As the global financial services industry continues to modernise, offshore jurisdictions have to keep...
This has left good corporate service provision an increasingly important part of any offshore jurisdiction's sales story.
The Isle of Man is a case in point. The light population allows room for expansion in the corporate services sector, while taxation is kept as modest as the public demands of the island allow. Meanwhile, initiatives from the G7's Financial Action Task Force and the OECD are putting increasing pressure on jurisdictions to conform to some, as yet hazy, set of international standards.
As part of the OECD's fight against tax evasion and predatory taxation practices, it has produced a 'Grey list' - jurisdictions that are currently judged to have harmful tax regimes. Those that do not comply with OECD recommendations will be put on a black list at the end of July 2001.
Sanctions that the OECD might recommend include the introduction or strengthening of Controlled Foreign Company legislation. Also it could call for double taxation treaties to be cancelled. If the OECD can convince a significant number of its members to take up its recommendations, it might not be absolutely disastrous for those blacklisted, but it would increase the expense, the administrative overhead and the awkwardness of working in those jurisdictions. In a world of increasingly narrow margins between competing jurisdictions, this could make all the difference to the success of the financial services industry there.
It is not a risk that the Isle of Man is willing to take. John Cashen, the island's chief finance officer, has been in negotiation with the OECD since the investigation started
He is confident that the series of changes made to the Isle of Man taxation system, plus the island's relative transparency in financial affairs, should be enough to satisfy the OECD.
Cashen says: "To be a 'tax haven', you've got to have no or nominal tax, ring fencing and substantial activities requirements and allow exchange of information. Ring fencing will be dealt with by this current set of laws, substantial activities are required and we are prepared to discuss the exchange of information."
The Isle of Man has received criticism from several EU members about its lack of information provision regarding taxation issues. Cashen is adamant that this widespread opinion is unfair. The Isle of Man has had an information exchange treaty with the UK authorities since 1955 and would be willing to set up a similar treaty with any other country. However, no other OECD member states have requested such a treaty.
The Isle of Man government is constitutionally obliged to budget for a net surplus every year. In the 1980s the island came close to hitting the red. Fears that taxes would have to be raised again if the financial services industry took a downturn or if the Isle of Man lost popularity are unfounded, according to Cashen.
He says: "As a result of the international situation, the economy is much stronger. In 1984 the government had a couple of million in reserves. Now it is above 200 million. Now is the best time for us to cut the rates of taxation. We will be able to stay healthy in a downturn."
Michael Gates, head of the International Services Division for the Isle of Man, says: "The top rate of tax in the UK has come down from 98% to 40% and were coming down too. The UK will never be able to match the rates we offer - it's a different economy, a different society.
"The UK still has a substantial debt and although it has improved there still is substantial unemployment.
So even if we maintain the same quality of services we won't have to maintain the same rates of tax.
"The mainstream markets are vulnerable to niche players like ourselves. We have a population density lower than that in the UK - so there is more room for expansion, unlike many of the traditional offshore centres. The Government is committed to a GDP growth of 12% nominally, or 9.5% in real terms. This is with a 1% to 1.5% growth in population."
Gates sees the provision of services as a vital part of attracting new business. This year the island saw the establishment of its International Business School. The school has just taken its first set of students - public services staff being trained in IT. But within 12 months the school should be offering MBAs.
As part of its corporate reforms, the Financial Services Supervision Commission has added a new 'Companies Supervision' division, headed up by Jane Bates. This has responsibility for compliance with company legislation, the company registry and is responsible for implementing the island's new regulatory regime for corporate services providers.
Another route to adding value that has been taken by many jurisdictions is by setting up a stock exchange. The Isle of Man occasionally looks at this possibility. But at the present time, Gates doesn't see the point. If fund promoters want cheaper listing than the mainstream exchanges, Dublin and Luxembourg already provide for that.
Gates says: "Why go through all those costs and if we can just leave it to them?"
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