The Isle of Man has experienced positive economic growth for 30 years now: an enviable record considering the cyclical nature of world markets and the exceptional financial crises during that period. What features of our small country contribute to this success story? Perhaps two key aspects are facilitating good business while remaining a good neighbour internationally.
Five years ago, Michael Foot published his report on British offshore financial centres: commissioned by the UK government. Early in the report, Foot said: “Many of the jurisdictions have developed important niche positions in international financial markets; but their importance in global terms, as measured by financial flows through the banking system, is modest.”
Even in this short sentence, there are three important messages. Finance centres like the Isle of Man are recognised players in the markets. They are specialists, offering individually tailored and therefore highly ‘value-added’ services. Finally, even though there is a level of importance associated with centres like the Isle of Man, it is modest; which can easily be taken to mean that we represent no threat to markets.
The report went on to say: “The Crown Dependencies provide a gateway to route funds to other financial centres, including London; and they also service the financial needs of many UK nationals living abroad.” The Isle of Man, of all of the countries reviewed by Foot, is the key centre for expatriate banking services.
Foot made clear that there is no discount for being small. In other words, if a centre wishes to play in the international financial services game, there are rules which must be adhered to. Regulation of the financial services sector is vital, and there is increasing attention being paid to standards set out in law and delivered in practice.
The Isle of Man has been a leader in a number of ways: ranging from negotiating and signing a network of tax agreements (which is still growing), through being an active and highly visible member of the Global Forum on Transparency and Exchange of Information for Tax Purposes and most recently to partnering with the USA and EU member states in the introduction of FATCA and related systems.
In some of these activities the private sector has been concerned that investment in the Isle of Man might be deterred: but the government has been skilled at understanding the strategic environment, managing the related risks and, moreover, working constantly with businesspeople to keep them informed about the necessity for change.
We must continue to deliver all of the positive features of our financial centre. It goes without saying that meeting international standards is vital if you want to operate in the globalised economy. It is essential, and indeed a sign of confidence, to have a broad network of good relations and co-operation agreements of various kinds with other countries; as it is a feature of what we offer that investors should trust the Isle of Man and rely upon its services, and that other countries should also trust and rely upon us.
Part of the Isle of Man’s competitive offering for many years has undoubtedly been its tax system. There is no reason why this should not be the case in the future too. When an investor uses our financial services sector, a commonly desired objective is that there should be no ‘tax leakage’ or, put another way that the services should be delivered via a ‘tax neutral platform’. If we assume transparency in respect of the income accruing to a transaction or wealth management structure in the jurisdiction where taxation will be levied ultimately, then tax neutrality applying to intermediate steps should not be a threat.
Tax evasion is a crime and cannot be tolerated. Countries should assist each other in tackling tax evasion, as they should with other forms of financial crime. The Isle of Man has been at the forefront of small international financial services centres in putting in place tax co-operation agreements, and this policy has consolidated our international standing while at the same time having no discernible impact on our volume of business.
One can ask, as Foot implied, what is the threat from a finance centre like the Isle of Man? I suspect that it is minimal, if it exists at all, and we should be prepared to explain this, while at the same time asking for a level playing field when much bigger centres offer regimes which are as competitive (and sometimes more so) than our own.
We should resist and question challenges and attacks aimed at tax rates in themselves, especially when we assist other countries with their legitimate investigatory work. Why should a zero per cent corporate income tax rate be any less acceptable than one set at 10 per cent or more? The question is not the rate at all: it is how to reduce the risks associated with global financial flows.
Advocating our position is not easy, as we are a small country with few resources. Standards, and the debate associated with them, are a constantly changing picture. In the tax sphere, automatic exchange of information will soon be commonplace, and new initiatives like the OECD/G20 project on base erosion and profit shifting are moving to centre stage. The FATF has updated its anti-money laundering standards and new reviews of their operation in countries are being carried out. World banking regulatory systems are undergoing revolutionary overhauls. In all of these areas, the Isle of Man must be able and willing to move with the times. Failing to do that will result in negative peer reviews and reduced confidence from investors.
A small country with a strategically-orientated government has the advantage of speed of action, and may therefore if it is skilful gain ‘first to market’ advantages. If we are a provider of niche services, then we must ask ourselves constantly – at governmental level and at the level of industry – what does the market need? Financial services are changing constantly, and the Isle of Man should be known for innovation, professionalism and excellence in service delivery. With those features in place, we are well positioned to thrive.
Financial services are a central aspect of the Isle of Man’s economy, and will continue to be so long into the future. Putting all of your eggs in one basket is never a good plan, however, and the government has been following a strategy of economic diversification for a number of years with great success.
Traditional industries such as agriculture, fishing and tourism remain an important aspect of the Manx economy. Ultra-high specification engineering, particularly in the aerospace sector, employs many people in the Isle of Man, is growing rapidly and contributes solidly to GDP. E-gaming has grown to something like one tenth of the economy in less than 15 years. We are now seeing a new wave of businesses coming to the Isle of Man, putting down roots and growing here: with just two examples being biomedical engineering and digital currency services.
What of fiscal management? When times have been good and revenues strong, successive Isle of Man Treasury Ministers have proposed to our parliament that reserves should be built up. This rolling strategy has had the full support of parliament, and so healthy reserves and an absence of national debt are and will continue to be evidence of our prudent fiscal approach. The Manx reserves have given us the capacity to manage significant reductions in our income from our Customs and Excise union with the UK, while at the same time continue to provide various forms of financial assistance to start-up and growing businesses.
The Isle of Man Government prides itself on giving its people and businesses freedom to flourish. Our economic data show that this pride is amply justified.
About the Author:
Malcolm Couch became Chief Financial Officer on 1 May 2013; the chief executive of the Isle of Man Treasury Department.
Before becoming CFO, Malcolm was the Assessor of Income Tax of the Isle of Man for eight and a half years, and was responsible for all direct taxation and national insurance collection matters in the Island and internationally.
Malcolm has experience gained in a wide range of technical and managerial roles in both the public and private sectors: Inspector of Taxes in the UK Inland Revenue; tax partner with Pannell Kerr Forster; senior consultant with Ernst & Young; and, Oil Products Tax Manager of the North Latin America and Caribbean Region of Royal Dutch Shell.