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Much has been commented on the UK's opposition Conservative Party seeking and promising to impose a flat tax rate of £25,000 on the so-called 'non-doms' - people who are resident but not domiciled in the UK.
The existing non-domicile rule in principle allows some residents of the UK to cite a different country as their real domicile and to effectively only pay UK tax on their earnings in the rest of the world if these earnings are remitted to the UK. Should the UK change the rules for non-doms as low tax centres, such as Gibraltar, are likely to expand their rules to capitalise on those seeking reduced tax rates?
The principle behind the non-domicile status and the idea of an individual being taxed on a remittance basis dates back to 1799. On the introduction of income tax, those who owned land in His Majesty's dominions would not pay tax on their colonial wealth unless this was repatriated to England. This idea was, in 1914, applied to a 'non-domiciled' resident to enable those born in the colonies to live in England without paying tax on their foreign rents and stocks so long as the money remained abroad.
Today this regime benefits some of the wealthiest people in the country, including a significant assortment of foreign business executives, but it is only recently that proposals to change this regime have been mooted despite the common perception that it is inequitable.
The US's view is that it does not matter where you were born. If you qualify as a resident of the US then you must pay US tax on your worldwide income and capital gains. The Australians, the French and the Danes are of the same view if you spend more than six months of the year in their country, the Canadians and the Spanish if you spend 183 days a year, while the Germans, the Belgians and the Greeks if your customary place of abode is in their country. The Japanese have an equivalent to the UK domicile rule, but only if you stay there for fewer than five years.
So why does the position remain the same in the UK, based on old principles that should arguably no longer apply? Defenders of the rule say that the non-doms provide jobs, investment and opportunity in the UK and that if the rules were changed, the result would not be that these wealthy individuals would pay hefty tax bills, but rather that they will leave the country, taking the tax that they pay and the money they spend and invest in the UK with them.
Others say it is unfair that a small group of wealthy people should be given this tax relief and that no other country will accept them as non-domiciles. This, however, is not entirely true. The reality is that globalisation has increased the level of tax competition and provided international tax planning opportunities at a time where it is not necessarily paramount for an individual to be physically located in the same place as his business for much of the time. The question for these wealthy individuals and the term that is often used is that of 'quality of life'; there has to be a clear risk that the UK based non-domiciles will relocate to other jurisdictions where similar opportunities are offered.
The Treasury has been making noises about the tax privileges of the non-domiciles since the 2003 budget when a formal period of consultation was launched over proposed changes. But what would be the effect of an introduction of a £25,000 flat fee for these non-domicles now?
Gibraltar introduced the status of High Net Worth Individual (HNWI) residency in 1992. These rules, forming part of the Gibraltar Income Tax Act, have been reviewed and promulgated several times resulting in the current Qualifying (Category 2) Individual Rules 2004.
Category 2 individuals only pay tax on the first £60,000 of assessable income with a minimum tax payable per annum of £18,000. Only income received or remitted to Gibraltar is taxable so foreign income would only be taxable if received by the individual for his own use in Gibraltar (and in any event only the first £60,000 is assessable with the maximum tax of £21,880 payable on that amount).
Applications for the status are made to the Finance Centre Director with certain requirements needing to be met, such as having approved residential accommodation in Gibraltar for the entire year of assessment. Residency is also obtained by the Category 2 individual through an application for residency under the Immigration Control Ordinance, with a permit generally being issued for a period of one year, and renewed subject to the continuation of the Category 2 status certificate which remains effective so long as the Gibraltar Finance Centre Director is satisfied that the requirements are still met on each anniversary of the certificate.
Regardless of an individual's tax category, interest arising from a licensed bank or building society, or dividends arising from companies quoted on a recognised stock exchange are not taxable in Gibraltar, and furthermore there is no wealth tax, capital gains tax gift tax or estate duty in Gibraltar.
Although the Gibraltar Category 2 status is unlikely to affect the decision of Chancellor Alistair Darling in relation to the taxation of non-domiciles, the reality is that for the low tax centres all over the world the advantage of being small and predominantly reliant on the finance centre industry is that they can change existing rules and laws quickly to react to new opportunities. If there is not already a worldwide market to cater for services for non-domiciles, then one might quickly be created.
To a certain extent this has already happened in other situations. For example, in Singapore new trust laws that came into effect a year ago prompted its slower moving rival Hong Kong to re-examine its own trust laws. Luxembourg dominates the market for Undertakings for Collective Investment in Transferable Securities (UCITS) because it was the first to incorporate the UCIT directive in the 1980s. Cayman is the world's leading provider as a domicile for hedge funds because of the critical mass and expertise reached quickly in the jurisdiction.
Onshore products and services can be quickly commoditised by offshore or low tax centres, and the non-domicile rule in the UK is a good example of a principle precariously in place now. Only a slight tip of the balance is required for competitors such as Gibraltar to offer realistic and potentially much cheaper and secure alternatives.
Joey Garcia is an advocate at Isola & Isola