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.
