In this blog, Phil Craine, convenor of TaxWatch Isle of Man, shares his perspective on the Island’s history as an offshore financial centre – and what the future might hold for it, and others like it.
Throughout the first half of the eighteenth century, Britain imposed high customs duties on imported goods such as tea, coffee, wines, spirits, cotton and tobacco. But the Isle of Man could set its own import duties, which were much lower or even zero, legally attracting goods sailed from the Continent which could then – the illegal bit – be transferred into smaller vessels to be sailed across to England or Scotland on the next moonless night. By 1764 the loss of British duties due to Manx smuggling was 15% of its total customs revenue. In the following year Britain – hard up after the Seven Years War with France – passed the Revestment Act to buy the rights to Manx customs duties, which were raised to British levels and strictly enforced by the navy.
Fast forward 250 years to today and the island again finds itself under an external threat. After fifty years of a booming economy based on corporate secrecy and low taxes – including 0% on company profits – the writing may be on the wall for the offshore model, both here and in havens elsewhere.
Globally, the IoM is a small player on the offshore scene. Much of the Island’s finance industry is legitimate, and the Island has improved in many ways. Yet opacity and the facilitation of tax avoidance remain central pillars of the Manx economy. This offshore system has brought prosperity and jobs to the Island over past decades, but at what cost to our neighbours – and ourselves?
Examples of harm inflicted elsewhere include disguised remuneration. Scores of ‘payroll solutions’ outfits operate on the island, allowing off-island self-employed workers to route their pay through the island to escape paying income tax at home, normally by disguising remuneration as a loan. The UK Government have made inroads into this through legislation, yet the rise of the gig economy worldwide opens the door to new schemes.
Another well-known practice is profit shifting. Profits earned elsewhere in a corporate group are transferred internally and artificially to the IoM. After the EU placed us (and others) on a grey list due to concerns that they ‘facilitate offshore structures which attract profits without real economic activity’, Manx firms now have to demonstrate such substance.
Recent years have seen the surfacing – often in court and in liquidations – of Manx-registered investment funds where depositors have lost their savings, with claims of insufficient protection by the regulator.
So the Isle of Man now finds itself under unprecedented regular scrutiny from a range of international regulators, ranging from MONEYVAL (checking on money laundering and terrorist financing) to campaigning NGOs and the EU – now minus the UK to protect Manx interests. The suspicion under which the IOM is now placed internationally and by financial institutions is why ordinary citizens and companies here find it so hard to simply open a bank account or add a signatory. Transactions which could be done in the blinking of an eye in Doncaster are a bureaucratic nightmare in Douglas. Because we’re offshore we’re too often deemed to be a risky bet.
But winds of change are blowing. Perhaps an early turning point was a crisis in 2019 when a House of Commons majority of cross-party MPs were ready to back an amendment from Dame Margaret Hodge and Andrew Mitchell to force the Crown Dependencies (IoM, Jersey and Guernsey) to make public our registers showing the real owners of companies, as the UK and EU have committed to. In the face of a parliamentary defeat, the UK Government pulled the bill, but the Crown Dependencies saw the direction of travel, and to avert a possible constitutional crisis announced they would set up such public registers if they became the international norm – albeit not until 2023. Company accounts, meanwhile, remain unpublished.
This year we have seen an international consensus form with remarkable rapidity around Joe Biden’s initiative to address profit shifting by large multinational companies, especially but not only in the digital sector. The direct short-term effect on the island seems likely to be marginal, but what is certain is that major economies, desperate for post-Covid revenue, are plugging their tax leaks and a 0% rate is increasingly being perceived as decidedly anti-social and perhaps unsustainable.
The Isle of Man must stand on its own feet, without any subsidy from the United Kingdom. Geography and history have bestowed on us the gift of home rule, allowing the island to enjoy autonomy and legislative independence which would be the envy of any county. Although vested business interests remain powerful, the lesson of 1765 is that we ignore external threats at our peril. As the offshore industry gradually fades, and our newly-elected parliament gets down to business, how can the island reinvent itself for the next generation, providing long-term sustainability and economic justice for itself without exploiting its neighbours?