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The Isle of Man’s Zero Tax Strategy
By Steven Beevers, Business Development Manager, Isle of Man Finance

The Isle of Man has successfully run a low taxation environment for business and individuals for over 40 years, with the latest development being its announcement of a new zero tax strategy. The Isle of Man is demonstrating clearly its competitive positioning, managing its internal fiscal affairs, whilst at the same time addressing a number of key international taxation issues.

In June 2002 a new zero tax approach for business was announced as a second stage development of a tax strategy first evolved by the Isle of Man Government in June 2000. Broadly speaking, the Isle of Man has operated a low tax system for individuals and businesses since the early 1960’s during which for the most part a headline rate of 20% has applied to both - there being in the strictest sense no corporation tax. Low taxation has as a policy, pre-dated any notion of the Isle of Man’s development as an international finance centre.

The origins of this policy came several years later seeded by early business entrants in the 1970’s. The potential was embraced by the Isle of Man Government in 1983, with the introduction of a dedicated regulatory body in the form of the Financial Supervision Commission. However, the advent of early growth in international financial services business also led to the introduction of overseas business tax exemptions, so that the Island generally did not seek to tax the income of business which was non resident or did not enjoy locally sourced income.

It was this “territorial approach” to business taxation that in recent years attracted scrutiny and some criticism by the international bodies of the OECD and EU Code of Conduct Committee in their supranational initiatives.

Clearly, this system had stood the Island in good stead as the low tax environment has not compromised the Island’s ability to raise sufficient revenues for its public services. Equally, there has been sufficient revenue to create a surplus and reserves. Moreover, the Island has been able to fund a welfare state more benevolent than its counterpart in the UK, as spending in the areas of health and education are proportionately greater in the Isle of Man. Indeed the Island has enjoyed a period of continuous economic growth during the past 20 years.

So how can the Isle of Man continue to fund its services by moving to a zero tax regime for all business profits? What are the real costs and benefits associated with such a move?

The first question can be answered by explaining that the bulk of the Island’s revenues are sourced from VAT and other indirect taxes to the tune of some 67% of Government revenues. Nonetheless the zero tax strategy does have a direct cost estimated to be in the order of Ł23 million in lost revenues in its phased period of introduction up to 2006. While the zero rate is expected to cover all classes of business, an exception is a retention of a higher rate of 10% on bank profits, though this still represents a significant reduction in the prior regime. The zero rate for fund managers and administrators of funds has already been brought in from April 2003 as part of a package to stimulate growth in the funds industry.

Thus the Island’s Tax Strategy is already well ahead of schedule in its delivery and is starting to pay dividends, as intended, in the form of the attraction of significant new business to the Island. This is most noticeable in the areas of fund administration, e commerce and latterly in space and satellite related technologies – an area of new business also targeted through the accelerated introduction of the zero rate in the Island’s 2004 Spring Budget.

The zero tax strategy for Island businesses is a major part of the Isle of Man Government’s economic policy, serving to support not only the development of existing business in the Island but also providing a magnet to new business in the form of inward investment across a range of sectors. In addition, it provides a mechanism for the replacement of the exempt company regime.

At the same time, the introduction of the zero tax strategy has addressed wider concerns, including those of the EU Code of Conduct Committee, when it included the Crown Dependencies of the Isle of Man, Jersey and Guernsey in its Review of Harmful and Preferential Tax Practices across Europe. The zero tax rate replacement for the exempt company and its extension to the profits of resident businesses clearly addresses the requirements of the Code of Conduct Committee and when fully implemented in 2006, it is likely to be a full two years ahead of any competitor response to deliver and implement similar initiatives in competitor jurisdictions.

The economic outlook for the Island in terms of its ability to generate new business and sustain its economic prosperity notwithstanding the immediate costs of recent revenue foregone is something which Standard & Poor’s and Moody’s have positively endorsed by continuing to award the Isle of Man a AAA rating for its sovereign risk.

The outlook for the Island’s prosperity therefore can be said to be bright and in the current year a healthy growth in the order of 5% is anticipated in GDP, the GDP per capita having already risen above the level generated by the UK in recent years.

For businesses looking at an international business base the Isle of Man’s zero tax strategy is but one of its many attractions. The Island is unusual among its peers in being a relatively large Island at 227 square miles and with a population of 76,000, it has unrivalled capacity for growth, without placing undue pressure on its infrastructure and competitive cost base. Moreover, with low rates of unemployment, the Island is relatively open to the migration of labour and it has also managed to reduce the tax burden on individuals in recent years.

Importantly, the Island has developed a diversified economy, which while recognised for its strong financial services sector (37.8 % of GDP), also supports high tech manufacturing, e business (including gaming) and a multitude of specialist niche business areas such as international ship management and registration, film production and asset finance and leasing.

Businesses of all shapes and sizes from small entrepreneurial manufacturers through to large financial institutions can not only benefit from the value for money cost base, Isle of Man’s Government’s leading vision of zero tax strategy, but equally from the strength of its infrastructure, political and economic stability and last but by no means least the warm welcome extended to them by Government and local services providers alike.

The Isle of Man is very much open to new business and the zero tax strategy for Isle of Man companies is a strong endorsement of this pro-active and welcoming approach.

For more information please contact our Isle of Man office.