Recent changes to the Isle of Man's financial services sector, achieved through close cooperation between the island's Government and Fund Management Association, have breathed new life into an underdeveloped industry
Fundamental changes to the financial services sector announced in the Isle of Man's 2003 Budget have succeeded in injecting new energy into what was previously a relatively underdeveloped funds industry. The Budget - delivered by the island's Treasury Minister, Allan Bell MHK - contained three important new initiatives designed to sharpen the funds industry's competitive offering.
In summary, the first change dealt with the introduction of a zero rate of tax and the second an extension of a VAT exemption. The third development removed dual regulation legislation which contained a number of restrictions that were preventing the island's funds industry moving to the next stage of its development.
Some time ago, the global funds industry was identified as a key sector for growth. At the same time, however, it became apparent that if the island was to tap in to this potential it had to improve its core offering.
Never one to shirk a challenge, the industry took up the gauntlet and submitted a strategic plan for change. It was this thinking that was incorporated in the Budget announcement of 2003 and which drove the development of a package of measures designed to give the island's investment funds industry a major boost.
The island's funds industry thrives on the management and administration of highly specialised funds (including hedge funds) and the Experienced Investor Fund category, which is the vehicle of choice for funds, has grown exponentially in servicing this demand - already topping the 100 fund mark. Assuming a wide interpretation of what a hedge fund is, these funds are likely to account for a sizeable proportion of the US$10billion of funds administered in the Isle of Man.
The initiative announced by the Isle of Man combined tax reduction with regulatory simplification and reflected a determination to compete for business in a vital sector of the global finance industry.
The zero rate of tax for all Third Party Fund Administrators and Managers of Experienced Investor Funds (EIF) and Professional Investor Funds (PIF) was brought forward by three years and its scope was also widened.
VAT exemption was extended to all funds within the Island (with the exception of private exempt international schemes) and furthermore investment management provided to funds in the island from the UK is now exempt as well.
This also helps ensure the running costs of EIFs and PIFs incorporated in the Isle of Man are highly competitive compared with the costs of operating funds in other jurisdictions. And overseas incorporated funds are now be able to be administered in the Isle of Man without the burden of dual regulation".
Reducing the regulatory burden is likely to affect a large section of the industry already established on the island. As there will no longer be a requirement to amend an overseas fund's constitutional documentation to comply with a second raft of regulations imposed by the Isle of Man, it will also assist globally-based fund groups looking to transfer management and administration of foreign incorporated funds to the island on account of its excellent reputation and international standards of regulation.
The tax component of the funds initiative is part of a continuing long-term strategy to maximise the impact of a series of tax reductions. At the heart of this is the delivery of a standard zero rate of corporation tax by 2006. And the Budget of 2004 confirmed the island is well on course to achieving this. Indeed, the island's low tax strategy has been a major contributor to the fact that in recent years the Isle of Man has had the fastest growing economy in Europe.
an island tradition
The Isle of Man seems to have achieved the impossible - combining low taxes and high public spending on the things that matter to Isle of Man residents (for example health and education). This view is echoed by Standard & Poor's and Moody's, who awarded the Isle of Man a AAA rating in its own right and recently reaffirmed that rating on the basis they do not consider the Island will be affected adversely by the EU Savings Tax Directive.
As has been mentioned, before making these changes to the funds industry, the Isle of Man Government took care to consult very closely with the Isle of Man's fund management industry. This follows what has now become an island tradition of a close working partnership between the public and private sectors. While it is governments that must take decisions on tax and regulations, it is the professionals at the sharp end who have the closest insight into what will and will not generate maximum new business.
The close working relationship between the public and private sectors didn't end with the creation of the funds initiative. Importantly the two parties worked tirelessly throughout 2003 and have continued to do so in 2004 to make sure the message about the initiative is delivered directly to the people who will ultimately determine the level of its success - the lawyers, the administrators and the custodians.
Immediately following the Budget of 2003, the island's fund management industry together with Isle of Man Finance - the division of the Treasury tasked with facilitating the ongoing development of the Isle of Man as a leading international finance centre - began the long-term rollout of the fiscal and regulatory initiatives. This took them to the City of London and beyond. The response to this has been extremely enthusiastic. There is already tangible evidence of new funds projects and it is expected this momentum will grow substantially throughout 2004.
So the Island's three main tranches of fund management reform are now firmly in place and are starting to make a real difference.
As has been mentioned, the running costs of EIFs and PIFs are now highly competitive compared with the costs of operating funds in other jurisdictions. EIFs currently make up around 65% of the total fund market with the number growing strongly over the last 12 months and little sign of this trend stopping.
The measures aim to have long-term beneficial significance for the island and the Government is determined to maintain the close partnership it has created with the private sector. This will in turn no doubt lead to additional strategic initiatives and joint promotion and further strengthen the position of the Isle of Man funds industry.
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