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The Isle of Man - Life After
The OECD
by Jeremy Hetherington-Gore, Lowtax.net |
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The Isle of Man's Commitments
The Isle of Man is set
to be one of the first jurisdictions to be removed from
the OECD's blacklist when it is reviewed in July, having
given the commitments to transparency and non-discrimination
required by the Paris-based organisation. Although the
blacklist was originally of jurisdictions offering 'unfair
tax competition', the strident resistance put up by
the offshore world to the OECD's initiative has led
it to downplay the tax aspects, certainly as far as
rates of tax are concerned.
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The Isle of Man may
have reached an accommodation with the OECD, but
it hasn't veiled its distaste at the process to
which it has been subjected. At a February forum
in Paris hosted by the FATF, an organisation set
up by the OECD, the Isle of Man's Chief Minister,
Donald Gelling, attacked the multilaterals saying:
'We seem to have witnessed a period of unprecedented
international suspicion about the nature of business
transacted in small financial centres. On the
tax front we have had to contend with the OECD
harmful tax competition report and the various
European Union tax initiatives. The prejudice
in some quarters has been palpable. Having been
on the receiving end of more international scrutiny
and ill-informed comment than I can ever recall,
I relish this opportunity of responding.'
|
Donald Gelling, Isle of
Man Chief Minister |
However
Mr Gelling said the Isle of Man's impending removal
from the blacklist marked a new beginning for the Island's
financial services sector and his government would overlook
what could be considered as the OECD's prejudice and
threats, in order to make a commitment to building on
the new consultative process. He stated: 'We are prepared
to give the new process a chance to get it right.'
What has the Isle of Man promised the
OECD?
- Exchange
of Information: The Isle of Man will not introduce
banking secrecy laws, and will enter agreements with
all OECD members under which it will provide information
in response to specific requests on criminal and tax
matters, whether or not an alleged offence is criminal
under local laws.
-
Transparency:
Details of beneficial ownership for all business entities,
trusts and businesses on the island will be available
to the authorities as and when needed ('Know Your
Customer' rules will apply in all cases to intermediaries);
businesses will have to keep accounts and audit requirements
will be in line with international standards.
- Non-Discrimination:
Discriminatory tax regimes will be abolished along
with the specialised corporate forms which offer them,
such as International Companies, Exempt Companies
and Non-Resident Companies.
- Timing:
The commitments will be implemented in stages, with
transparency installed by the end of 2001, tax discrimination
for new company formations removed by the end of 2003,
and all completed by the end of 2005.
The Island
did say to the OECD that its commitments were conditional
in some respects on adherence by other offshore and
OECD jurisdictions to similar regimes; and all commitments
will be implemented through the normal Isle of Man legislative
process.
| In
fact, the Isle of Man legislature, Tynwald, has
addressed itself to the issue of the legality
of what is proposed by the OECD and other international
agencies in an international context, and has
called on the government to seek independent specialist
legal advice on international law to help it understand
the legal context in which it is being called
upon to operate by agencies such as the United
Nations, the European Union, the International
Monetary Fund, and the OECD.
This
recommendation was made in a recent report by
the Tynwald Standing Committee on Economic Initiatives,
which was created to monitor the economic, fiscal
and monetary initiatives of international and
multilateral agencies which have the potential
to significantly affect the island's economy.
The Committee's first report, late in 2000, dealt
with double taxation agreements and exchange of
information. |
Tynwald, the Manx parliament |
The Committee questions the international legitimacy of
some of the economic initiatives undertaken by the international
agencies, saying: 'this may affect both the competence
to undertake the initiatives as they affect the Isle of
Man and also the way the initiatives are conducted. We
believe that these are considerations which could, perhaps,
play a more central role in the strategic thinking of
the government when responding to such initiatives. To
that end we recommend that the government take independent
specialist legal advice on the international law and community
law issues raised in this report.' The
full text of "The Legal Context of Contemporary
Economic Initiatives" Report can be found at: http://www.tynwald.isle-of-man.org.im/papers/reports.htm
| The
Island is in a reasonable position internationally
to be able to fight its corner. At one time the
Isle of Man was lumped together with other offshore
jurisdictions in a bag labelled 'suspect', but
that has changed as the Island has generally cleaned
up its act over the last few years. In a recent
issue of the FBI's Law Enforcement Bulletin, the
Bureau praised the offshore financial centres
of the Isle of Man and the Channel Islands for
their 'willingness to cooperate with and provide
assistance to foreign authorities.' |
|
The article,
written by Special Agent Mark Ferbrache, assistant legal
attaché based in London, explained that most
FBI fraud investigators had tended to view the Channel
Islands and the Isle of Man as 'loosely regulated tax
havens ... which makes the islands the choice of criminals
to launder their illegal gains.' But the 1998 Edwards
report into the crown dependencies and a survey conducted
in 1999 by the FBI itself have changed the FBI's perception
of the financial centres.
The FBI
review focused on the islands from a law enforcement
point of view and praised the "significant contributions"
made by the Islands' law enforcement agencies, 'to improve
law enforcement cooperation in the global fight against
fraud and money laundering. Today, law enforcement agencies
in the islands have established informal gateways to
share criminal intelligence on a regular basis with
the FBI.'
Mr Ferbrache
said the FBI has particularly welcomed the role that
the islands can now play in international fraud investigations.
He stated: 'The consensus of these reviews found that
the islands have a well-regulated financial industry,
money laundering legislation in place and a demonstrated
willingness to co-operate with and provide assistance
to foreign authorities.'
The International Status Of The OECD's
Initiative
Apart from
the safeguards that the administration has tried to
build into the process of compliance, and the healthily
independent attitude of Tynwald, the Island can also
comfort itself that the whole OECD initiative is far
from a done deal, at least as regards discriminatory
tax practices.
When the
OECD began to compile its blacklist in 1999 it was in
the context of a solid agreement between international
agencies and the left-leaning administrations in power
in the G7 countries that they would attack the perceived
threat from 'offshore' to their fiscal base. Several
things have gone wrong for them, the first (in time)
being the stiff and perhaps unexpected resistance put
up by the targetted jurisdictions, the second being
the failure of the EU to reach agreement on its harmonising
tax directive, which left its own attack on 'harmful
tax practises' looking like a beached whale, and the
third and perhaps most important being Al Gore's failure
to clinch the US presidency.
| The
new Washington administration is no friend of
European fiscal absolutism, and does not support
the whole of the OECD's agenda. Treasury Secretary
Paul O'Neill has yet to make his views clear,
but it is very unlikely that he will want to put
limits on the freedom of independent countries
to set their own tax rates.
As
of April 2001, it is not possible to be sure about
the outcome of the international politicking that
is going on, but the most likely result is that
while transparency and exchange of information
will become standardised features of all but a
few renegade regimes, which will as a result be
excluded from much of the world's financial system,
discriminatory regimes will continue to exist.
|
Paul O'Neill, US Treasury Secretary |
Some of
the more egregious practises such as 'designer' tax
companies will be banned; but it is hard to see that
the US will be prepared to abandon Foreign Sales Corporations,
or Belgium its headquarters regime, or Portugal its
International Services Centre in Madeira.
Harmonisation Of Corporation Tax Rates
| So
the Isle of Man will probably never have to harmonise
its onshore and offshore tax rates - unless it
wants to. It may want to, in order to stay in
good odour with the EU. Ireland has agreed with
the EU a harmonised 12.5% tax rate for all companies,
which will apply from the end of 2005; Portugal
is awaiting the EU's agreement to a harmonised
12.5% tax rate for Madeira, which will apply fully
only after 2011; and Cyprus is preparing itself
for a similar rate which it will probably have
to adopt during the EU accession process. |
 |
But it's
one thing for smaller, open economies to have a low
corporate tax rate - how would Germany, France or the
UK get along with a 12.5% coporation tax rate? It won't
happen. It follows that jurisdictions such as the Isle
of Man can compete very well against their mainland
rivals with a 12.5% rate, although they won't be able
to win as against the no-tax jurisdictions.
Bermuda,
along with a number of the Caribbean and Pacific jurisdictions,
not to mention Labuan and Dubai, have no income or corporation
taxes, and will be able to maintain this situation now
that the OECD has been forced to back off the 'tax competition'
part of its agenda. How will the Isle of Man and other
'harmonised' jurisdictions fare against the no-tax competition?
Specialise To Survive: E-Commerce?
| As
a generalisation, the initial wave of wealthy
individuals that made use of 'offshore' for tax
minimisation and asset protection has been succeeded
in the UK's nearby jurisdictions, as anti-avoidance
legislation became ever tougher, by more specialised
and often corporate clients. Thus for example
Guernsey has the Channel Islands Stock Exchange
and is a major fund-management location. The Isle
of Man has broad strength across the financial
services sector, and unlike the small and cramped
Channel Islands still has the space to encourage
light industry and service businesses which generate
employment. |
The Isle of Man Has Room To Expand |
This is
not to downplay the Island's trust business, which is
still very strong, but the Isle of Man probably needs
to develop a clearer corporate specialisation if it
is to continue fast growth in a post-OECD future - and
that specialisation is probably going to be e-commerce.
The Island's own marketing has recently focused quite
heavily on its suitability as a business base, under
the banner, "Isle of Man, PLC" with a globe-trotting
roadshow which has promoted the island as a secure,
stable and well-regulated environment for businesses
and their clients.
| In
March, representatives from the Isle of Man's
e-commerce community were busy in London promoting
the Island's e-commerce possibilities to interested
parties from central Europe and India in two separate
presentations. Spear-headed by the Island's e-commerce
director, Tim Craine, the presentations are the
latest step towards achieving the jurisdiction's
aim of becoming a world-class leader in the e-commerce
arena. |
Treasury
member Sir Miles Walker MHK, a key speaker at the presentations,
explained to the Isle of Man local press: 'The theme
for the Central European countries is very much on trading
links and the legitimate use of offshore structures
in the international market place. For them it is really
a question of learning more about our international
services and business opportunities, but of course not
at the expense of the revenues of their own countries.
We're highlighting the use of Isle of Man trading companies
with a real tangible base here, captive insurance and
treasury management, and the use of the Island as as
a springboard for opening up new world markets.'
The first
presentation concentrated on the Island's international
services and took place at the Czech embassy with an
audience comprising embassy officials, businessmen and
bankers from Czechoslovakia, Slovenia, Slovakia and
Hungary.
The second
presentation, hosted by the HSBC bank in association
with the Confederation of Indian Industry highlighted
the Island's e-commerce opportunities to an audience
representing international Indian software/e-commerce
companies. The meeting was chaired by Sir David Gore-Booth,
former High Commissioner to India and special adviser
to the chairman of HSBC.
Sir Miles
said: 'These countries are all seeking to join the EU
and they are seeing significant changes taking place
— privatisation of banking systems, telecommunications
deregulation and the dismantling of the old communist
economy for a more open free market. A changing economy
offers opportunities for new investment which could
make use of international structures, but in the first
instance there has to be some awareness of what those
opportunities may be.'
Isle Of Man E-Commerce Legislation
The Manx
government has certainly been doing its part to lead
and drive forward the development of e-commerce on the
island. The Isle of Man was one of the first countries
in the world to pass dedicated e-commerce legislation,
with the Electronic Transactions Act, which received
Royal Assent in June 2000 and was effective from November
2000. The Act is based on Australian legislation, which
is in turn based on the model issued by the United Nations
Commission on International Trade Law. Its purpose is
to enable electronic commerce to be put on the same
legal footing as paper-based commerce, as well as removing
any legal impediments to the use of electronic communications
with public authorities.
The Act
ensures equality of electronic transactions with paper
ones, subject to precautions to ensure that electronic
communications are authentic and accessible, and is
technology neutral. As a general rule, electronic communications
are treated as being sent from the originator's place
of business and received at the recipient's place of
business. It incorporates the common law principle that
a communication which appears to be from a person can
only be treated as such if it was sent with their authority.
Electronic
signatures are given parity with written ones, and there
is provision for a system of Certification Service Providers
to verify the authenticity of communications.
Internet
Service Providers and telecommunications operators are
not required to monitor the content of communications,
and will not be liable for such communications provided
they take appropriate action when they are brought to
their attention.
Although
the Isle of Man is within the European Union in some
respects, applies its Common External Tariff, and imposes
EU VAT in common with the UK, it does not partake of
much other EU legislation, and will not need to implement
the EU's or the UK's e-commerce legislation, which is
notably more restrictive than the Act which has been
passed by Tynwald.
E-Commerce Applications On The Isle Of
Man
The government
created an e-commerce department in 2000 (a Ministry,
in effect) and appointed Tim Craine as its first head.
The department has carried on the government's work
in tailoring and creating purpose-built legislation
for various types of e-commerce application. Two of
the main sectors identified for special attention have
been financial services, including on-line banking,
and betting and gaming. Mr Craine and his team have
worked hard to position the Isle of Man as a leading
force in the e-commerce arena. Earlier this year, the
island appointed a local legal firm to advise the government
on its e-commerce strategy, and created a private sector
e-commerce consultative committee made up of seven individuals
who are recognised as being particularly pro-active
in the field of e-commerce.
Like other
prominent offshore e-commerce jurisdictions, the Isle
of Man has done more sowing than reaping in terms of
installed applications, and even one or two existing
businesses have scaled-back or abandoned their operations
on the island - no doubt this is a temporary situation
worsened by the dotcom implosion during the last 12
months.
Going forward,
the Isle of Man has to ask itself how it can win as
against its competition, which consists primarily of
Bermuda, Ireland, the Netherlands Antilles, Gibraltar,
Malta, Dubai and Hong Kong. These are the jurisdictions
which have or will shortly have adequate connectivity,
facilities and skilled support to be considered as serious
options for e-commerce.
In financial
services, the Island should be well-placed to attract
the offshore subsidiaries of banks, securities houses
and insurance companies aiming at the European market-place.
Customers and regulators will be comfortable with such
a 'respectable' jurisdiction, returns on savings and
investments will not be taxed on the island, and a low
level of corporate taxation is not going to worry firms
which will have to repatriate the profits to a high-tax
area in any case. And there is an adequate supply of
affordable accommodation and labour for back-office
operations.
| Betting
and gaming is an interesting case. In this very
rapidly evolving sector, which is arguably the
only offshore e-commerce application to have reached
critical mass globally, the island should perhaps
have sorted out its legislative regime and pricing
policy sooner. However it's understood that discussions
have now been resolved, and that legislation (which
has been in the works for many months) will shortly
be finalised on the basis that sports betting
firms will readily be able to have affordable
licenses to allow them to operate from Manx servers
without needing local establishments. |
Sports betting and gaming will have separate licences |
Gaming licences will be harder to come by, in terms of
precautionary checks, although still not expensive, and
operators will have to apply 'Know Your Customer' rules
to their clients, as well as operating a permanent establishment
on the island. The legislation won't include any banned
countries of origin, but the government will have reserve
powers to 'ban' a country which clearly makes Internet
gambling illegal. The Isle of Man's advantages as a location
for betting and gaming are not so marked as in the case
of financial services - a lightly administered and inexpensive
licensing regime could make the difference against main
rivals Gibraltar and Malta.
|
Long-term though, the island may find that the
most satisfactory e-commerce businesses will be
those which take advantage of the Isle of Man's
real-world assets, and have offices or plants
with staff in addition to an electronic presence.
This model would particularly fit companies with
distribution of small, expensive objects into
Europe: the Ronaldsway Free Zone and the island's
VAT status make it particularly suitable for such
an operation.
|
The Ronaldsway Free Zone |
For all
of these applications, the basic sinews of e-commerce
are well-established on the island: there is redundant
connectivity of 1.2 terabytes; there is a wide choice
of ISPs and hosting services; there are banks to provide
payment processing; and there are software houses with
established expertise in e-commerce systems design and
implementation. Any European (or for that matter, worldwide)
B2B or B2C sales, marketing and distribution operation,
whether dealing in physical or electronic product, can
certainly find the facilities and skills it needs on
the island, although a local certification authority,
which was envisaged by the island's Electronic Transactions
Act, is not yet in place. Certification can be 'outsourced'
so to speak to a provider in another jurisdiction, but
it will be better when it can be provided locally.
Last November
WISekey, a worldwide leader in certification authority
and public key infrastructure, announced that it had
created WISeOffshore, an internet initiative to be based
in the Isle of Man which would enable offshore financial
institutions to improve their transaction efficiency
and comply with "Know Your Client" requirements.
But the service was later put on hold, much to the disappointment
of the Island's e-commerce sector, due partly to legislative
uncertainty over the status of electronic 'know your
customer' routines.
WISeOffshore
had been viewed as a major opportunity for the island
and was described by Treasury Minister, Richard Corkhill,
as 'excellent news for the future of the Isle of Man
as a centre of excellence for e-commerce.' Director
of E-Commerce, Tim Craine, who had initially enthused
at the prospect of the WISeOffshore initiative, said:
'I can understand the reasons for the delay. There have
been changes in the market environment since the launch
that no-one could have predicted, particularly dot com
failures.' WISeOffshore is still expected to come on
stream in stages over the next few months.
'Digital
rights management' (DRM) is one rapidly developing e-commerce
sector which is particularly demanding on the security
and certification front, and which is in the sights
of some IOM providers. DRM refers to the secure handling
of intellectual property licensed and sold over the
Internet. The ongoing Napster debate in the music industry,
and parallel discussions in other industries, make it
clear that there will be very significant e-commerce
activity in the transfer for money of an intellectual
property right from its owner to a user, and in limiting
the ability of the user to enjoyment of the transferred
right for the period, and to the extent that has been
paid for.
Conclusion
The OECD
affair is over, bar the shouting, and sensible jurisdictions,
of which the Isle of Man is a prime example, will now
get on with life in the e-commerce fast lane.
Although
offshore jurisdictions have many advantages when it
comes to attracting international e-commerce business,
once the obvious basics of adequate connectivity and
legislative certainty have been provided, which is now
the case in the leading offshore territories, the most
important factor of all may turn out to be people.
As the
'Digital Rights Management' problem demonstrates, usable
solutions are going to be highly technical, and will
need to be encapsulated in a complex legal and fiscal
web if they are to pass muster with serious players
in the world of international business. It is obviously
beyond the possibilities of a speck of rock in the middle
of the Pacific Ocean to be a player in this game. Only
a few of the best organised and most skilled jurisdictions
will get a chance to play, and within a certain range
of tax rates the exact level won't matter nearly so
much as the ability of a jurisdiction to perform to
a high standard on all professional and business dimensions.
It's possible to argue that the complicated intellectual
work will be done in Cambridge or California, and the
jurisdiction will merely have to be good at building
earthquake- and hurricane-proof server hotels, but that
is a risky position for a jurisdiction to take.
| On
this analysis, the real enemy of the Isle of Man
is Ireland, as the only other low-tax jurisdiction
suited to be an entry point into Europe, and evidently
having a far more substantial infrastructure.
The
island's USP in this context is its unique position
vis-a-vis the EU, since it is almost wholly free
of the monstrous regulatory carapace imposed on
EU member states by the acquis communautaire.
Minds in Douglas and on Tynwald's virtual hill
need to be sternly concentrated on the problem
of how to make Manx legislation ever more friendly
towards business in general, and e-commerce in
particular. |
Ireland is the real enemy
|
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LOWTAX.NET
13/07 
