The Manx 2000 Budget - Basil Sabine OBE, MA, FTII brings readers up to date on the latest changes to the Manx taxation system.

The Manx 2000 Budget
BASIL SABINE OBE, MA, FTII brings readers up to date on the latest changes to the Manx taxation system.
The Manx update which appeared in Taxation, 26 October 2000 at pages 100 to 101 covered in brief detail the projected shape, the 'grand design', of Manx fiscal reform. It dealt with the new corporate structure, personal tax, the bold suggested reform of capital allowances, a new tax credit scheme and the international scene. All these proposals derived from considerable research, consultation and working parties. In June last year the Minister for the Treasury followed his outline of the changes for the benefit of interested parties with this current outline of future taxation strategy for the Island last October. Consultation will be continued and in proposing formally 'that Tynwald endorses the implementation of the future taxation strategy by the Treasury, as set out in volume I of the policy review 2000', the Minister grasped the opportunity of giving more details of what that strategy entails.
Risk assessment
It was now necessary to make, he said, an assessment of the risks, costs and benefits of all the proposals, who will be affected and in what way. In this context, although the Island controls its own fiscal policy, an important feature is the Customs and Excise agreement with the United Kingdom. This agreement provides for the Island's share of these duties to be a share of the total duties received from both countries and a portion dependent on the performance of the Manx economy.
This indirect taxation provides a vital underpinning to the direct taxation receipts so that any considerable decline in the United Kingdom's total receipts would have a devastating effect on this safety net. Happily this is not thought to be likely by either party, nor, even more, any fundamental change in the current ratio or its permanency. All the proposals must be looked at in the light of this bedrock of the Manx economy. The Minister certainly did not consider that indirect taxation receipts would suffer to any marked degree.
Key changes
He then turned his attention to the key changes in the sphere of direct taxation. He confirmed the introduction of a new corporate tax rate of 10 per cent for all trading companies; private investment companies would suffer a 15 per cent rate. In addition there was to be a start up scheme for new businesses to allow a phased approach to the full rate of taxation. This would be combined with venture capital initiatives.
With regard to personal taxation, there would be a reduction in the standard rate of income tax, again to 10 per cent, with a higher rate of 15 per cent for taxpayers in a higher income bracket. The Minister also confirmed the introduction of a current year basis of assessment, although realising the problems associated with such a radical charge. There would be a system of low income credits as explained in the earlier article, and the grant of personal allowances for non-resident recipients of Manx source income. The recipients of such income will be subject to tax on the gross of that income in their country of residence.
Other likely changes
This proposed ambitious programme will be followed by further reductions in direct taxation levels. The Minister was well aware of the danger in increasing local inflationary pressures and the need for sustained economic growth allied with a cautious approach to public spending, as well as the stability in indirect taxation revenue. He felt, however, that in the following year he could anticipate a lowering of direct tax rates by 2 per cent, together with a 'nominal' increase in personal allowances. Tax credits would, however, have to wait until 2003.
In respect of these reductions, he was instructing the Income Tax Division, when preparing for the 2001 Budget, to anticipate decreases of 2 per cent in general tax rates and an increase in allowances of the same percentage. The cost of these changes over a five year period would be almost double the amount regarded as available normally for tax changes. He felt the risk to revenues during the transitional period was outweighed by the advantages of this more liberal policy; as he said 'it will be a smaller slice of a much bigger cake'.
Capital allowances
There is a final point on corporate and business taxation. The simplified approach to capital allowances, to adopt accountancy principles, was also noted as one of the key changes. Presumably the date and manner of its introduction will depend on when the Income Tax Division can accommodate so radical a change.
Timing
As far as the general timetable is concerned the Minister said this would depend on two key factors, a continually buoyant economy and whether primary or subordinate legislation is necessary to implement this raft of changes. The administrative measures, such as changes of rate can easily be managed. But basic changes such as the introduction of corporate tax at the adoption of a current year basis of assessment will need a new taxes bill. A consultation document on the latter procedure has been issued.
The overall conclusion was that all elements of the strategy would be in place by 2005, although the Minister expressed his personal opinion that it would be 'to the Island's advantage' if an earlier date, 2003, could be achieved.
International aspects
Finally, and perhaps most important, were his comments on the international scene. This was in particular in respect of the Island's relationship with the Organisation for Economic Co-operation and Development's campaign against harmful tax competition, and the fact that it was identified as being a tax haven (the term is used in the pejorative sense) along with 34 others, although it has met some of the most stringent criteria and had always been most co-operative with that organisation.
Defending the Island
There were three aspects of the Island's status which the Minister was at pains to defend. As far as exchange of information was concerned, he felt he could claim with some justification that the Island had always been willing to share with another jurisdiction the information held, and to obtain such information when requested, provided there is good and sufficient reason. Secondly there was the problem of ring fencing where an enterprise, such as the exempt insurance company, enjoys a preferential tax status, if it carries on international business solely, against which the Organisation for Economic Co-operation and Development looks askance.
Thirdly, there is concern about the lack of transparency (allied to exchange of information) whereby certain companies can conceal their true ownership, or where there are exempt companies.
For all these areas of concern, the Island is quite certain that there is either legislation in place or the problems have been covered in the current fiscal strategy. Relations with the Organisation for Economic Co-operation and Development remain cordial.
Bright outlook
In short the Minister had good reason to maintain that the prospect for direct and indirect taxation, as well as the international fiscal scene gave grounds for real confidence.
Basil Sabine is an ex-Inspector of Income Tax, Isle of Man Government.
 

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