The Isle of Man is enjoying success in its investment fund activities and its recent budget has included a number of measures that try to ensure that this continues
The Isle of Man's latest budget ' delivered by Treasury Minister, Allan Bell ' included a number of measures designed to give the island's investment fund industry a major boost. Together, these measures seek to sharpen the fund industry's competitive edge.
The roots of the funds initiative can be traced back to March 2002 when the treasury minister challenged the Isle of Man's fund industry to come up with new ways to develop the sector. The industry did not disappoint.
In what has now become an island tradition, the Fund Management Association worked in partnership with various treasury departments and the Financial Supervision Commission (FSC) to create a package of reforms aimed at building a strategic platform for growing the island's funds industry ' making it more competitive vis-Ã -vis its peers.
This public-private partnership demonstrated that, while it is governments that must take decisions on tax and regulations, it is the professionals at the sharp end of the business who usually have the best insights into what will and will not generate maximum new business.
With the island's specialist experienced investor fund category now starting to show a trend towards exponential growth and topping the 100 fund mark, the treasury minister's announcement will provide a solid base from which the island's fund industry can take its next significant step forward.
The zero rate of tax for all third-party fund administrators and managers of experienced and professional investor funds is being brought forward by three years to start on 6 April 2003. And its scope is being widened.
VAT exemption is also being extended widely. And overseas incorporated funds will now be able to be administered in the Isle of Man without the burden of 'dual regulation'.
cause and effect
What impact will these changes have? Firstly, the tax component of the latest budget boost for funds is part of a continuing long-term strategy to maximise the impact of a series of tax reductions. The island is not interested in being drawn into semi-theological discussions about the impact of 'supply side' economics, other than to point out that its zero tax policy has helped the Isle of Man in recent years to be the fastest growing economy in Europe.
Nor has this been achieved at the price of holding back public spending. Although the Isle of Man charges less tax, it still manages to spend more per head on education and health than the UK. So, although the island still has improvements to make, it seems to have achieved a winning double of low taxes and high public spending on the things that matter to Isle of Man residents. This view is echoed by both Standard and Poor and Moody's, who have awarded the Isle of Man an AAA rating in its own right and who have recently reaffirmed the rating in the light that they do not consider the island will be affected adversely by the EU Savings Directive.
The Island's three main tranches of fund management reform are expected to be in place by summer 2003.
Global growth in alternative investment products is significant and in the Isle of Man, these funds are likely to be structured as experienced investor funds or professional investor funds which are specially tailored for this, and offer speed of establishment and flexibility of structure. Extending the zero rate of tax to managers and administrators of these funds will provide a huge incentive to globally-based fund management and administration groups to ensure their Isle of Man office is high on the list when considering which jurisdiction a new scheme should be administered or managed in. Similarly, it will encourage fund groups with operations in competitor jurisdictions to consider establishing an office in the Isle of Man.
The relevant order to extend VAT exemption is to be in place from the beginning of April. While the zero tax rate gives the Isle of Man a lead over a number of other jurisdictions ' it is acknowledged that the VAT reform, by contrast, merely enables the island to catch up with some others.
International and authorised categories of investment schemes already qualified for VAT exemption, but the specialist sub-categories of experienced investor funds and professional investor funds did not. Now that the costs of running such funds incorporated on the Isle of Man will be on par with competitor jurisdictions, it is expected that even larger volumes of business will be generated.
One of the excellent factors about these funds, especially in the current stock market climate, is that some of their specialist areas of investment are counter cyclical. Many are bespoke products ' which can include various hedge fund strategies, property and even classic cars, jewellery and works of art ' and, as such, may command better returns than straightforward general equity funds.
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, it will also affect globally-based fund groups looking to transfer management and administration of foreign incorporated funds to the island.
The previously adopted notion of applying a second layer of regulation to funds incorporated in other well regulated jurisdictions did not improve shareholder protection and could be confusing. The FSC's licensing policy recognises this, and through arrangements with its licence-holders seeks to minimise any reputational risk to the Isle of Man.
Streamlining of legislation for the redomiciliation of funds to the Isle of Man is also pending and provides an opportunity to managers of schemes in some jurisdictions to transfer to an Isle of Man incorporated fund with minimal disruption to shareholders. Promoters of these funds will have a fund incorporated in another well regulated centre, but may find it attractive to re-domicile the fund.
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