Last week TJN's director John Christensen visited the Isle of Man to speak at a packed public meeting on tax havens. This was a rare and healthy airing of the issues which lie behind this island’s prosperity over the past 30 years, since the offshore structure was set up. The meeting was organised months earlier but the timing was spot-on: events unfolding on a daily basis hold massive significance for the Island.
Gordon Brown has recently announced on TV that the UK needed to take a closer look at its relationship with the IoM, in the wake of Icelandic bank Kaupthing, Singer and Friedlander (KSF) going pear-shaped a couple of months ago. He was echoing Alistair Darling’s sentiments voiced a few days earlier when being grilled by the Treasury Select Committee looking into the Icelandic debacle. KSF’s IoM subsidiary was left owing some £820m to over 8,000 depositors, many of whom were shocked to discover the IoM’s depositor compensation scheme (even after being beefed up) could take many years to pay out. There is much anger here that KSF’s UK subsidiary – now in administration – is sitting on £550m which was frozen by order of Her Majesty’s Government, which would now go a long way to making the IoM customers happy. The Manx Government has committed £150m to the compensation scheme – half its reserves – to maintain our credibility as an offshore centre, showing the dangerous stakes which are now being played for.
Then on Monday of last week, in the UK Chancellor’s Pre-Budget speech, two further body blows landed in quick succession. First the 2.5 per cent reduction in VAT, which will reduce IoM Govt income by £40 million (7%) at a stroke, a disproportionate effect because over half the IoM Government’s income comes from VAT through a very favourable VAT-sharing deal - known as the Common Purse - with the UK. But perhaps even worse was the news that the UK would be launching a review of its Crown Dependencies (that’s us and the Channel Islands) as well as its far-flung Overseas Territories. In addition to looking at how we handle the financial crisis, the review will probe our systems of financial supervision, transparency, and international cooperation. Critically, the UK admits there is ‘growing international pressure to line up standards of financial regulation and meet international norms with regard to taxation’.
The strong current resentment here against the UK is seen in many calls for outright independence, which would surely kill off the offshore industry straight away. The feeling that the UK has got it in for us contrasts sharply from the reality that on the international scene it’s the UK which is dragging its feet over reforms to make havens more transparent. This reflects the two sides of the struggle going on for the ear of HMG; on the one hand huge vested City interests pleading for the status quo, but on the other growing pressures from a revitalised USA, a continental Europe shocked by the Liechtenstein scandal, and – dare we say it – voices from TJN and an increasing number of development agencies pleading for the poor, whose own voices in this debate are still so weak.
The finance sector accounts for 35-40% of our workforce and national income (with many more dependent upon it), so it’s not surprising that many on the Island remain in denial about the harm we (and all havens) are causing. Yet the evidence mounts up. In 2006 a report of a subcommittee of the US Senate declared that the Isle of Man has become ‘a haven for tax evasion’, and that the US government is losing up to $100 billion each year due to such offshore finance centres. The IoM is particularly heavily criticised in the report; in a series of detailed case studies the report showed how IoM corporate service providers helped to set up sham trusts and shell companies in the Island in order to pretend that wealthy US citizens had no obligation to pay US tax. The IoM is one of the naughty jurisdictions listed in the Stop Tax Haven Abuse Bill, which may soon be brought to life.
Closer to home, in May 2006 a UK tax tribunal highlighted the damage which the offshore sector is doing there. HM Revenue and Customs demonstrated that out of 9,300 Barclays offshore customers resident in the UK, over 96 per cent had failed to declare such offshore bank interest on their tax return, as the law demands. As a result, Barclays was required to hand over income details of all its offshore customers to the UK Revenue, which expects this to bring in £1.5 billion of unpaid tax. And this is Barclays alone – the decision has allowed them to demand the same from all other banks. Many customers face six years’ back tax, interest, penalties, and possibly even jail. Approximately 3 million Britons hold offshore bank accounts in the Isle of Man and the Channel Islands.
At end-June 2008 some £155bn of funds were deposited in Manx banks and the trust and insurance sectors, so we’re much smaller than Jersey and a tiny player on the global scene. Not all funds placed in the IoM are there for illicit purposes, yet at the end of 2006, some £76bn of assets in the IoM financial sector were owned by non-IoM individuals who were likely to be illegally evading tax on those assets in their home jurisdictions. Around 7 per cent of these bank deposits come from developing countries. It is estimated that The IoM alone causes poor governments to lose some £15m each year – a figure which may be compared to the £2.2m given in 2008-09 by the Manx Government in overseas aid.
Since July 2005, the IoM has had to implement the European Union’s Savings and Tax Directive. Rather than apply the norm of automatic comprehensive information exchange, we opted for the withholding tax alternative – a telling choice. At least this is a start, but it’s to be hoped that the current review of Directive will extend its scope beyond individuals to companies and trusts. Its ironic too that under the EU Directive, Manx banks are now acting as tax collectors for the UK, French and German governments, who need the money far less than, say, India, Brazil or South Africa – showing the ultimate need to exchange comprehensive information globally, through a UN mechanism. Still, one step at a time.
Also, much more transparency is needed here to reveal the true ownership of IoM sham trusts and front companies with nominee Manx directors. And our regulator, the Financial Services Commission (whose lack of independence has been starkly exposed by the Kaupthing affair), needs to be far more robust in taking active measures to combat large-scale evasion. Offshore companies are also guilty of trade mispricing, so we also need reform of accounting rules to disclose country-by-country reporting of profits.
What lies in the future? Our Treasury Minister, Allan Bell, is surely right when he says we are facing the biggest challenge since the second world war. A reformed finance sector implies significant emigration. An obvious prescription is to diversify away from our concentration on finance – but to what? Tourism was a traditional breadwinner for much of the 20th century, but our weather can’t persuade many to come when the Med costs just the same. Fishing and farming have enough problems of their own. One thriving new sector is internet gambling, and the Manx government has successfully attracted many companies to set up here. Out of the frying pan or what?
To be fair, the Island has made limited reforms in recent years, and -as John Christensen pointed out - we are placed towards the less disreputable end of the offshore spectrum. One such step has been the signing of about a dozen Tax Information Exchange Agreements, mainly with continental and Nordic countries. Yet under these, tax info is only supplied on a 'by request' basis where an individual is under suspicion; a much more timid and less effective tool than automatic information exchange.
The Isle of Man is a beautiful nation with its own language and culture, which over the centuries has allowed it to claim a high degree of political autonomy. As an isolated island on the periphery of Europe it has natural economic disadvantages, and our legislative freedom has been used many times to carve out niches for prosperity. In 1907, we were able to close public roads to claim the TT races for the island, which still continue. In the 17th and 18th centuries its lower duties gave rise to much smuggling around our coastline, which came to a sudden end in 1765 when an infuriated UK Government lost patience and bought us for the Crown – sounds familiar? Our national motto – symbolised by our three-legs flag – is ‘Quocunque Jeceris Stabit’ (‘Whichever way you throw me I stand’) and such resilience will be certainly be needed in these interesting times.
Phil Craine, Douglas
PS Anyone living on the IoM and wishing to join a new tax justice organisation here should contact me on 01624 672224 or at pcraine-at-christian-aid.org