IOM May Cap Corporation Tax

by Amanda Banks, Tax-News.com, London

08 August 2006

The Isle of Man's Treasury has released the results of a consultation on capping corporate tax liabilities for financial institutions; the response, not surprisingly, was favourable.

The aim of the consultation was to seek views about the proposal to cap corporate tax liabilities at a level above the current highest payer, therefore ensuring that current revenue receipts are not reduced.Seven responses were received: two from individuals, two from professional firms and three from professional bodies.

The Isle of Man now has a standard rate of 0% income tax for corporate taxpayers, however a small number pay income tax at 10%. This includes companies holding banking licences and those receiving income from land and
property in the Isle of Man (which includes rental income, extraction of minerals and property development).

No one was opposed to the idea; some responses were cautiously supportive and several were very enthusiastic.

• “This is a fantastic idea – it will be incredibly beneficial for the Isle of Man.”
• “..this could be a good thing for the IOM...”
• “..an interesting idea and worthy of further consideration.”

One response did suggest that this should only be an interim measure which should not detract from the aspiration to make all of industry subject to a zero rate of tax. They also suggested that a ‘floor’ as well as a ‘ceiling’ would be
appropriate and would attract smaller start ups, which would in turn bring more highly qualified staff with them.

A cap of at least £6 million, just above the current highest tax paid by a company, had been suggested in the consultation document. Two responses requested that a cap should be revenue neutral and recognised that this would not affect established Island companies; however, it may attract new banking business.

Two responses mentioned the possibility of allowing subsidiaries or associated companies to pool their tax liabilities for the purposes of the cap. One suggested that such an approach should not use the existing group relief provisions within the income tax legislation.

The IOM's current definition of a group is found in Schedule 2 of the Income Tax Act 1980, and its key principle is that:
“two companies shall be deemed to be members of a group of companies if one is the 75% subsidiary of the other or both are 75% subsidiaries of a third company”.

As the Isle of Man now has a standard 0% rate of corporate income tax, the corporate tax cap concept would be a further move towards applying the standard rate to all companies. A cap, being based on a level of income which, once exceeded, will then see the remaining income charged at the 0% rate, would further demonstrate Treasury’s stated intention to move to an overall zero rate of corporate income tax when revenues permit.

The Treasury says it will now give further consideration to the timing and level of a cap based on the consultation results.

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