Island’s links with the Northern powerhouse worth promoting
A full and fascinating roundtable discussion based around the island’s place as an international finance centre was held at KPMG’s headquarters in Athol Street, Douglas.
Around the table were David Karran, managing director, IQE, Simon Scott, managing director, Barclays Isle of Man, Andrew Thomas, chief executive, Isle of Man Enterprises PLC (parent company of Shoprite) , David Parsons, tax director, KPMG LLC, Greg Jones, tax director, KPMG LLC Paul Davis, managing director Counting House, Isle of Man
KPMG tax director Greg Jones chaired the event with a panel of leading business figures.
The gathering of business leaders proved to be anything but ‘taxing’ with a wide variety of subjects covered including putting the spotlight on what the island should do to make itself more attractive to new businesses.
There was also a strong emphasis on building on the established affinity with the North West and the growth of the so- called ‘Northern powerhouse’. In fact it was suggested that the island could be seen as an extension of that powerhouse. But the growing links with the emerging markets could not be ignored.
The broad theme of the wide ranging discussion was the future of international finance centres, but the meeting at KPMG’s Douglas base covered a wide range of subjects.
The event was held days after the Conservatives won the UK General Election and Greg Jones asked whether the panel thought it was good news or bad news.
Paul Davis, managing director of Counting House got the ball rolling by saying: ‘I think it was extremely good news.
‘You’ve got the prospect of stability and five years of the devil we already know and we have a business friendly government that doesn’t have a resoundingly negative attitude to offshore financial centres.
‘It couldn’t have been better.’
Greg Jones said the key thing was the confidence in the economy that was generated by the result and ‘I think generally speaking, that when you have a confident buoyant UK economy the ripples spread outwards and the Isle of Man does feel some benefits.
‘I can’t say that I’m disappointed by the result of the election. It is business as usual.
‘But it is interesting to speculate on what the flip side might have been had a Labour government been elected with promises to abolish the non-dom scheme.’
He said it was interesting to note that before the election the Financial Times had run articles on people packing their bags to go to places such as the Isle of Man, Monaco and Switzerland if Labour won the election.
David Parsons, KPMG director said the threat of the loss of non-dom status in the UK provided a ‘more subtle opportunity for the Isle of Man.’
And he said that even with the Tories winning there was the likely impact of developments such as BEPS (Base Erosion Profit Shifting) and CRS (Common Reporting Standard) to be considered.
limited shelf life
Barclays managing director Simon Scott said he thought the so-called non-dom status had a ‘limited shelf life in its current form – there is a consensus across most parties on this.’
Andrew Thomas, chief executive of Isle of Man Enterprises, the parent company of Shoprite said: ‘I don’t understand why we as an Island don’t promote ourselves a little better in regards to the mass affluent.
‘I’m coming towards the end of my working life and quite a lot of my friends in the UK are retired and most of them I would describe as being part of the mass-affluent and they simply don’t know about the advantages of the Isle of Man.’
‘It astounds me that we don’t bang on about the freedom from capital gains tax and the freedom from inheritance tax.
‘It seems to me that encouraging those people to come to the island could provide a real fillip for the economy. I think there is a concern that if we do this openly the UK Government will retaliate in some way.’
This comment was backed by Paul Davis of Counting House who said: ‘Absolutely! There is this pervading belief here that if we shout loudly about how wonderful the tax regime is here in the Isle of Man the UK government will get upset and do something about it.
‘And it’s absolutely nonsense because the higher echelons of the UK tax regime is populated by educated intelligent people who can read our tax laws just like we can.
‘They know perfectly well what we have and there is no way they are going to be involved with some sort of trade war with the Isle of Man.
Mr Jones pointed out the people who really matter in terms of our relationship with the UK at a tax level is HMRC ‘and they understand the position perfectly.’
Paul Davis said: ‘Companies that genuinely locate to the Isle of Man and genuinely manufacture something here and genuinely sell it from the Isle of Man to the UK and get the benefit of our tax regime are not under any pressure at all.’
David Karran of IQE said he agreed with the point made by Mr Davis: ‘Let us not make tax
the single driver. Let’s talk about how great a place the Isle of Man is.
For every 1,000 people that
come across there are potentially 1,000 partners, a couple of thousand children, 5,000 visiting relatives and so on that could all be positively beneficial to the wider economy..’
The panel agreed that this could also lead to houses being bought and helping to kick start the housing market.
Andrew Thomas claimed, however, that many local residents have seen their wealth gradually eroded in recent years.
He said that for everybody who owns a freehold house, ‘it’s worth significantly less than it was in 2008. If we can kickstart the housing market and get some of this massive overhang of houses for sale sold.’
Mr Thomas said in his experience that people who come here for fiscal reasons are so happy they are paying less tax that they ‘splash out’ on expensive houses. And then the effect for the island cascades downwards.
Simon Scott for Barclays said mortgage demand is still there.
He could not speak for the whole market but he believed one of the keys for the future was to attract more high net worth individuals over here.
Mr Jones said one of the things that concerned him was the blurring of the distinction between avoidance and evasion.
Tax evasion is a criminal offence while tax avoidance is not.
He said: ‘We have already seen recently the introduction of a new corporate statutory offence for helping people to evade tax.
‘One wonders whether this is just a slippery slope and at some point whether we will [end up] with statutory offences of helping people to avoid tax on the basis that it is not a good thing to do.
He asked whether international finance centres would fall short of promoting tax as a USP (unique selling point) and instead concentrate on other things – and if so, what?
He asked how an IFC could promote itself if for one reason or another you cannot say it has lower taxes.
Andrew Thomas said it would be stretching things to say that people are moving here for tax avoidance.
‘There is a whole range of reasons.
‘One is the quality of life but it is also a fact that there is no capital taxation, and what is wrong with saying that?
Simon Scott of Barclays said: ‘I think there’s a big argument for working jointly with the UK and piggy backing on the inward investment into the UK.
‘We hear about the threat of BEPS but is it really a threat because we should not be interested in companies that are artificially shifting profits to different jurisdictions, especially the Isle of Man?
‘We need to be looking at companies, with bricks and mortar, infrastructure, premises, helping companies invest in jobs and develop the economy; that is the future.
‘And selling the jurisdiction as a whole.’
Government has to be bold
Manxman David Karran of IQE said: ‘And to support that the government has to be bold and offer initiatives.
‘We have land; the Isle of Man is not densely populated and there is plenty of space. In the Channel Islands the one thing they don’t have is space.
‘We have it in abundance. And it’s not the case that every small business has to be attached to Douglas.
‘So we have to look at regenerating outlying areas.’
Paul Davis said: ‘This whole area of tax transparency does not sit alone. If you go up a level and look down on what used to happen in the offshore world, once upon a time it was smuggling! More recently, of course, we’ve done our thing with internet gaming which was viewed as being high risk at the turn of the century and we have done a great deal in making it respectable.
‘FATCA is the single biggest indicator of how the world has changed, and I think that when we were the first to sign up to FATCA we clearly indicated that we were going to join the party with the big boys.
‘Now having done that we find we have serious competition from them.
‘We are now trying to be a first world player on the world stage and to maintain that role we have to look at our navels and look at what we are particularly good at and the propositions we can offer to companies in those big jurisdictions.
‘It’s not hard to find a list of the things we really are good at in the Isle of Man.
‘One of the biggest growing areas in the financial world is compliance. And on the island we have a lot of people who are good at that; that’s a service we can market to the rest of the world.’
And he said that in the future there will be other areas worth looking at, possibly including green energy but he said: ‘These things come in waves – no pun intended!’
From a corporate service perspective David Karran of IQE said FATCA will not go away. ‘The corporate service sector must embrace it. IQE has invested to ensure we are compliant [with FATCA].
‘I think though there may be a number of providers who have their heads in the sand and maybe are not willing to make that investment and I think this could lead to further contraction and consolidations in our sector.’
David Parsons of KPMG said: ‘I think the island took a positive step to keep on the right side of all this stuff a long time before FATCA came along.
‘For 15 to 20 years the Isle of Man has wanted to be at the leading edge of co-operation on international tax matters.
‘I’m a little less negative about FATCA in the wider CSP community. I think most organisations are coping with FATCA. ‘Ultimately some of the smaller players are finding it difficult but most of the larger players have adapted their systems and it is (more or less) a global level playing field we have on FATCA now.
‘There is a need for a greater level of expertise in these niche areas such as FATCA
Simon Scott from Barclays said the way the island had been pro-active and co-operative from the start was now beginning to pay dividends ‘and we are starting to see a level playing field. It is now starting to pay off for the Isle of Man.
‘Jurisdictions that lag behind [us], I think they will face challenges.
‘We are seeing the press coverage over Switzerland, who are now trying to play catch up.’
Mr Jones turned to the recent success for the SNP in Scotland.
Andrew Thomas said a longstanding friend from Scotland had told him that anyone with any money was making plans to buy a house south of the border.
He said as far as his friend is concerned the SNP is ‘bad news for business in Scotland.’
The chair then moved on to the potential impact of the international crackdown on diverted profits.
BEPS is an OECD project as part of an international scheme. The UK side of it is the diverted profits tax affecting larger businesses.
‘Although it was established because of the issues surrounding the Googles of this world, it probably affects more businesses than were originally targeted,’ said Greg Jones. He added the diverted profits tax could affect Isle of Man companies.
Diverted Profits Tax is 25 per cent in the UK compared with 20 per cent corporation tax in the UK.
‘How do we cope with it?’ asked Mr Jones putting the question to the panel.
Simon Scott of Barclays said: ‘We have to see this as an opportunity. As an organisation we are supportive of BEPS It’s a workable level playing field.
‘We can see this as an opportunity to attract businesses that have premises, people and infrastructure.
‘Businesses that will help contribute towards the economy. It has to be the way to go, and our proximity to the UK is important.’
Greg Jones said: So what you are saying is that we should see BEPS as an opportunity and not a threat?
This led Mr Karran to remind the panel of the affinity that the Island has with the North West of the UK and pointed to last year’s International Festival of Business in Liverpool.
Simon Scott referred to the business being generated along the M62 corridor.
Mr Karran said the island had to be bold and to change its image, and this spurred a new line to the discussion.
Mr Karran said the island has to be more focused and should continue to look further afield to emerging markets.
He said going to China was a good strategic initiative but we should not expect immediate results.
He said that the ‘long game’ of seeking links with emerging markets should not be ignored but there was much that could be explored ‘on our doorstep that could include using the Island as a platform for foreign direct investment into the UK.’
He said: ‘We cannot ignore London because it will continue to be a main driver of business, but what about the North West and the Northern power house? Can we not be an extension of that?
This prompted Mr Davis to say: ‘That is absolutely spot on. We have this extraordinary affinity with the North West, people who speak the same way, live in the same sort of houses and we have the same sort of weather!
‘We need to look at where we already are and build on it.‘
Mr Karran said these ‘badges of affinity are important with the North west. Culturally we are more northern and this is important in a meeting of minds, in giving the confidence to [businesses to] set up here.’
Simon Scott said the affinity was not just in the North West but in the North as a whole: ‘from Birmingham northwards, that is the area we should be targeting. The same is true for high net worth individuals.’
Mr Thomas said more should be done to attract high net worth individuals to the island. ‘The entrepreneurial classes, if we could capture more of those and at a younger age I think that would be a huge driver for the Isle of Man.
‘We have still got that quality of life and a relaxed way of life over here.’
Mr Jones asked if there are things we should be investing in here and in the way we promote the island elsewhere. He asked about shops for instance.
world has moved on
But Paul Davis said: ‘The world has moved on from little shops on rainy streets. The world shops on the internet and in covered malls where you don’t get wet. The Isle of Man has missed the boat on that. We have relegated ourselves in a retail environment to a third world country.’
Mr Thomas said: ‘With the exception of food shopping I think so much shopping is now going on to the internet.
Mr Davis said the solution is to maintain the air links so that ‘people can go to London, Liverpool or Manchester, wherever they want to go and shop. We’ve really missed the boat.’
Greg Jones said: ‘Air links are important’.
Mr Thomas said: ‘I like the link with London City. I’m not at all sure that in the long run the open skies policy has been a good thing because Easyjet have creamed off the holiday traffic, the low cost traffic. Lots of people want lower air fares but I’d rather have higher air fares if it means a bit more certainty of service. But that’s not a commonly held view.
Simon Scott said: ‘We have to sell the island as a whole package with government and private sector, there’s been a lot of good work done and we have to continue with that.
‘So it is about air links and sea links, it is about quality of life and about the professional services network that we have got. It’s about ease of doing business and planning and things like that.
‘All those things are important to the whole package.
‘I think it is down to the private sector and government to get those messages across to the UK and other markets.’
Paul Davis said he wanted to shift to a completely different area by saying that one of the biggest disincentives to doing business in the island is the lack of availability of certain skill sets, particularly in the IT environment.
He said: ‘It is virtually impossible to recruit new quality IT staff without poaching them from another business here.
‘The ICT university, if it ever gets off the ground, may supply some of the need there but we haven’t done a lot about making this an attractive jurisdiction for young, highly trained people to come here seeking work.
‘The employers are not here looking for IT staff and the IT staff are not looking for jobs here, it’s perpetuating pressure on businesses involved in that sector to go elsewhere.’
In our case [Counting House] we are recruiting in places like Bulgaria and Slovakia and then we find the costs of keeping them there are far less than trying to bring them here, plus there are no work permit issues.
‘I don’t think I have a solution for this but I’m very, very conscious that something needs to change in the way we allow people from jurisdictions where there is a surplus of qualified labour to come and live here.’
Mr Jones then turned the discussion back around to tax.
David Karran reminded the panel that there was talk five or six years ago about changing the zero-ten regime.
‘I was absolutely against that, but in the face of continued pressure on international finance centres, is a sensitive review of the headline rate of corporate tax that would potentially be seen as more internationally acceptable something we carefully consider?’
Andrew Thomas said: ‘I think the attempted reform of the national insurance system is far too radical but we do have a problem with the public sector pensions liability.’
He suggested the government should ‘steel itself to reform the pensions regime massively, but it may be unpopular.
‘We have to do what they did in Ireland and legislate for pension reform.’
‘Trying to explain the effect of QE [Quantitative Easing] on final salary schemes has been a bit of an uphill struggle i.e. that the size of the pot is artificially inflated by QE.
‘This is a real existential crisis and there is no easy solution.’
Paul Davis argued one thing that has to happen here is for the price of houses to ‘fall
dramatically and there is a cartel here that does not want this to happen.
‘Why are there so many houses that are unsold here? It is because they are asking too much money for them.
‘There is a price where they will sell but there is a lot of vested interest that wants to keep the perceived value of housing at the level it is today.’
Mr Thomas was asked about property taxes. He said he was ‘somewhat surprised’ that the tax on income from Manx property was doubled in the last Budget and he asked: ‘Where does 20 per cent fit into a zero 10 policy?
‘It seems to me to be a figure plucked out of the air to fill a hole. The thing to do is not create the hole in the first place. Don’t spend £21 million on redoing the promenade. If we haven’t got the money don’t do it.’
Greg Jones asked the panel about the tax cap for high net worth individuals.
Mr Karran said it is a good thing to have. What I don’t understand is why we tinkered with it – we should have kept it at the same level to provide certainty.’
On the question whether it was fair that high net worths had this tax cap Mr Karran said you had to look at what these people generated in other taxes, in VAT receipts, and National Insurance contributions.
The wider benefits need to be better understood and the other factors why attracting high net worth individuals to the Isle of Man is a positive initiative.
Mr Davis said: ‘The tinkering with the tax cap produces a negligible amount of revenue, but is potentially off-putting to high net worth, high taxpayers.’
As a way of rounding off the debate about promoting the Island Mr Jones asked if there was any fine tuning that should be made to our tax system especially in view of the competition from places like Switzerland, Monaco, and Ireland.
Mr Karran repeated the question of carefully and sensitively considering rates of corporate tax in the face of continued pressure on international financial centres.
Mr Jones said: ‘In my experience clients like the simplicity and certainty of zero per cent. You can’t go wrong with that.’
David Parsons said: ‘My take on this is that the world is now so global and so many businesses are mobile and so many jurisdictions have similar regimes to the Isle of Man.
‘For the Isle of Man to put its head above the parapet and look to be a first mover on tax rates now, to go to a positive rate of tax, given that we are not in the EU, I think it would be highly dangerous at this point of time.
‘Ultimately it may come but that will be at a time when competitor jurisdictions are moving as well. I don’t think we want to be first.’
Paul Davis said companies don’t just decide to come here because of zero rate of corporate tax – it is one in a long list of considerations.
‘One thing that zero rate does do is that it keeps us on the list for longer than competitor jurisdictions and if we started tinkering with that then certain people will take us off the list straightaway.’
brave new world
Greg Jones: ‘In the brave new world of tax transparency and substance I think it has always been the Isle of Man’s strength, looking for new niche areas that we can introduce to the world and exploit.
‘We have seen the success of eGaming. What is the next niche area? Is it digital currency?’
Mr Davis replied: ‘It’s not the currency, it’s the technology, definitely block chain technology. The private sector will get on with it. The less government interferes the better at this point.’
He added: ‘Having been very critical of the government, actually one thing we are very good at is staying on the leading edge of technology and capitalising on the opportunities.’
Simon Scott said: ‘I think we are going to look at the whole fin tech sector as an opportunity.
‘We have a massive financial services sector here and banks and other financial services are getting more and more digital. But also there is lots of disruptive technology and disruption which is potentially a threat but we need to embrace it.
‘Crowdfunding is a big opportunity.
‘We’ve made success in other niches, aircraft, shipping, ecommerce.’
Mr Jones concluded the panel with a round-up: ‘It seems we agree that the Isle of Man is in a relatively strong position due to its strong compliance record and that whilst there are some threats – political, regulatory, and fiscal – the island is still well positioned to capitalise on certain niche market opportunities within the broader economic landscape.’