The years 2003, 2004 and 2005 will be seen as the period when the Isle of Man laid down new foundations to take its economy forward to meet the challenges of a globalised and, theoretically, more transparent world. Accordingly, the changes that occurred in 2004 should be seen as part of a strategy that is being rolled out by the island’s authorities. This strategy is centred around an AAA credit rating, zero corporate tax, tax information exchange on a ‘level playing field’ basis, strict anti-money laundering and compliance with all material international regulatory norms.
In the tax arena, 2004 saw the confirmation of the introduction of zero corporate tax from April 2006 and an acceleration of this date for certain sectors, notably space-related activities. The Isle of Man is more fortunate than the Channel Islands in that most of its tax revenues are collected from indirect sources, notably VAT. Zero corporate tax is therefore thought more capable of delivery in this jurisdiction.
In the field of the exchange of tax information agreements, the Isle of Man has entered into a series of bilateral agreements with individual EU member states to satisfy its commitment to introduce the same measures as apply within the EU in relation to the EU Savings Directive. The Crown Dependencies have opted for the withholding or retention tax option, initially at a rate of 15 per cent. The tax applies only to individuals tax-resident in member states and not to, for example, bodies’ corporate or discretionary trusts. These agreements will come into effect in the summer of 2005, providing the directive becomes operational.
In addition, during 2004 the Isle of Man continued its negotiations with certain Organisation for Economic Cooperation and Development (OECD) member states in relation to entering into OECD-style tax information exchange agreements (TIEAs). The Isle of Man was materially involved in the drafting of the model TIEA. The Isle of Man’s stated policy in relation to entering into a TIEA is that the Isle of Man must obtain some form of tangible benefit, whether economic or otherwise, as a result. In the event, no TIEAs were entered into during 2004 – only one has to date, that with the US. In 2005 there should be at least two agreed upon.
In 2004 there was a consultative exercise in relation to further strengthening the anti-money laundering regime on the island, initiated partly by recommendations made by the 2003 International Monetary Fund review of the island and partly to keep pace with developments elsewhere.
It would appear that the problematical area of mandatory retrospective know your client (being pre-1998 clients) is on hold, not least because of the UK backing away from this requirement.
In 2004, the bill for the regulation of fiduciary service providers was introduced into Tynwald. This bill and the underpinning codes of practice have had a long gestation period due to a determination that the regulatory system should not be seen to run counter to existing trust law. The Financial Supervision Commission called upon the services of Professor Hay of Stikeman Elliott to guide them through this tricky balancing act. The bill and the draft codes now look in reasonable shape and should come into operation in late 2005. Obviously, corporate service providers have been regulated since 2001. On a level playing field basis it would be nice to see the UK introducing analogous legislation.
Although there was a 2004 Companies Act, this is seen by practitioners as a housekeeping exercise. There is no doubt the Isle of Man needs a new, simplified and modern corporate vehicle to compete with the 2005 British Virgin Islands version, while at the same time not detracting from the Isle of Man’s international reputation for regulatory integrity. During 2004, Cains and Dickinson Cruickshank were tasked by the Treasury Minister with drafting a corporate vehicle bill.
This was delivered to the treasury in December 2004 and is currently being reviewed by two leading commercial and tax silks before undergoing a wider consultative exercise in the early spring of 2005. The Treasury Minister has stated he wants the new vehicle on the stocks before April 2006 to coincide with the introduction of zero tax.
Andrew Corlett is managing director of Cains in the Isle of Man