Isle of Man agrees a mini-FATCA with the UK

The Isle of Man government last week broke ranks with the Channel Islands by agreeing a deal with the UK government relating to the automatic exchange of information regarding British individuals holding assets in the Isle of Man, in what has been dubbed a mini-FATCA.

Much of the press commentary surrounding the development focuses on measures that have been put in place to secure a voluntary disclosure of illicitly held assets prior to the commencement of the automatic exchange of information in 2016: individuals who have assets in the Isle of Man which have not been properly disclosed to the UK tax authorities will have until September 2016 to come forward and settle outstanding tax bills, plus interest and penalties, before their details are passed to HM Revenue & Customs, under a disclosure facility agreed as part of the deal.  Those who utilise the disclosure facility will be unlikely to face prosecution but will pay a penalty charge of 10% of unpaid tax up to 2009 and 20% for later years. Those who do not use the disclosure facility and who are subsequently found to have held assets in the Island without declaring them for tax could face a penalty of up to 200% of the unpaid tax, or prosecution.  The disclosure regime has been designed specifically to achieve as much voluntary disclosure as possible, given that HMRC is struggling with resources on cases where prosecution is involved, and follows similar initiatives in relation to Liechtenstein and Switzerland, although those territories have not signed up to a FATCA-style automatic disclosure regime.

The agreement from the Isle of Man is a coup for Chancellor George Osborne, who is making tax transparency a focus of the UK’s G8 presidency, and he will doubtless use it to bring further pressure to bear on other territories to do the same thing.

However, to date the Channel Islands have resisted following suit, despite pressure from the UK.  The reason is not so much an objection to the principle of automatic exchange of information (there is now a general acceptance that it is a question of when, rather than if, automatic exchange of information will happen and few people would argue against the principle of trying to prevent tax evasion) but an objection to certain countries being forced to do it before others.  The fact of the matter is that any FATCA-style agreement will result in increased costs of compliance for the financial businesses which operate in the affected territories – even if those businesses do not conduct any business which relates to the illicit holding of assets offshore.  So businesses operating in the territories which are early adopters of FATCA-style agreements will face higher operating costs which they will either have to pass on to their customers (likely to result in a loss of business to less regulated jurisdictions – from all customer groups, and not just those involved in any illicit activity) or to absorb the costs themselves, resulting in a drop in margins (not easy when businesses already face difficult trading conditions).  To witness a movement of perfectly legitimate and fully disclosed business from the Channel Islands to a less regulated jurisdiction would be a real own-goal for the UK government, and could cause serious harm to the Channel Islands. 

The Isle of Man government appears to have taken a view that notwithstanding the risks, it will be the first-mover in order to try to ensure that it stays in favour with the UK government.  The Channel Islands governments can be expected to try to secure some more concrete assurances from the UK regarding the future and its support for the Crown Dependencies before agreeing to do likewise.