The government of the Isle of Man has warned that unless offshore financial centers adapt to the realities of new rules demanding they are more transparent and provide no boltholes for tax dodgers, these jurisdictions will fall by the wayside.

Note: This has already appeared on sister publication WealthBriefing but has been published on Family Wealth Report given the global nature of the article and how it resonates with the US in terms of individual state law and so-called favorable jurisdictions.

The government of the Isle of Man has warned that unless offshore financial centers adapt to the realities of new rules demanding they are more transparent and provide no boltholes for tax dodgers, these jurisdictions will fall by the wayside.

The comments are unusually sharp by the standards of an industry that at times has not always been blunt about such issues.

John Spellman, director of financial services for the Isle of Man government, believes that the future for offshore jurisdictions that are unable to cope in the new regulatory environment looks less than rosy and that they could fall by the wayside unless they adapt.

“The premier jurisdictions will be able to meet the international standards no matter how high the bar is set, and the Isle of Man will be there. There are certain financial centres that won't be able to meet the new demands and they will fall away in the coming years,” said Spellman.

The impact of this, he argues, is that international organizations won't deal with jurisdictions that can't meet the standards and he points to the Common Reporting Standard as the next significant regulatory change that is likely to hit offshore centers hard. The CSR is a new single global standard for automatically exchanging information between tax authorities. It was unveiled in February by the Organization for Economic Cooperation and Development.

Setting the standard for global tax transparency has been the Foreign Account Tax Compliance Act, which is set to take effect on July 1 and requires all financial institutions outside of the US to regularly submit information on financial accounts held by US persons to the Internal Revenue Service.

When the act comes into force, those who are not compliant will suffer a 30 per cent withholding tax on income and gross proceeds, as of January 2015. Since it was announced, it has been followed by a similar non-US FATCA-style intergovernmental agreement between the UK and Crown Dependences.

“FATCA was the first stage and the Common Reporting Standard will be the next. Some jurisdictions that have traded on the basis of opaqueness, simple reporting standards or light touch information will not be able to comply with the Common Reporting Standard as they won't have the information and their clients won't expect to supply it. Offshore jurisdictions will have to adapt or die,” he said.

Impact

FATCA has come in for heavy criticism due to the increased financial burden that it places on foreign financial institutions. As a result of the legislation, there are significant requirements for registration, due diligence and reporting, forcing entities to change operating models, invest in technology and spend more in order to meet compliance costs.

While Spellman believes that transparency is important, he raises a number of concerns about the impact of FATCA on the industry.

“The most worrying part of it is the cost of the compliance, because whilst every effort has been made to make the rules consistent between jurisdictions, for large national companies it is extremely high. The second problem is the lack of fairness both from the US and the UK as the complexity and costs of reporting were underestimated. We believe that many jurisdictions are badly prepared for the implementation of FATCA,” said Spellman.

Despite these issues, Spellman is confident that the Isle of Man is well-placed to cope in the new regulatory environment as a result of the island's favorable tax regime and its appeal to international business.

“What we offer is tax neutrality, so whilst you may not pay direct taxes in the Isle of Man, taxes may be due in their home state. In the Isle of Man, taxing individuals and employees on PAYE allows us to balance the budget. We also encourage business activity to the Isle of Man through yachting, shipping aircraft, insurance products and e-business, for example,” said Spellman.

“We have created a regime that complies with international standards and regulation, but is also appealing to companies as they may not have to deal with standards in other territories such as the European Union which are over the top,” he added.

Challenges

The Isle of Man is a self-governing British Crown Dependency and is ranked the world's eighth richest nation per capita by the World Bank. As it is not part of the UK, it is able to offer a favorable tax regime with no capital gains taxes, withholding taxes, inheritance taxes or wealth taxes. Income tax on individuals is between 10 to 20 per cent and there is a £120,000 ($203,800) tax cap per person, while the rate of corporation tax is 0 per cent for almost all types of income.

Along with other offshore jurisdictions, the Isle of Man has come in for some stinging criticism in recent years in regards to how it handles tax matters.

In 2008, the former Labor UK chancellor of the exchequer, Alistair Darling, described the Isle of Man as a "a tax haven sitting in the Irish Sea," while only last year, ahead of the G8 summit in Northern Ireland, UK prime minister David Cameron was urging British Overseas Territories and Crown Dependencies to get their "house in order" over tax transparency.

However, since the Overseas Territories and Crown Dependencies signed up for the OECD's Multilateral Convention on Mutual Assistance in Tax Matters, Cameron has changed his stance, saying that he thought it was unfair to label Crown Dependencies as tax havens.Spellman said that with the “moral compass” changing since 2008, one of the biggest challenges has been how the Isle of Man is perceived.

“We are consistently being asked to apply higher standards than onshore locations, which is incredibly frustrating. We have had many rules in place for years, but people assume with smaller jurisdictions that they are unsophisticated. The island has worked in international markets for a very long time and we know the rules. We sometimes wish that some of the political rhetoric would actually recognize some of the actions we have taken,” said Spellman.

“Tax challenges lie with the state. It is our responsibility to be transparent with information, but we cannot stop onshore-based organizations cooking up schemes where it affects onshore locations,” he added.

The future

As part of its ongoing crackdown on tax evasion, the UK government recently announced it was pressing ahead with plans to introduce a new beneficial ownership register setting out who owns and controls companies, available to the public, not just tax authorities.

“While the Isle of Man Government understands the need to establish beneficial ownership, the UK wanting to put this information in the public domain is not in line with Isle of Man government policy,” said Spellman.

“However, we are happy to consult on the matter with our industry and see what the response is. It is an area where the UK is proposing international actions that are beyond its competitors. So we are concerned that the UK remains a competitive jurisdiction. We also need to make sure there is a level playing field on this. So the Isle of Man wants to be sure what the right way of going forward on this is,” he added.

Spellman was keen to point out the significant steps the Isle of Man has made in the move towards transparency and said that the jurisdiction was also looking to expand its network of double taxation agreements.

"With the introduction of global transparency we hope that people will be more accommodating as we want to work with countries and businesses to ensure there is tax neutrality, but we don't want to penalize people simply because we are a low taxation regime. We apply tax neutrality ourselves, we're happy to share that information and we are looking to expand double taxation agreements," said Spellman.

“Wishing the world was a different way does not help the here and now. Fact: the world has changed and transparency is the new religion. In this brave new world, I sincerely hope that the plethora of compliance and tax rules invented to cope when this was not the case, now come under as vigorous review as some will be simply redundant in the future,” he added.