Isle of man
7 November 2005
OECD releases BEPS Action Plan — a sweeping international tax effort to combat base erosion and profit shifting
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10 May 2013
The recent announcement of a bilateral tax information agreement between the Isle of Man and the Netherlands is a groundbreaking achievement that has wider repercussions for the offshore world.
The suite of agreements and memoranda were signed in the context of the Organisation for Economic Cooperation and Development's (OECD) continuing aim to promote the creation of a level global playing field. To the uninitiated, this involves the OECD championing an open and multilateral trading system in which tax-induced distortions on financing and investment decisions are reduced.
Key elements of eliminating harmful tax practices are considered to be transparency and the effective exchange of tax information. To this end, in 2002 the OECD produced a model agreement on information exchange on tax matters. These pro forma agreements are intended for bilateral or multilateral use and seek to promote exchanges of information which are foreseeably relevant to the determination, assessment and collection of such taxes, the enforcement of tax claims or the investigation or prosecution of tax matters.
The Isle of Man's tax exchange agreement with the Netherlands is the first such agreement of its type entered into by an offshore centre with an OECD country other than the US.
Unlike preceding agreements, the current documents display elements of reciprocity, in that, by entry into a tax information exchange agreement, the Isle of Man has secured certain concessions in return.
The tax information exchange agreement is part of a package of measures designed to promote international business opportunities between the Isle of Man and the Netherlands. Specifically, the package includes elements dealing with shipping and aircraft taxation and transfer pricing when companies have operations in both territories and move goods and services between them.
Given the importance of the shipping industry to the Isle of Man, such agreements with respected OECD members can only strengthen the market. Likewise, the proposed G-Reg aviation register for the island would benefit greatly from equivalent agreements with other OECD members.
Tax agreements with OECD members do not have to be one-way streets. The Isle of Man remains fully committed to the OECD tax exchange initiative; however, it will where appropriate seek to ensure the promotion and protection of its own interests in return. Future agreements may consequently cover additional areas, such as market access for Manx financial services and products. The agreements also include a commitment that Manx subsidiaries of Dutch companies will not experience any tax issues as the Isle of Man moves to its '0/10' company tax system in 2006.
This understanding on the application of the so-called 'Dutch participation exemption' has struck the right note with international tax planners based on the island. The Dutch authorities have agreed that the profits of a Manx subsidiary of a Dutch parent undertaking will remain tax-exempt in the Netherlands, notwithstanding that the Isle of Man moves to a zero tax rate for most corporate vehicles. At the moment, the exemption only applies to the extent that the Manx subsidiary is "subject to tax on its profits in the Isle of Man", which clearly would not work moving forwards if no tax was levied.
The parties have also agreed to work towards a full double taxation agreement (DTA). Assuming this follows the same path, then it would be likely that a Dutch subsidiary of a Manx holding company would also be able to distribute profits back to the parent with minimal or no withholding tax applicable. Given the tax leakage that is often encountered on cross-border structures, the Manx/Dutch concessions could be a useful tax planning tool.
Greg Jones, head of tax for KPMG in the Isle of Man, says: "Depending on the eventual rate of withholding tax chosen - zero or 5 per cent would be nice - the availability of a full DTA between the Netherlands and the Isle of Man will give tax planners - particularly those based on the island - a highly attractive and more tax-efficient alternative to the Dutch-Dutch Antilles structure, and will enable Manx businesses with international operations to access the Netherlands' own DTA network with minimal tax leakage."
The fact that an OECD member is expressly acknowledging that a jurisdiction is moving to a zero rate of tax for general corporate activities is undoubtedly crucial for the continued international acceptance of similar low or no-tax jurisdictions.
But will other OECD members follow this lead if the figures stack up? Well, they do in the Isle of Man, in that a move to zero rate tax (and 10 per cent for banks) can be fiscally maintained.
But will they acknowledge this formally in other tax exchange information agreements and ultimately double taxation treaties? One might conclude that a level playing field does not necessarily mean all jurisdictions must maintain equivalent tax bases. One can legitimately keep taxes low so long it is possible and one is prepared to be transparent about the process.
Dutch deputy finance minister Joop Wijn says: "Because of the globalisation of the economy, taxpayers are generating more of their income abroad or transferring more of it across borders. That's why the international exchange of information is so important for accurate tax assessment. All countries want to pursue competitive tax policies - there's nothing wrong with that, as long as the policies are transparent."
The process has also provided invaluable exposure for the Isle of Man's officials and key advisers on an international level. Notably, the Isle of Man was one of the 11 jurisdictions that worked with the OECD countries to develop the model agreement on the exchange of information in tax matters on which the Dutch bilateral agreement is based. Meeting the people behind the policy cannot be underestimated. It should also be noted that the Isle of Man is currently negotiating similar agreements with 10 other countries.
These agreements are an important milestone in the ongoing relationship between the OECD and offshore international business centres. By seeking concessions in return for legitimate tax information, one would hope that the credibility of the offshore centres can be greatly enhanced without compromising unduly their role in the modern business environment.
Daniel Mackelden heads the London office of Cains