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The Isle of Man's Commitments

The Isle of Man is set to be one of the first jurisdictions to be removed from the OECD's blacklist when it is reviewed in July, having given the commitments to transparency and non-discrimination required by the Paris-based organisation. Although the blacklist was originally of jurisdictions offering 'unfair tax competition', the strident resistance put up by the offshore world to the OECD's initiative has led it to downplay the tax aspects, certainly as far as rates of tax are concerned.

The Isle of Man may have reached an accommodation with the OECD, but it hasn't veiled its distaste at the process to which it has been subjected. At a February forum in Paris hosted by the FATF, an organisation set up by the OECD, the Isle of Man's Chief Minister, Donald Gelling, attacked the multilaterals saying: 'We seem to have witnessed a period of unprecedented international suspicion about the nature of business transacted in small financial centres. On the tax front we have had to contend with the OECD harmful tax competition report and the various European Union tax initiatives. The prejudice in some quarters has been palpable. Having been on the receiving end of more international scrutiny and ill-informed comment than I can ever recall, I relish this opportunity of responding.'

Donald Gelling, Isle of Man Chief Minister

However Mr Gelling said the Isle of Man's impending removal from the blacklist marked a new beginning for the Island's financial services sector and his government would overlook what could be considered as the OECD's prejudice and threats, in order to make a commitment to building on the new consultative process. He stated: 'We are prepared to give the new process a chance to get it right.'

What has the Isle of Man promised the OECD?

• Exchange of Information: The Isle of Man will not introduce banking secrecy laws, and will enter agreements with all OECD members under which it will provide information in response to specific requests on criminal and tax matters, whether or not an alleged offence is criminal under local laws.
• Transparency: Details of beneficial ownership for all business entities, trusts and businesses on the island will be available to the authorities as and when needed ('Know Your Customer' rules will apply in all cases to intermediaries); businesses will have to keep accounts and audit requirements will be in line with international standards.
• Non-Discrimination: Discriminatory tax regimes will be abolished along with the specialised corporate forms which offer them, such as International Companies, Exempt Companies and Non-Resident Companies.
• Timing: The commitments will be implemented in stages, with transparency installed by the end of 2001, tax discrimination for new company formations removed by the end of 2003, and all completed by the end of 2005.

The Island did say to the OECD that its commitments were conditional in some respects on adherence by other offshore and OECD jurisdictions to similar regimes; and all commitments will be implemented through the normal Isle of Man legislative process.

In fact, the Isle of Man legislature, Tynwald, has addressed itself to the issue of the legality of what is proposed by the OECD and other international agencies in an international context, and has called on the government to seek independent specialist legal advice on international law to help it understand the legal context in which it is being called upon to operate by agencies such as the United Nations, the European Union, the International Monetary Fund, and the OECD. This recommendation was made in a recent report by the Tynwald Standing Committee on Economic Initiatives, which was created to monitor the economic, fiscal and monetary initiatives of international and multilateral agencies which have the potential to significantly affect the island's economy. The Committee's first report, late in 2000, dealt with double taxation agreements and exchange of information.

Tynwald, the Manx parliament

The full text of "The Legal Context of Contemporary Economic Initiatives" Report can be found at: http://www.tynwald.isle-of-man.org.im/papers/reports.htm

The Island is in a reasonable position internationally to be able to fight its corner. At one time the Isle of Man was lumped together with other offshore jurisdictions in a bag labelled 'suspect', but that has changed as the Island has generally cleaned up its act over the last few years. In a recent issue of the FBI's Law Enforcement Bulletin, the Bureau praised the offshore financial centres of the Isle of Man and the Channel Islands for their 'willingness to cooperate with and provide assistance to foreign authorities.'

The article, written by Special Agent Mark Ferbrache, assistant legal attaché based in London, explained that most FBI fraud investigators had tended to view the Channel Islands and the Isle of Man as 'loosely regulated tax havens ... which makes the islands the choice of criminals to launder their illegal gains.' But the 1998 Edwards report into the crown dependencies and a survey conducted in 1999 by the FBI itself have changed the FBI's perception of the financial centres.

The FBI review focused on the islands from a law enforcement point of view and praised the "significant contributions" made by the Islands' law enforcement agencies, 'to improve law enforcement cooperation in the global fight against fraud and money laundering. Today, law enforcement agencies in the islands have established informal gateways to share criminal intelligence on a regular basis with the FBI.'

Mr Ferbrache said the FBI has particularly welcomed the role that the islands can now play in international fraud investigations. He stated: 'The consensus of these reviews found that the islands have a well-regulated financial industry, money laundering legislation in place and a demonstrated willingness to co-operate with and provide assistance to foreign authorities.'

The International Status Of The OECD's Initiative

Apart from the safeguards that the administration has tried to build into the process of compliance, and the healthily independent attitude of Tynwald, the Island can also comfort itself that the whole OECD initiative is far from a done deal, at least as regards discriminatory tax practices.

When the OECD began to compile its blacklist in 1999 it was in the context of a solid agreement between international agencies and the left-leaning administrations in power in the G7 countries that they would attack the perceived threat from 'offshore' to their fiscal base. Several things have gone wrong for them, the first (in time) being the stiff and perhaps unexpected resistance put up by the targetted jurisdictions, the second being the failure of the EU to reach agreement on its harmonising tax directive, which left its own attack on 'harmful tax practises' looking like a beached whale, and the third and perhaps most important being Al Gore's failure to clinch the US presidency.

The new Washington administration is no friend of European fiscal absolutism, and does not support the whole of the OECD's agenda. Treasury Secretary Paul O'Neill has yet to make his views clear, but it is very unlikely that he will want to put limits on the freedom of independent countries to set their own tax rates. As of April 2001, it is not possible to be sure about the outcome of the international politicking that is going on, but the most likely result is that while transparency and exchange of information will become standardised features of all but a few renegade regimes, which will as a result be excluded from much of the world's financial system, discriminatory regimes will continue to exist.

Paul O'Neill, US Treasury Secretary

Some of the more egregious practises such as 'designer' tax companies will be banned; but it is hard to see that the US will be prepared to abandon Foreign Sales Corporations, or Belgium its headquarters regime, or Portugal its International Services Centre in Madeira.

Harmonisation Of Corporation Tax Rates

So the Isle of Man will probably never have to harmonise its onshore and offshore tax rates - unless it wants to. It may want to, in order to stay in good odour with the EU. Ireland has agreed with the EU a harmonised 12.5% tax rate for all companies, which will apply from the end of 2005; Portugal is awaiting the EU's agreement to a harmonised 12.5% tax rate for Madeira, which will apply fully only after 2011; and Cyprus is preparing itself for a similar rate which it will probably have to adopt during the EU accession process.

But it's one thing for smaller, open economies to have a low corporate tax rate - how would Germany, France or the UK get along with a 12.5% coporation tax rate? It won't happen. It follows that jurisdictions such as the Isle of Man can compete very well against their mainland rivals with a 12.5% rate, although they won't be able to win as against the no-tax jurisdictions.

Bermuda, along with a number of the Caribbean and Pacific jurisdictions, not to mention Labuan and Dubai, have no income or corporation taxes, and will be able to maintain this situation now that the OECD has been forced to back off the 'tax competition' part of its agenda. How will the Isle of Man and other 'harmonised' jurisdictions fare against the no-tax competition?

Specialise To Survive: E-Commerce?

As a generalisation, the initial wave of wealthy individuals that made use of 'offshore' for tax minimisation and asset protection has been succeeded in the UK's nearby jurisdictions, as anti-avoidance legislation became ever tougher, by more specialised and often corporate clients. Thus for example Guernsey has the Channel Islands Stock Exchange and is a major fund-management location. The Isle of Man has broad strength across the financial services sector, and unlike the small and cramped Channel Islands still has the space to encourage light industry and service businesses which generate employment.

The Isle of Man Has Room To Expand

This is not to downplay the Island's trust business, which is still very strong, but the Isle of Man probably needs to develop a clearer corporate specialisation if it is to continue fast growth in a post-OECD future - and that specialisation is probably going to be e-commerce. The Island's own marketing has recently focused quite heavily on its suitability as a business base, under the banner, "Isle of Man, PLC" with a globe-trotting roadshow which has promoted the island as a secure, stable and well-regulated environment for businesses and their clients.

Treasury member Sir Miles Walker MHK, a key speaker at the presentations, explained to the Isle of Man local press: 'The theme for the Central European countries is very much on trading links and the legitimate use of offshore structures in the international market place. For them it is really a question of learning more about our international services and business opportunities, but of course not at the expense of the revenues of their own countries. We're highlighting the use of Isle of Man trading companies with a real tangible base here, captive insurance and treasury management, and the use of the Island as as a springboard for opening up new world markets.'

The first presentation concentrated on the Island's international services and took place at the Czech embassy with an audience comprising embassy officials, businessmen and bankers from Czechoslovakia, Slovenia, Slovakia and Hungary.

The second presentation, hosted by the HSBC bank in association with the Confederation of Indian Industry highlighted the Island's e-commerce opportunities to an audience representing international Indian software/e-commerce companies. The meeting was chaired by Sir David Gore-Booth, former High Commissioner to India and special adviser to the chairman of HSBC.

Sir Miles said: 'These countries are all seeking to join the EU and they are seeing significant changes taking place — privatisation of banking systems, telecommunications deregulation and the dismantling of the old communist economy for a more open free market. A changing economy offers opportunities for new investment which could make use of international structures, but in the first instance there has to be some awareness of what those opportunities may be.'

Isle Of Man E-Commerce Legislation

The Manx government has certainly been doing its part to lead and drive forward the development of e-commerce on the island. The Isle of Man was one of the first countries in the world to pass dedicated e-commerce legislation, with the Electronic Transactions Act, which received Royal Assent in June 2000 and was effective from November 2000. The Act is based on Australian legislation, which is in turn based on the model issued by the United Nations Commission on International Trade Law. Its purpose is to enable electronic commerce to be put on the same legal footing as paper-based commerce, as well as removing any legal impediments to the use of electronic communications with public authorities.

The Act ensures equality of electronic transactions with paper ones, subject to precautions to ensure that electronic communications are authentic and accessible, and is technology neutral. As a general rule, electronic communications are treated as being sent from the originator's place of business and received at the recipient's place of business. It incorporates the common law principle that a communication which appears to be from a person can only be treated as such if it was sent with their authority.

Electronic signatures are given parity with written ones, and there is provision for a system of Certification Service Providers to verify the authenticity of communications.

Internet Service Providers and telecommunications operators are not required to monitor the content of communications, and will not be liable for such communications provided they take appropriate action when they are brought to their attention.

Although the Isle of Man is within the European Union in some respects, applies its Common External Tariff, and imposes EU VAT in common with the UK, it does not partake of much other EU legislation, and will not need to implement the EU's or the UK's e-commerce legislation, which is notably more restrictive than the Act which has been passed by Tynwald.

E-Commerce Applications On The Isle Of Man

The government created an e-commerce department in 2000 (a Ministry, in effect) and appointed Tim Craine as its first head. The department has carried on the government's work in tailoring and creating purpose-built legislation for various types of e-commerce application. Two of the main sectors identified for special attention have been financial services, including on-line banking, and betting and gaming. Mr Craine and his team have worked hard to position the Isle of Man as a leading force in the e-commerce arena. Earlier this year, the island appointed a local legal firm to advise the government on its e-commerce strategy, and created a private sector e-commerce consultative committee made up of seven individuals who are recognised as being particularly pro-active in the field of e-commerce.

Like other prominent offshore e-commerce jurisdictions, the Isle of Man has done more sowing than reaping in terms of installed applications, and even one or two existing businesses have scaled-back or abandoned their operations on the island - no doubt this is a temporary situation worsened by the dotcom implosion during the last 12 months.

Going forward, the Isle of Man has to ask itself how it can win as against its competition, which consists primarily of Bermuda, Ireland, the Netherlands Antilles, Gibraltar, Malta, Dubai and Hong Kong. These are the jurisdictions which have or will shortly have adequate connectivity, facilities and skilled support to be considered as serious options for e-commerce.

In financial services, the Island should be well-placed to attract the offshore subsidiaries of banks, securities houses and insurance companies aiming at the European market-place. Customers and regulators will be comfortable with such a 'respectable' jurisdiction, returns on savings and investments will not be taxed on the island, and a low level of corporate taxation is not going to worry firms which will have to repatriate the profits to a high-tax area in any case. And there is an adequate supply of affordable accommodation and labour for back-office operations.

Betting and gaming is an interesting case. In this very rapidly evolving sector, which is arguably the only offshore e-commerce application to have reached critical mass globally, the island should perhaps have sorted out its legislative regime and pricing policy sooner. However it's understood that discussions have now been resolved, and that legislation (which has been in the works for many months) will shortly be finalised on the basis that sports betting firms will readily be able to have affordable licenses to allow them to operate from Manx servers without needing local establishments.

Sports betting and gaming will have separate licences

Long-term though, the island may find that the most satisfactory e-commerce businesses will be those which take advantage of the Isle of Man's real-world assets, and have offices or plants with staff in addition to an electronic presence. This model would particularly fit companies with distribution of small, expensive objects into Europe: the Ronaldsway Free Zone and the island's VAT status make it particularly suitable for such an operation.

The Ronaldsway Free Zone

For all of these applications, the basic sinews of e-commerce are well-established on the island: there is redundant connectivity of 1.2 terabytes; there is a wide choice of ISPs and hosting services; there are banks to provide payment processing; and there are software houses with established expertise in e-commerce systems design and implementation. Any European (or for that matter, worldwide) B2B or B2C sales, marketing and distribution operation, whether dealing in physical or electronic product, can certainly find the facilities and skills it needs on the island, although a local certification authority, which was envisaged by the island's Electronic Transactions Act, is not yet in place. Certification can be 'outsourced' so to speak to a provider in another jurisdiction, but it will be better when it can be provided locally.

Last November WISekey, a worldwide leader in certification authority and public key infrastructure, announced that it had created WISeOffshore, an internet initiative to be based in the Isle of Man which would enable offshore financial institutions to improve their transaction efficiency and comply with "Know Your Client" requirements. But the service was later put on hold, much to the disappointment of the Island's e-commerce sector, due partly to legislative uncertainty over the status of electronic 'know your customer' routines.

WISeOffshore had been viewed as a major opportunity for the island and was described by Treasury Minister, Richard Corkhill, as 'excellent news for the future of the Isle of Man as a centre of excellence for e-commerce.' Director of E-Commerce, Tim Craine, who had initially enthused at the prospect of the WISeOffshore initiative, said: 'I can understand the reasons for the delay. There have been changes in the market environment since the launch that no-one could have predicted, particularly dot com failures.' WISeOffshore is still expected to come on stream in stages over the next few months.

'Digital rights management' (DRM) is one rapidly developing e-commerce sector which is particularly demanding on the security and certification front, and which is in the sights of some IOM providers. DRM refers to the secure handling of intellectual property licensed and sold over the Internet. The ongoing Napster debate in the music industry, and parallel discussions in other industries, make it clear that there will be very significant e-commerce activity in the transfer for money of an intellectual property right from its owner to a user, and in limiting the ability of the user to enjoyment of the transferred right for the period, and to the extent that has been paid for.

Conclusion

The OECD affair is over, bar the shouting, and sensible jurisdictions, of which the Isle of Man is a prime example, will now get on with life in the e-commerce fast lane.

Although offshore jurisdictions have many advantages when it comes to attracting international e-commerce business, once the obvious basics of adequate connectivity and legislative certainty have been provided, which is now the case in the leading offshore territories, the most important factor of all may turn out to be people.

As the 'Digital Rights Management' problem demonstrates, usable solutions are going to be highly technical, and will need to be encapsulated in a complex legal and fiscal web if they are to pass muster with serious players in the world of international business. It is obviously beyond the possibilities of a speck of rock in the middle of the Pacific Ocean to be a player in this game. Only a few of the best organised and most skilled jurisdictions will get a chance to play, and within a certain range of tax rates the exact level won't matter nearly so much as the ability of a jurisdiction to perform to a high standard on all professional and business dimensions. It's possible to argue that the complicated intellectual work will be done in Cambridge or California, and the jurisdiction will merely have to be good at building earthquake- and hurricane-proof server hotels, but that is a risky position for a jurisdiction to take.