Isle of Man: International Law

In response to its inclusion on the OECD blacklist in 2000, the Isle of Man announced a package of radical financial reforms focusing on the three crucial areas of taxation, e-commerce and banking, in an effort to create an attractive and competitive business environment.

Although the IOM planned to implement some taxation legislation before learning that it was included on the blacklist, the jurisdiction quickly amended its proposals to placate the OECD, working towards an integrated offshore/onshore system, with corporation tax reduced from 20% to 10% for trading companies over a three to five year period, with a deadline of 2005. In the event, and after the OECD had been driven off tax-competition turf, the IOM proposed a zero-rate coporation tax.

In 2004, the Assessor of Income Tax was granted new powers to obtain documents including material relevant to the international exchange of tax information on request, in line with the Island’s commitment to the OECD.

In December 2000, a consultation document was published, entitled 'Overriding Principles For A Revised Know Your Customer Framework', which was essentially a joint initiative from financial regulators in Guernsey, Jersey and the Isle of Man to bolster their existing anti-money laundering regulations.

In early 2001, an inter-governmental report was published which praised the IOM in its fight against money-laundering practices. The report, written by the Offshore Group of Banking Supervisors and the FATF, applauded the Manx authorities for their successful endeavours in countering money laundering and related criminal activities.

At this point, the Isle of Man government stopped to consider the international legal environment and to understand the legal context in which it was being called upon to operate by international agencies such as the United Nations, the European Union, the International Monetary Fund, and the OECD.

As in other offshore jurisdictions, the events of 11th September 2001 had consequences for the Isle of Man.

Speaking to a group of financial executives in Douglas, Isle of Man, Sir Howard Davies, Chairman of Britain's Financial Services Authority at the time, while generally complimentary about the island's supervisory regime, warned that offshore jurisdictions needed to battle against negative perceptions at a time when there is more pressure than ever for financial institutions to be transparent.

"The US decision to freeze the assets and transactions of international banks which fail to co-operate with the campaign against terrorism raises the stakes further," said Sir Howard. "It will cause banks to look even harder at whether their branches around the world, and especially in offshore centres are fully compliant with money laundering best practice. Anyone who is responsible for the governance and regulation of offshore centres would do well to be aware of the challenges they face. In short, offshore centres will need to do much more in the coming years to demonstrate that they can and do meet international standards of best practice. If that does not happen, then the future is bleak."

The Isle of Man said the Financial Services Authority had been right to insist on high standards offshore but pointed out that Britain had problems of its own.

When the final OECD blacklist was published in March 2002, the Isle of Man, which had made its own commitment to the OECD a long time previously, announced that it welcomed the OECD's statement on tax practices in offshore financial centres. The Channel Island authorities also endorsed an earlier statement by Gabriel Makhlouf, the Chair of the Committee on Fiscal Affairs, who stated that implementation of the jurisdiction's commitment to improving transparency would strengthen the Island's role in the international finance community.

Ian Kelly, the Isle of Man Tax Assessor at the time commented: 'The expansion of the global economy depends on international finance centres - both onshore and offshore - combining a highly competitive, entrepreneurial environment for business with a quality of regulation that safeguards a company's reputation. That is why we support the OECD's efforts to ensure that tax competition is fair as well as keen.'

However, he reiterated the concerns expressed by several offshore jurisdictions, that the international tax initiative operate on a 'level playing field', asserting that equality of treatment is 'absolutely fundamental to the success of the initiative.'

The Isle of Man was the first of the UK's Crown Dependencies to offer a response to the European Union's Code of Conduct on Business Taxation, proposing a zero corporate tax rate for all companies based on the Island, in order to bypass the threat posed by EU rules to the jurisdiction's exempt company regime.

The government said that although the Isle of Man did not belong to the European Union, the Manx authorities recognised the need to 'constructively engage' with EU initiatives, explaining that the requirements of the Code of Conduct 'can be accommodated within the Island's evolving tax strategy'.

'The creation of a zero corporate rate applied to resident and non-resident businesses alike would preserve the international business we would wish to retain, allow the economy to diversify still further, and give the Island a powerful competitive advantage for the future, albeit with some initial loss of revenue,' the Manx Treasury Department revealed, adding that: 'Such loss of revenue is not considered as significant and will not affect our AAA rating.'

In October 2002 the Isle of Man signed a tax information exchange agreement (TIEA) with the United States. Following the jurisdiction's commitment to co-operate with the OECD, the Manx authorities are obliged to enter into a TIEA with any OECD member state or committed territory which requests one.

The model adopted provided for exchange of information based upon a formal request being received by the competent authority in the Isle of Man. 'A request must be made on an individual case basis and the subject of the request must be under investigation in the requesting jurisdiction,' the news service reported.

The IOM's agreement with the US formed part of the jurisdiction's efforts to implement its commitments to the OECD, given in early 2001, which included a commitment to develop effective exchange of information. Over the following 12 months the Isle of Man, together with other jurisdictions, negotiated a Model Tax Information Exchange Agreement.

The provisions of the agreement had effect from 1 January 2004 with respect to criminal tax matters relating to taxable periods beginning on or after 1 January 2004; and from 1 January 2006 with respect to all other tax matters relating to taxable periods beginning on or after 1 January 2006.

In the spring of 2003, the Isle of Man, like its fellow 'dependent territories', had to respond to the EU's Savings Tax Directive, which had finally begun to look inevitable after the EU decided to believe that the United States was applying 'equivalent measures' to its information-sharing proposals.

The Manx authorities were uncomfortable being dragged into an EU issue, but resigned to the fact that the jurisdiction's participation in this international initiative was mandatory, arguing that:

'The whole exercise is not based on fairness, or common sense, or logic. In many ways it is quite an irrational political process which we have ended up with and, perhaps, from our point of view it is not the best way of going about things but we have to live in the real world.'

In May, Jersey and the Isle of Man revealed that they would both be following Guernsey's example, and would, from January 2005 (later changed to 1st July, 2005), levy a withholding tax rather than exchange information on the savings interest of EU residents.

In November 2003 the Isle of Man's parliament, the Tynwald, gave its formal approval for the jurisdiction to implement the aforementioned withholding tax in the initial stages of the new European Savings Directive. The initial minimum rate of withholding tax under the Savings Tax Directive was 15% on savings interest, rising to 35% by 2011.

On a regulatory note, and also in November 2003, a report released by the International Monetary Fund praised the Isle of Man’s financial regulators for their “proactive” approach in achieving the required standards demanded internationally.

The report was welcomed by Allan Bell, who commented: “The report is a positive and welcome independent endorsement of the regulatory arrangements which we have in the Isle of Man. It is probably the most authoritative and comprehensive report which has ever been prepared on our regime and will therefore stand us in very good stead in attracting new business to the Island.”

The report did however contain some criticisms of the degree of independence of the island's regulators, and in December 2003, the Treasury Minister said that the government would deal with issues raised in the recent IMF report with regard to the independence of the island’s financial regulators within six months. The potential “shortcomings” identified by the IMF concerned the accountability of the Financial Supervision Commission and the Insurance and Pensions Authority.

In addition, the IMF observed that the heads of the regulators were also members of the Tynwald, which it suggested “effectively make the FSC and the IPA departments of government”.

In response, Mr Bell said that the independence and accountability of the FSC and the IPA “have never been in doubt”, although he announced that the government was taking the IMF's concerns “very seriously.”

The Manx government announced in November, 2007, that businesses in the Isle of Man which accept cash payments worth EUR15,000 or more would have to comply with new anti-money laundering legislation in place in the jurisdiction.

The Criminal Justice (Money Laundering) Code 2007 (the ML Code) came into effect on September 1, 2007. The ML Code replaced the previous Anti-Money Laundering Code 1998, and brought in changes to anti-money laundering and counter terrorist financing requirements. In addition, where previous legislation had focused on the financial services sector, the ML Code brought additional businesses within its remit, ensuring that the Isle of Man complies with international standards.

Home Affairs Minister, Martyn Quayle commented:

"Important changes to the legislation mean that any business accepting cash payments equivalent to 15,000 euros or more will have to keep records for a minimum of five years and identify the customer. While banks and the finance sector generally have been used to complying with the legislation for some time, we appreciate the need to publicise the changes to bring it to the attention of businesses including shopkeepers, auctioneers, car dealers and jewellers – for example – who may not realise they must now comply with the Money Laundering Code."

The Home Affairs Department revealed that it is launching a publicity campaign, in partnership with the Financial Supervision Commission (FSC), to ensure that businesses which accept cash payments of 15,000 euros or more are aware of the requirements under the ML Code. All businesses are due to receive a leaflet later this month giving details of the ML Code and its requirements.

The ML Code states the amount in euros in order that Tynwald does not need to amend it each time the currency’s value fluctuates against the pound.

Changes to the ML Code were made in order to bring the Isle of Man in line with international standards.

The following year, in June, two pieces of anti-money laundering legislation entered into force in the Isle of Man meaning that persons entering or leaving the island were obliged to declare cash amounts to a value of EUR10,000 or more (approx GBP7,700).

Under the European Communities (Cash Controls) (Application) Order 2008 and Cash Controls (Penalties) Regulations 2008, individuals must declare these amounts of cash to the Manx Customs and Excise Department in writing, on forms made available on the department's website, or available at its office in Douglas.

The new cash declaration rules went into effect across the European Union on 15th June, 2007.

Returning to tax matters, the Isle of Man's 2006 budget included the introduction of zero corporate tax as of 5th April 2006. The new 0% tax regime was in accordance with the promised five year public taxation plan announced in 2000, which has been delivered on target, two years ahead of other UK Crown Dependencies and other competitors in the full implementation of a zero tax strategy, said the government.

Commenting on the Budget, Allan Bell stated that:

“The 2006 Budget marks the delivery of our promises to the international community and demonstrates the Isle of Man’s ongoing commitment to innovation. It provides for significant increases in public expenditure and the provision of further assistance to those in our society who need it most, both at home and overseas. It is also a Budget for business, inviting the enterprising and the ambitious to come to our Island to work with us”.

The government subsequently consulted on capping the new 10% corporate tax liabilities for financial institutions; the response, not surprisingly, was favourable.

A cap of at least GBP6 million, just above the current highest tax paid by a company, was suggested in the consultation document published in August 2006.

In April 2008, the OECD welcomed two new bilateral arrangements for the exchange of information for tax purposes, between Guernsey and the Netherlands and between the Isle of Man and Ireland.

The OECD revealed that this brought to fourteen the number of such agreements signed since the beginning of 2007 by jurisdictions committed to work with OECD countries.

For the Isle of Man, the agreement with Ireland was its tenth tax information exchange agreement.

Paolo Ciocca, Chair of the OECD’s Committee on Fiscal Affairs, argued that the agreements enhanced the international reputations of Guernsey and the Isle of Man as legitimate financial centres, thereby strengthening their integration into the international financial system.

Mr Ciocca explained that:

“The trend towards greater transparency and tax cooperation continues as more and more countries and jurisdictions implement the OECD standards."

“Recent events have put international tax evasion in the spotlight, demonstrating the pressing need for action to tackle tax compliance issues in an increasingly borderless world. These agreements will better equip their signatories to address all forms of tax abuses," he concluded.

In May 2008, the Isle of Man came in for praise when the UK House of Commons Committee of Public Accounts published a report arguing that the Foreign and Commonwealth Office (FCO) was not doing enough to manage the risks arising from the UK's liability for the 14 Overseas Territories choosing to remain under British sovereignty, according to Edward Leigh, Chairman of the House of Commons Committee of Public Accounts.

Edward Leigh, Chairman of the Committee, observed that:

'In most of the Territories, the standards of regulation across areas such as banking, money laundering, insurance and securities are not as good as those in the Crown Dependencies. The FCO, actively supported by other relevant agencies, must do more to help the Territories, especially the smaller ones, strengthen regulation. Where necessary, this should include bringing in more UK investigators and prosecutors.'

The report, using evidence from the Foreign and Commonwealth Office and the Department for International Development, examined the oversight of offshore financial services in the Territories; the balance between UK and Territory funding and responsibilities; and governance and management of the Territories' external relations.

While the report noted that the UK government is attempting to increase capacity for oversight of Territories' financial services industries, it argued that regulatory standards in most Territories are not yet up to those in the Crown Dependencies (Jersey, Guernsey and the Isle of Man).

It also found that limited capacity reduced the ability of Territories to investigate and prosecute money laundering.

Echoing this, in late June 2008, the Commons Select Committee on Foreign Affairs in the UK published its seventh report addressing issues surrounding overseas territories and offshore centres.

On the subject of the regulation of offshore financial services, the Commons Select Committee (CSC) observed that the UK has strong reasons to ensure that Overseas Territories' financial industries are well regulated.

In an unwelcome revisitation of the Savings Tax Directive in September 2008, meanwhile, the European Commission announced its intention to tighten the rules of the legislation and consequently close existing loopholes and prevent tax evasion.

Germany led the onslaught to review the directive perturbed by the numbers of German investors avoiding tax by pouring millions of euros into investment vehicles which fall outside the scope of the rules, particularly in neighbouring Liechtenstein and Switzerland.

EU Tax Commissioner Laszlo Kovacs was due to issue a formal proposal by November outlining the amendments. However, as in all EU tax matters, in order to ensure that the proposal is adopted, the unanimous backing of all 27 member states would be required.

In July, 2009, as part of its ongoing programme of developing closer economic and taxation co-operation with other countries, the Isle of Man concluded agreements with the government of New Zealand for the exchange of information in tax matters and the avoidance of double taxation.

The signing ceremony took place at New Zealand House in London, United Kingdom, between Allan Bell, the Isle of Man’s Treasury Minister, and the New Zealand High Commissioner to the United Kingdom, Derek Leask.

The two agreements are:

• A Tax Information Exchange Agreement (TIEA) based on the Organisation for Economic Co-operation and Development (OECD) model; and
• A convention for the avoidance of double taxation, which will allocate taxation rights over certain income of individuals and establish a mutual agreement procedure in respect of transfer pricing adjustments.

The Isle of Man said it had now signed 17 agreements that met the OECD international standard on tax co-operation and transparency.

Minister Bell commented, "Part of the Isle of Man’s economy is based on financial services, and it is vital such financial services operators adhere to the standards required by the global economic community. The Isle of Man has been committed to the OECD standards of transparency and effective exchange of information for tax purposes for over eight years and this latest TIEA is part of our continuing work and mutual co-operation not only with New Zealand, but with all other countries with which we have agreements. This agreement represents the start of a new phase in relations between New Zealand and the Isle of Man and I expect it will lead to further political, economic and cultural ties.”

In September, 2009, the Isle of Man’s continuing high level of compliance with global standards of financial sector regulation and supervision – including international co-operation and the combating of money laundering – was confirmed by the International Monetary Fund (IMF).

An IMF report showed that the island is amongst the top countries in the world in terms of implementing the recommendations of the Financial Action Task Force (FATF) to counter money laundering and terrorist financing.

The report concluded that "the Isle of Man is broadly compliant with most aspects of the FATF recommendations," having continued to upgrade its requirements significantly. The report further states that "the quality of implementation of AML/CFT measures by financial institutions was found to be mainly of a high standard. In meetings with financial institutions (as well as in some cases their auditors and legal advisors) the assessors found a very high level of awareness of AML/CFT risks and requirements."

The report says the Island has a general high standard of financial sector regulation and supervision, and a "very high standard of compliance" with the Basel Core Principles for effective banking supervision. The IMF found that the Manx banking system had a limited exposure to market shocks, with a "very sound" level of capitalization. The insurance sector was found to be similarly well regulated, also with "considerable resilience against shocks."

The report goes on to say that "the Isle of Man authorities take their responsibilities in the area of international co-operation seriously," citing supervisory cooperation, mutual legal assistance, and tax information exchange agreements.

In August, 2010, the Department of Home Affairs in the Isle of Man launched a consultation on new legislation that would update the Isle of Man’s anti-terrorism legislation, including tackling the financing of such.

The draft Anti-Terrorism and Crime (Amendment) Bill seeks to amend and add new provisions to the Anti-Terrorism and Crime Act 2003 and the Terrorism (Finance) Act 2009.

Home Affairs Minister, Adrian Earnshaw, commented of the proposals: “This Bill is about the Isle of Man being a good neighbour and maintaining its reputation for being a well-regulated finance centre. The 56 clauses seek to update and modernize our existing legislation with a view to complying with international agreements in relation to terrorism.”

Earnshaw added: It’s in our interests to ensure the island is not a safe haven for terrorists or those who finance terrorism. We have established the island as a well-regulated international finance centre and we want to make certain there aren’t any weaknesses in legislation that could be exploited by those who want to engage in international terrorism, or by those who wish to damage the island’s reputation.”

BACK TO TOP