Pressure mounts on EU zero-ten-tax islands

Isle of Man survey shows fear of tax system change

Public consultations on the future
of business taxation systems in several European low-tax jurisdictions have
expressed concern for the local financial services industries. The Isle of Man,
Jersey and Guernsey have come under pressure from the European Union working
group on the Code of Conduct for Business Taxation to review their tax systems.

Although not members of the EU, the
jurisdictions agreed to comply with the code, adopted by EU members in 1997,
and in the past have changed aspects of their business taxation regime that
were found to be harmful by the Code of Conduct Group.

They replaced it with a corporate
tax system with a standard rate of 0 per cent for resident companies and a 10
per cent rate payable by certain specified financial services companies and in
the Isle of Man on income from land. 

In light of the challenging
economic and fiscal environment, attitudes in the Code of Conduct Group toward
the zero-ten tax regimes in these jurisdictions have turned negative. Some
members of the group have taken the view that zero tax rates constitute harmful
tax competition, something the Code of Conduct intended to remove.

Following intensifying scrutiny
from the Code of Conduct Group and the indication that it will review the tax
systems in the Isle of Man and Jersey from September this year, the Isle of Man
Income Tax Department launched a public consultation on the future of its
business taxation in February 2010.

The review seeks to determine the
options for a business taxation system that strikes a balance between the
requirements of the EU Code of Conduct and the needs of local businesses, in
particular the preservation of the competitiveness and the attractiveness of
the Isle of Man as a business location.

Jersey and Guernsey launched
similar public consultations in June.

Survey results

The responses to the Isle of Man
consultation together with the results of a survey were released in late July.

Nearly all people surveyed felt
that if a tax on worldwide income was introduced, the impact for the Isle of
Man would be negative (92 per cent) or very negative (72 per cent).

While over 70 per cent of the
respondents believe the impact would be a down-sizing of their business, a
fifth stated that their business would have to shut down.

Even a 2 per cent tax would likely
result in the reduction of financial services sector staff by a third,
respondents estimated.

At the same time, more than half of
the businesses surveyed expect competitors such as the British Virgin Islands
(79 per cent) and the Cayman Islands (53 per cent) to benefit most from such a
move.

Meanwhile, the Isle of Man’s treasury
minister, Anne Craine, has moved to allay those fears, saying that is too early
to say whether the Island will amend its current business taxation system.

“At this stage it is not clear
whether the current zero-ten regime needs to change,” she said.

“The consultation has attracted a
diverse range of views on the Island’s business taxation system, and I am
grateful to all those who have taken the trouble to contribute to this exercise,”
Mrs. Craine added.

She noted that the Code of Conduct
Group will commence a formal review of the zero-ten tax regimes next month.

“Any decision on whether the
business taxation system needs to change will not be made until the outcome of
this formal assessment is known. If a change is required the Island will not pre-empt
any move ahead of that of our competitors,” she said.

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