The Isle of Man should be preparing the lifeboats

August 12th, 2010

According to Isle of Man Today the island is in deep trouble:

AN end to the current zero-10 corporate tax regime could devastate the largest sectors of the Manx economy according to a survey carried out of business professionals in the Island.

Jobs and business would leave the Island and go to rival jurisdictions if the Isle of Man introduced corporate tax.

As it explains:

The Island cut corporate tax to zero in 2006 for most industries to lure more business here. The Channel Islands followed suit.

But the European Union, which initially did not complain about the Manx tax arrangements, began to sit up and notice.

Some members believe the rates are predatory and are taking money away from them. The EU Code of Conduct Group is now looking at the issue.

I readily confess to having a hand in that. I have long argued (this paper is from 2005) that the Isle of Man’s arrangements are  not EU compliant. I have not changed my mind since then. Just as I did not on the Isle of Man’s VAT subsidy, where my work was the precursor for change.

The IoM Today article is fascinating. They, for example, say:

If the EU comes out against the Isle of Man, the Island’s complicated constitutional relationship with the UK could, in a worst-case scenario, mean that the UK could legislate over the head of Tynwald for the Isle of Man. It has not done that since Westminster banned Radio Caroline from broadcasting from a ship off Ramsey Bay by extending the Marine Broadcasting Offences Act to the Isle of Man in 1967.
Such a move, in itself, would damage the Manx economy and put back years of progress in which the Isle of Man has gained more independence from the UK.

Which is a welcome acknowledgement that all that the Isle of Man does is with the consent of the UK. All; those who claim otherwise, please note.

But the article also provides impact of by how much the island has been captured by the financial services industry:

About 36 per cent of the Island’s national income comes from the finance sector. A further 20 per cent is in professional and scientific services (for example, accountancy and law). Those sectors would face the brunt of the changes. The CSP (Corporate Service Provider) sector currently employs about 1,900 people. But the impact would go much further. Since 60 per cent of the Island’s banks’ corporate deposits come from CSPs, they will be affected too. More jobs would certainly disappear from them.

This, as I have pointed out and John  Christensen and Mark Hampton have pointed out, is the problem of being a secrecy jurisdiction without a Plan B. The scale of the problem is indicated by the findings of the surveys:

Bankers, lawyers, accountants and investment managers were asked in the survey referred to (run by the Isle of Man Association of Corporate Services Providers  and the Society for Trusts and Estate Practitioners, who it should be said, are far from objective observers) what would happen to their firms if corporate tax were introduced. The survey revealed:

  • 53 per cent expected that their companies would shrink;
  • 32 per cent said their companies would move elsewhere;
  • 26 per cent said there would be no changes;
  • 16 per cent said they would close their Isle of Man operations.

In addition, 70 per cent believed the Isle of Man’s status as an international finance centre would be adversely affected and 82 per cent said international business would move elsewhere.

The bankers, lawyers, accountants and investment managers surveyed said that revenue would drop by 18 per cent if a tax rate of just 2 per cent were introduced. It would mean that 17 per cent of jobs in the sector would go.

If tax were 20 per cent, they predicted revenue would shrink by 47 per cent. Then 39 per cent of jobs in the sector would disappear.
The jobs most at risk would be administration and support staff. There would be knock-on effects on all sorts of industries, in particular the legal profession who currently rely on international business.

And they predicated wider ramifications:

As people and money left the Island, the value of property would fall.
There would be fewer people travelling to and from the Island, so services would be cut and costs might rise.
Meanwhile, because the tax take would also fall, sustaining leisure facilities would be harder to do.

In all likelihood some of this is true.

But the question then becomes – so what? Why should the EU and the UK tolerate the abuse the Isle of Man facilitates by being a secrecy jurisdiction when the UK alone is facing the loss of millions of jobs as a result of a collapse in tax revenue – some of it, no doubt, the result of activity in the Isle of Man? In May 2009 I estimated that the Isle of Man cost the UK £1.5 billion a year in lost revenues. That would be enough, in itself, to prevent most of the job losses and service cuts that have been learned of at the Ministry of Justice in the UK in the last day. In straightforward terms of utility alone it is clear UK jobs in staffing prisons, providing justice and keeping probation officers at work have much more value than a loss of 1,900 staff engaged to avoid and evade tax in the Isle of Man. So the Isle of Man can expect no sympathy at all for its cause from the UK – and it is the UK that has to argue its case at the EU.

But what happens when zero ten does, inevitably, go? What next for the Isle of Man? I’ve offered Jersey Plan B and they do not want it. I’ll offer it to the Isle of Man again. And if they reject it, then I fear the mess will be as big as they predict. And yes, I do suspect that will mean that first the Isle of Man government will fail financially, second it will ask the UK to bail it out and if it will not the EU will and third it will lose much or all of its supposed independence as a result. What other options are there if it will not save itself?

And of course those options have a cost to the UK. I accept that. But they’re less than the option of saving the Isle of Man’s tax abuse, by a long way. So if that’s the option put on the table the outcome is, I suggest, inevitable.

The Isle of Man should be preparing the lifeboats. It’s going to need them.


Originally published on the Tax Research UK blog.

Written by Richard Murphy

Follow @FinTrCo