to represent the Island‟s interests in the Code Group.

14. During a meeting in September 2009, senior officials of HM Treasury advised the Isle of Man Government that in the context of the changing international climate and harsher economic and fiscal conditions, opinions in the Code Group in relation to zero- ten regimes had hardened, and that it was now likely that they would be found harmful.

The Isle of Man Government’s Position

15. The Isle of Man Government recognises that the global economic and financial crisis has led to a renewed examination both of the nature of international tax standards and how their effectiveness is to be monitored.

16. There is no doubt that the Isle of Man has led the way among the smaller international financial services centres in tax co-operation with other countries. This work has developed from the policy set out in paragraph 5. On 2 April 2009 the OECD acknowledged the Isle of Man‟s quality in regulation and co-operation by placing it on what many have referred to as the „white list‟ of countries which have substantially implemented the internationally agreed tax standard.

17. It is important that the Isle of Man Government should take account of the views of the EU in relation to the Manx tax system.

18. Similarly, it is important that the Isle of Man should develop rapidly a far more comprehensive understanding of the business tax systems in the EU and the major trends in EU-wide tax policy.

19. The Isle of Man Government wishes to be in a smoothly functioning economic relationship with the EU and its member states, and must, therefore, take seriously the matters set out in this paper. However, changing the tax system of a country is not something to be taken lightly and it is not something that can be done overnight.

Issue Date: 25 February 2010

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

The Isle of Man Government’s Intentions

20. The Isle of Man Government wishes to gather detailed information so as to be able to consider two questions:

i) How should the Isle of Man change its business taxation system?

ii) What are the optimal changes?

21. The Government considers that it needs more information in order to develop policy options. The options must be founded on the Isle of Man‟s business taxation system fulfilling the following key criteria:

 it meets the requirements of the EU Code of Conduct;

 it meets the needs of as many domestic businesses as possible;

 it contributes to competitiveness - allowing existing businesses to continue to grow and attracting new businesses to establish on the Island; and

 it could potentially increase the attractiveness of the Isle of Man as a location for businesses in economic sectors not currently widely represented, if at all, on the Island.

In addition, the information must be capable of facilitating modelling with sufficient accuracy to allow an economic impact assessment to be drawn up in relation to any policy options. This economic impact assessment will need to take account of the likely economic damage were the Isle of Man‟s business taxation system found not to be in compliance with the Code.

22. To gather the necessary information, the Isle of Man Government intends to do the following during the first half of 2010:

 Explore, as far as is possible, with UK and EU interested parties the rationale which will be applied when the Code Group considers business taxation systems, such as those of the EU member states.

 Review business tax regimes in the EU member states (and regions or dependent territories).

 Conduct a public consultation to seek views on potential changes to the business taxation system.

 Engage Deloitte, the business advisory organisation, as external consultants to support the whole exercise.

23. The consultation will run until close of business on Friday 28 May 2010. Written comments and opinions are welcome, and may be submitted to the Assessor of Income Tax in any format determined by the respondent. If it is more convenient,

Issue Date: 25 February 2010

The Treasury, Yn Tashtey Income Tax Division

Reviewing the Isle of Man‟s Business Taxation System – Consultation Response

these views can be expressed at a meeting with the Assessor of Income Tax. Submissions from representative bodies, such as professional and business associations, trade unions, voluntary and consumer groups and other organisations should make it clear on whose behalf the submission has been made and the methodology used to obtain members' input into the response.

24. Respondents are asked in particular to comment on the following specific questions:

i) What difficulties or benefits could arise if the Isle of Man moves away from its current business taxation system?

ii) What alternative business taxation systems would you consider to be the most beneficial and least harmful to the economy?

iii) What is the minimum timescale in which you consider changes to the Isle of Man business taxation system could be made without compromising the economy?

25. In line with the Isle of Man Government Code of Practice on Consultation, we will summarise responses and publish the summary on our website within four weeks of the close of the consultation period.

26. The Isle of Man Government intends to make public its policy decisions on this vital strategic issue during the second half of 2010, and subsequently to seek Tynwald approval of them as required.

Issue Date: 25 February 2010