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IoM Explains Landmark UK Tax Transparency Pact Decision

by Jason Gorringe, Tax-News.com, London

28 December 2012


The Isle of Man's Chief Minister, Allan Bell has said that the government's decision to enter into an automatic tax information sharing agreement with the UK - similar to that it intends to sign with the United States to simplify compliance with its Foreign Account Tax Compliance Act (FATCA) - is intended to reinforce the island's reputation as a pioneering force in the adoption of international standards.

In an address to the legislative assembly, the Tynwald, Bell said the territory's cooperative attitude would serve to demonstrate the superior level of regulation in place in the island, bringing improved growth prospects for the island's diverse economy, which relies heavily on foreign investment particularly from the UK.

He highlighted that the island's tax regime has faced external pressure for change, in terms of transparency, for over a decade. He said that "the nature, extend and focus of [that] pressure has ebbed and flowed throughout that period, but has never left us."

He explained: "We have long sought to position the island so as to avoid damaging political and economic attitudes being held against it. This approach, for instance, led us to work successfully to feature on the OECD first “white list” in 2009 [of territories that have substantially implemented internationally-agreed standards on tax transparency and information exchange]."

"The government has also sought to foster an awareness of an island characterised by its pragmatic and co-operative approach to international relations, committed to the implementation of international standards in an effective and professional manner."

"Whilst some would argue that the island has gained little from this, the counterargument is simple: a failure to meet the standards of the best regulated jurisdictions in the world, and help to shape that framework, would damage the island’s economic prospects in the medium to long term."

"The US Foreign Account Tax Compliance Act is a game changer in relation to transparency and the automatic exchange of information agenda. It will be used as the lever and model by many countries for equivalent information to be provided to them."

"Such is its reach and effect, FATCA may even overtake the proposed changes in the EU savings directive. This government considers, therefore, that automatic exchange of tax information in something like the volume and form required by the USA under FATCA will become part of the international standard. It is clear that the next two years will see massive changes in the way in which nations co-operate in the field of international taxation issues."

"Bluntly, we have a choice: we can either participate in the shaping of that change and, in the process, help to minimise its less welcome impacts in the short term, or we can sit back and let others effectively shape our future," he said.

Bell added that: "Adhering to international standards and norms creates a sort of passport, or right of way, into global markets for all sections of our highly diversified economy."

"There is a brand associated with the Isle of Man as a country which both protects and fosters business. That brand will be damaged if we try to swim against the tide of international changes and sentiment and run the risk of forever being labelled as a tax haven, with the prospects of new blacklists and missed opportunities."

"The government does all that it can to maintain our reputation as a co-operative and competitive jurisdiction, and I am proud that during my tenure as Treasury, Economic Development and Chief Minister this reputation has been the bedrock of our economy, and has helped to deliver continuous economic growth and diversification."

Addressing potential concerns from the business community as regards the compliance burden, the Chief Minister said that the early negotiation of intergovernmental agreements for the facilitation of automatic information sharing will provide a consistent and predictable framework for multinational companies, who will need to comply with the requirements being introduced both in the United States in the medium-term, those proposed in the UK, and new, equivalent frameworks expected to emerge from other nations looking to muscle on similar automatic information sharing arrangements. Bell highlighted that the tax transparency landscape will likely change dramatically by the time FATCA is phased in in 2015, and is fully effective from 2017.

"We will be providing [our multinational companies] exactly the same platform in the Isle of Man that they will need to run in the UK and their other major countries of operation. This helps them reduce compliance costs and increases the attractiveness and credibility of the Isle of Man as one of the world’s leading international business centres."

"On the tax front, I believe the Isle of Man must be viewed by the international community as a highly competitive jurisdiction, with a good tax treaty network, but with tax and regulatory regimes which meet international standards and are not harmful to other countries’ economic or fiscal interests. Achieving this position will build further confidence in the stability of our investment environment and our credibility as a trading partner."

He also highlighted that the island's cooperative spirit with the United Kingdom will be favourable when the territory engages with the United Kingdom on renegotiating their 1955 double tax agreement. The Manx government seeks to revise the terms to provide greater certainty in relation to rules to determine where a person or business is resident for tax purposes, to foster improved economic ties between the territories.

The Isle of Man is the first territory to agree to a FATCA-style agreement with the United Kingdom. The other Crown Dependencies, Guernsey and Jersey, held exploratory talks with UK authorities towards similar agreements but have recently announced that they are to hold out on concluding such an agreement until the United Kingdom targets global adoption of its forthcoming regime, such as the United States is targeting with its FATCA, to ensure a level playing field among offshore international financial centres.

FATCA - the framework the UK intends to follow - was enacted by the United States Congress in March 2010 and is intended to ensure that the US tax authorities obtain information on financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, with foreign financial institutions (FFIs). Failure by an FFI to disclose information would result in a requirement to withhold 30% tax on US-source income.

To simplify the administration of the new system, several countries have been invited to enter into inter-governmental agreements with the US on a bilateral basis, to ease the compliance burden on local financial institutions by allowing them to report data directly to the tax authority in the country in which they are based, rather than to the US Internal Revenue Service.

TAGS: Isle of Man | environment | compliance | tax | investment | business | interest | Guernsey | Jersey | United Kingdom | tax authority | offshore | agreements | United States | dividends | standards | Compliance

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