House of Commons - Treasury - Written Evidence

Offshore Financial Centres - Treasury Contents

Memorandum from the Isle of Man Chamber of Commerce

1. NTRODUCTION

1.1 The Isle of Man Chamber of Commerce is pleased to make this submission to the House of Commons Treasury Committee in respect of its inquiry into Offshore Financial Centres. We welcome the opportunity to respond to the Committee's inquiries in respect of the Isle of Man. We will be pleased to address any questions that might arise; contact details are given below.

2. THE ISLE OF MAN CHAMBER OF COMMERCE

2.1 The Isle of Man Chamber of Commerce has a diverse membership, representing all sectors of the Isle of Man's economy, including finance, manufacturing, information technology, hospitality and leisure, transport, construction and retail.

2.2 The chamber was established in 1956 and currently has 360 members.

2.3 The Isle of Man Chamber of Commerce is affiliated to the British Chambers of Commerce ("BCC").

3. DEFINITION OF "OFFSHORE FINANCIAL CENTRE" AND RELEVANCE TO ISLE OF MAN

3.1 It would be helpful to understand the mandate and scope of this inquiry, particularly in the context of other reviews of the Island such as the Edwards Report (1998), reviews undertaken by OECD and the Financial Stability Forum, the most recent IMF visit in 2003 and the forthcoming visit of the IMF in September 2008.

3.2 It would also be helpful to know whether the inquiry relates only to the British centres (ie the Crown Dependencies and the Overseas Territories) or more widely.

3.3 We suggest it is important to define the expression "offshore financial centre" ("OFC"), so that it might be better understood in the context of the global economy. We are aware that the Committee has used the definition proposed by Zorom

(IMF Working Paper 07/87—"Concept of Offshore Financial Centers: In Search of an Operational Definition").[282] We consider this succinct, useful and serviceable, but the Committee should be aware that other definitions are in circulation.

3.4 It should also be recognised that an OFC need not necessarily be physically "offshore". Indeed, the Financial Stability Forum in their April 2000 report (cited above) commented that "while OFCs are commonly perceived to be small island states, a number of advanced countries have succeeded in attracting very large concentrations of non-resident business by offering economic incentives either throughout their jurisdiction or in special economic zones".

3.5 Some reports include the UK within the list of countries which are defined as OFCs. These include the IMF Background Paper "Offshore Financial Centres" published in 2000,[283] and Zoromé's Working Paper cited above.

3.6 Thus the defining characteristics of an OFC are not necessarily restricted to relatively small island territories. Major Nation states such as the USA, UK, Switzerland, Ireland, Dubai and Luxembourg have all been considered by various commentators to fall within this categorisation.

4. AN OVERVIEW OF THE ISLE OF MAN

4.1 The Isle of Man is located in the Irish Sea at the heart of the British Isles. The Island is 33 miles long by 13 miles wide, with a land mass of 227 square miles. The population is approximately 81,000.

4.2 The Island is a self-governing Crown Dependency with its own government and laws. The Island is not and has never been part of the United Kingdom and has no representation in Parliament. The Island's parliament, Tynwald, was founded over 1,000 years ago and is the oldest continuous parliament in the world.

4.3 The people of the Isle of Man, and things pertaining to the Island, are referred to as Manx.

4.4 The Isle of Man is not part of the European Union, but it has a limited relationship under Protocol 3 to the United Kingdom's Act of Accession in 1972. This allows for the free trade of agricultural and manufactured products across the EU, but not for services. The Island does not receive any funding or support from the EU. The Isle of Man is part of the European Common Customs Area and has a revenue sharing customs agreement with the UK.

4.5 Whilst the Isle of Man is a separate and distinct legal jurisdiction, it is not a secret one. The Island's legal system follows UK common law, and explicitly does not have any bank secrecy legislation. As explained elsewhere in this document, a number of independent external assessments of the Island's regulatory regime have validated that the Island co-operates fully in the international fight against terrorism financing and financial crimes.

4.6 These assessments include the Home Office commissioned Edwards' Report, the Financial Action Task Force ("FATF"), the OECD, the IMF and the Financial Stability Forum. Without exception, such reviews have found the Island to have very high levels of compliance with relevant international standards and supervisory practices, and levels of international co-operation that place it in the first division of OFCs.

4.7 The Island's positive image is further reinforced by Moody's and Standard and Poor's AAA accreditation. Accolades for the Island have included being awarded "Best International Financial Centre" at the International Investment Fund and Product Awards for seven out of the past eight years, and European winner of "Financial Centres of the Future 2005" from The Banker magazine.

5. ECONOMIC DIVERSITY OF THE ISLAND

5.1 The Isle of Man is an economically diverse economy, of which the Finance Sector directly accounts only for 36% of gross national income.[284] The Island's proposition is one of an international business centre, not merely a finance sector; one where real business is encouraged rather than "brass plate" operations.

5.2 Included within this diversity of activity within the financial community are:

E-business

Over the past 10 years, the Island's ebusiness activities have blossomed. From an IT infrastructure perspective, the Island's proposition is compelling. It offers a world-class telecoms solution, with two separate high capacity self-healing fibre optic rings currently utilised under 1% of capacity; advanced mobile technology, being the first country in Europe to introduce a 3G service, and the first in the world to adopt 3.5G; near 100% broadband available across the Island; and a highly IT-literate workforce, with over 90% of school leavers holding a recognised IT qualification. These technical advantages, coupled with a highly competitive corporate tax environment and a good quality of life for employees, have helped position the Island as a leading ebusiness jurisdiction. From the e-gaming perspective, Microgaming and BetInternet are key participants. The Isle of Man was one of only two countries identified by the UK Department of Culture, Media and Sport to be white-listed4 in relation to the Gambling Act 2006. But the e-business sector is wider than gaming; other companies provide a mix of specialist software solutions, web hosting, online money transmission, IP telephony, security, data storage and associated services.

Ship Register

As a maritime nation, it is only to be expected that shipping is within our lifeblood. In fact, the first entry on the Island's shipping register dates back to 1786, and the Island became an international register in 1984. Nowadays, there are different registers for merchant shipping, commercial yachts, and leisure craft. The Ship Registry is a world recognised Category One Red Ensign Group register, and maintains a high position on the Paris MOU "White List" for Port State Control. In addition the Isle of Man was placed No 1 on the Flag State Performance table issued by a Round Table of shipping associations making it the "Best Register in the World". The Isle of Man Shipping register adds significant value to the shipping sector in the City of London.

Aircraft Register

Adding to the success of the Ship Register, the Island launched an Aircraft Register in 2007. Linked to the UK CAA register, but with the aim of providing a fast and user-friendly service, the register has already seen great success particularly in the new "light jet" market.

Film/Media

Over recent years, The Isle of Man has built a worldwide reputation for co-financing and co-producing feature film and television dramas. The Island has become one of the busiest areas of film production in the British Isles, having produced over 80 feature films and TV dramas since 1995. Films such as Stormbreaker and Miss Potter were shot on locations both in the UK and the Isle of Man, demonstrating the symbiotic relationship that exists between the two jurisdictions. To support the film sector, a local industry has developed in areas such as construction, medical assistance, locations, production, post-production and wardrobe. To further assist in the development of career paths, Isle of Man Film is working with the Isle of Man College in enhancing the industry based courses already available on the Island. In addition to this Isle of Man Film ensures that at least four local trainees are employed per production as part of the Island's commitment to fostering a new generation of skilled and experienced local production crew.

Satellite/Space

The Island's Space business has developed strongly since the millennium. The Island is now home to active subsidiaries of the world's leading space and satellite companies such as SES Global, Inmarsat, Sea Launch, Lorel and Boeing. The Island is also home to other less well-known, but equally impressive, enterprises in the space sector. For example, Genesys Consulting Limited won top prize in the prestigious European Satellite Navigation Competition 2006 for innovative applications of satellite navigation technology, beating over 200 other companies from across Europe. Genesys Consulting's winning project married satellite navigation technology and geological science to create an application that can be used for surveying for natural resources and helping to predict earthquakes and volcanic eruptions. Working closely with ManSat Limited, Isle of Man satellite companies are able to access orbital positions and radio frequencies via the International Telecommunications Union in Geneva. ManSat can make such filings with a speed and efficiency that many jurisdictions cannot match.

Insurance

The Isle of Man has developed into one of the world's largest offshore life assurance jurisdictions. The Island's combination of highly skilled staff, innovative product design and strong but appropriate regulation has led to strong sustained growth in the market. The Island is home to international life assurance arms of many of the world's leading financial services groups. An indication of how successful the Island has been at attracting new life business is given by the total funds under management for the sector. For the year ended 31 December 2006 these totalled in excess of GBP32 billion, representing a compound annual growth rate of 17% over the last five years. Indicative figures for December 2007 confirm that this strong growth has continued. A significant portion of these assets are invested through the City of London.

Captive Insurance

The Isle of Man is recognised as being one of the leading centres for captive insurance and has a strong reputation for attracting high quality captive business. The Island offers a broad range of captive management services, ranging from small local operations to representatives of the world's leading captive management groups, such as Willis and Marsh, whilst the Global head office for AON Group's captive management is also based on the Island.

International Pensions

Since the introduction of the Retirement Benefits (International Schemes) Regulations 2001, the Island has become established as a major centre for the administration of international pension schemes. The legislation establishes a sound governance template for international schemes, with the objective of encouraging international businesses with globally mobile employees to base their schemes in the Isle of Man. The Island provides a solid foundation for international retirement planning by ensuring that schemes are operated by appropriately licensed professionals, that the latter adopt strong internal governance, and that certain member rights are enshrined in law. In terms of the transfer of pension rights from the UK, the Isle of Man's Pensions legislation is fully recognised by HMRC, and Isle of Man schemes are capable of being registered as Qualifying Recognised Overseas Pension Schemes (QROPS).

AIM listings

As described in detail in section 7.4 below, the Isle of Man plays a key role in assisting international companies to achieve listings on AIM. India is now the second largest investor into City of London, and 75% by market capitalisation of Indian business listed on AIM is structured through companies domiciled in the Isle of Man.

Professional support services

The various financial services provided from the Isle of Man are supported and complemented by a strong body of professional legal and accounting advisers offering a deep understanding of international personal and corporate business and the ability to advise on complex financial structures, thus developing business through a value added proposition rather than solely through a competitive tax environment.

5.3 The Island is not resting on its laurels, and constantly seeks to re-engineer and extend its proposition. The Island sees a key component of its future role as working in close partnership with the City of London on a "hub and spoke" basis, providing value and profits to both centres.

6. RESPONSES TO COMMITTEE QUESTIONS

6.1 We are pleased to respond to the Committee's questions as follows:

7. To what extent, and why, are Offshore Financial Centres important to worldwide financial markets?

7.1 It has been suggested[285] that OFCs have two implications for global economies:

7.2 First, such centres reduce the effective marginal tax rate on capital, and as a result, create more incentives to save and invest. Because the cost of doing business in or though OFCs is lower, businesses operating in or through these countries can undertake investments with lower expected returns or higher risks than those in high tax jurisdictions. With these new investment opportunities, individuals and corporates will most likely consume less (or keep a smaller share of their wealth in non-income generating assets) and save and invest more.

7.3 Secondly, by providing a lower tax alternative for mobile taxable resources, OFCs can serve to moderate public sector spending, improve efficiencies in public service delivery, and keep higher spending jurisdictions in check. Hines[286] notes that since the 1980s, effective corporate income tax rates across the industrialized world have fallen by nearly 15% and statutory tax rates have dropped by almost 20%. During the same period, activities in OFCs as a share of world economic output increased eightfold.

7.4 The geographic proximity and time zone of the Isle of Man and other Crown Dependencies has been important factors in the development of the City of London over the past two decades, to its current position as the World's pre-eminent finance centre. As outlined above, the growth in AIM listings for non-UK sourced business has been achieved in partnership with these three territories. It could be argued that without OFCs and the opportunities offered by the Crown Dependencies, AIM would not have achieved its current success. In the context of the Isle of Man, research from Hemscott Group Limited[287] dated March 2008 notes that:

521 AIM companies were incorporated outside the UK

The top three jurisdictions for the registration of non-UK AIM companies were Guernsey (61 companies), Isle of Man (59 companies) and Jersey (51 companies). In total, the three Crown Dependencies represented 171 listings, or 33% of the total non-UK incorporated companies. The combined market capitalization of these companies was nearly £17 billion, or which £7.2 billion alone related to Manx incorporated entities.

Of the 15 countries outside the UK that are the registered homes of AIM 100 companies, 12 of these are incorporated in the Isle of Man, with a market capitalisation of £4.6 billion.

This demonstrates the Isle of Man's growing reputation as the preferred jurisdiction for overseas companies listing in London.

7.5 The Isle of Man's contribution towards the City of London's international trade has been acknowledged by the current Lord Mayor, Alderman David Lewis, who is quoted as saying[288] that "assets worth billions of pounds held by Isle of Man companies are invested in and through the City. The way we see it is that the Isle of Man is a core asset for the City." adding that "from the City's point of view, your brand was immensely strengthened when you committed to work with the OECD on improving transparency and tax information, and then backed it up with a host of Tax Information Exchange Agreements".

8. To what extent does the use of Offshore Financial Centres threaten financial stability?

8.1 We submit that the Isle of Man poses no threat to financial stability, indeed the centre enhances it.

8.2 In the first instance, it should be recognised that not all OFCs are the same. The Financial Stability Forum in their April 2000 report noted that the term "offshore" carries with it in some quarters "a perception of dubious or nefarious activities". The report continues to note that "there are, however, highly reputable OFCs that actively aspire to and apply internationally accepted practices, and there are some legitimate uses of OFCs. OFCs are not homogeneous and there is a wide variety of practices found in them. Hence, there is a strong aversion by some jurisdictions to being listed as an offshore centre given the risk of guilt by association".

8.3 Following on from this work, in May 2000 the Financial Stability Forum published a press release[289] which placed the Isle of Man into Group I of OFCs, albeit with the imperative for the Island and the other British Isles centres to continue to improve their quality of supervision. Jurisdictions in this category "are generally perceived as having legal infrastructures and supervisory practices, and/or a level of resources devoted to supervision and co-operation relative to the size of their financial activities, and/or a level of co-operation that are largely of a good quality and better than in other OFCs".

8.4 We consider that the Isle of Man has engaged constructively with the international debate and developments in international supervision over the past 10 years.

8.5 The work done by the Isle of Man has been recognised by the House of Commons. In May 2008 the Committee of Public Accounts published its Seventeenth Report of Session 2007-08[290] entitled "Foreign and Commonwealth Office: Managing Risk in the Overseas Territories". Whilst the report is directed towards the Overseas Territories rather than the Crown Dependencies, a key conclusion was that "overall regulatory standards in most Territories, particularly those with smaller financial centres, are poor compared to standards achieved in the Crown Dependencies".

8.6 The Isle of Man has long-standing and comprehensive anti-money laundering legislation. Indeed, the Isle of Man led the way in the concept of "know your customer" and has long been regarded as setting the gold standard in this area.

8.7 It has been claimed that there are more company administrators within the London area than in all the British OFCs. Whatever the respective numbers, unlike the Isle of Man, these UK based businesses are not subject to regulation, although they have recently been brought into the UK's anti money laundering regime. In contrast to this unregulated corporate management activity in the UK, the Isle of Man's Corporate and Trust Service Providers have been subject to the Island's anti-money laundering regime since 1999, and have been regulated by the FSC since 2000 in the case of the provision of corporate services and since 2005 in relation to trustee services. It should be noted that the legislation to regulate fiduciary activities was introduced on the Island's own initiative, and not in response to any external pressures.

9. How transparent are Offshore Financial Centres and the transactions that pass through them to the United Kingdom's tax authorities and financial regulators?

9.1 The Isle of Man, unlike some other jurisdictions, does not have any bank secrecy legislation. The position in the Isle of Man in terms of the practice of normal commercial confidentiality is identical to that in the UK. UK case law on the subject is followed, as represented by the case of Tournier v National Provincial and Union Bank of England [1924] 1 K.B. 461.

9.2 The Island's stance has been to engage constructively with international bodies such as OECD and to position itself to be both internationally responsible and compliant, where possible.

9.3 Arising from this engagement, the Island has entered into a number of OECD model Tax and Information Exchange Agreements ("TIEAs") over recent years. In 2002, a TIEA with the USA was signed, and in 2005 one with Netherlands was executed; both of these came into effect in 2006. In 2007, the Island entered into TIEAs with Denmark, Faroe Islands, Finland, Greenland, Iceland, Norway and Sweden. More recently, the Island executed a TIEA with Ireland.

9.4 The Isle of Man currently has the largest network in the world of TIEAs based on the OECD model agreement on exchange of information on tax matters. Of the 25 TIEAs currently executed between OECD member states and OFCs, 10 of these have been entered into by the Isle of Man, demonstrating both the Island's commitment to transparency and international assistance, and its leading stance in this area.

9.5 We understand that the Isle of Man Government is in negotiations to execute TIEAs with a number of other OECD member countries, including Australia, Belgium, Canada, France, Germany, India, Italy, New Zealand, Spain and the United Kingdom.

9.6 The Chamber of Commerce endorses the stance of the Isle of Man Government, being the principle of entering into OECD-model TIEAs with other jurisdictions on the basis of mutual economic benefit, for example allowing market access or the removal of the Isle of Man from any black-lists maintained by the counterpart country.

9.7 In relation to the UK, the current Double Taxation Treaty between the two nations dates back to 1955. This agreement provides for the disclosure of relevant information held by our revenue authorities, on request.

9.8 As set out below, this Chamber would support the entering into of negotiations leading to an updated OECD-type DTA with the UK, subject to constructive support from the UK as outlined in our proposal.

9.9 The Isle of Man is a participant within the EU Savings Directive network of Third Countries and has adopted a default position of retention tax, along with the other Crown Dependencies and some other European countries. As this Directive evolves, the Chamber of Commerce is confident that the Isle of Man will continue to be an active contributor to the debate.

9.10 The FSC, which is the principal regulatory body in the Isle of Man, has committed to compliance with the Basel Core Principles in prudential regulation of banking institutions and with FATF Recommendations on the prevention of money laundering and the countering of the financing of terrorism.

9.11 The FSC is a member of the International Organisation of Securities Commissions ("IoSCO") and has been accepted as a signatory to the IoSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information. The FSC is committed to compliance with IoSCO's Objectives and Principles of Securities Regulation.

9.12 The FSC is also a member of the Offshore Group of Banking Supervisors. The Financial Crime Unit ("FCU") is the Island's financial intelligence unit. The FCU is a member of the EGMONT Group of Financial Intelligence Units, and the EGMONT secure channels of communication are available to other members of this grouping when contacting the FCU.

9.13 The Isle of Man has a wide number of gateways for the provision of information and evidence to foreign regulators, prosecutors and Courts. These are summarised in Appendix One at Section 19.

9.14 In summary, we consider the levels of transparency to be reasonable and balanced. The UK Tax Authorities have recourse to action that can be taken in the event of tax evasion, should this occur. Equally we are a well regulated jurisdiction and should the UK FSA identify a situation regarding regulated activity which gives it concern, it has recourse through the Isle of Man regulators to take appropriate action.

10. To what extent does the growth in complex financial instruments rely on Offshore Financial Centres?

10.1 If focus of the Committee is on the smaller nations, it should be recognised that these centres are not generally involved in the creation and distribution of complex financial instruments, other perhaps than being used as a booking centre for the transaction.

10.2 The sixth report of the Committee refers (paragraph 32 on page 14) to Granite, the Jersey-based SPV of Northern Rock. There are two aspects to the use of an SPV in this manner: firstly, the design and planning for such a structure took place in the UK, by a UK regulated banking institution. We suggest that control might better be focussed on the planning stage, particularly when such is undertaken by a regulated entity in the UK, rather than the implementation offshore of an agreed strategy. The second aspect is that the use of Granite and similar vehicles to package financial products and to move them off balance sheet into a separate structure is an important component of the international financial services environment which has facilitated the development of the finance sector over the past decade. We suggest that although Granite is a facet of the Northern Rock problem, it was the broad strategic failings of the UK bank's management which brought about the company's difficulties, rather than any activities emanating from an OFC.

10.3 Most complex financial derivates tend to be created in the major financial centres such as London and New York, and it is in these centres that the majority of the financial planning and engineering are undertaken.

11. How important have the levels of transparency and taxation in Offshore Financial Centres been in explaining their current position in worldwide financial markets?

11.1 The success of the Isle of Man is due to a dynamic and legitimate approach to business. The Island's levels of transparency are reasonable and balanced. Whilst it is recognised that the Island's competitive taxes are one component of its success, each country in the world has its own particular advantages and the Island competes honestly and legitimately on the international stage, with a high level of transparency and an aggressive willingness to assist nations in their fight against financial crime and terrorism.

11.2 As stated above, the Isle of Man is not a closed jurisdiction, and it has no bank secrecy laws. Over the past decade, the Island has been assessed by a number of international agencies and reviews. These have all confirmed that the Island is proactive in its co-operation with other territories in the pursuit of international financial crime and that its defences against money laundering comply with the highest global standards.

11.3 Our Government's policy is to be both internationally responsible and economically competitive: complying with changing international standards on information exchange and `harmful practices' whilst lowering the standard rate of income tax for businesses. Unlike others, the Island has pursued a strategy of engagement with international bodies. For example, the Island is, through the UK, a member of OECD and is an active participating partner in the OECD Global Forum on Taxation.

12. How do the taxation policies of Offshore Financial Centres impact on UK tax revenue and policy?

12.1 Although it might be assumed that an adjacent OFC would be detrimental to the tax base of the UK, we suggest that this is a simplistic and inaccurate interpretation of the relationship which exists.

12.2 The UK has introduced significant anti-avoidance legislation which has reduced the attractiveness of OFCs to UK resident and domiciled individual clients, and to most UK corporate taxpayers. In order to ensure that the Isle of Man reduces the risk from the wrong types of business the Island has introduced KYC and source of funds enquiries for new customers. In addition the FSC regulate corporate service providers to ensure that take-on procedures are adhered to; otherwise regulatory consequences will follow from a breach, which can include but is not necessarily limited to the revocation of the company's license to provide corporate administration services.

12.3 From the corporate tax perspective, recent press reports would suggest that mainstream EU partners such as Ireland are benefiting much more from tax arbitrage than are the smaller nation OFCs.

12.4. A paper by Desai, Heinz and Fritz Foley[291] ("Do Tax Havens Divert Economic Activity?" 2005) concludes that "contrary to many policy concerns and the assumptions of much of the tax competition literature, reduced costs of using tax havens do not appear to divert activity from non-havens".

12.5 The authors suggest that "the empirical evidence indicates that firms facing reduced costs of establishing tax haven operations respond in part by expanding their foreign activities in nearby high-tax countries. Hence it appears that careful use of tax haven affiliates permits foreign investors to avoid some of the tax burdens imposed by domestic and foreign authorities, thereby maintaining foreign investment at levels exceeding those that would persist if tax havens were more costly".

12.6 They conclude that "the available macroeconomic evidence indicates that countries have not reduced their taxation of foreign investment, or of capital income, to anything approximating the degree implied by many models of capital tax competition. The use of tax havens by foreign investors may help to explain this empirical pattern, as high-tax countries are able to maintain high-tax rates while continuing to draw significant levels of foreign investment. It is not even necessary that high-tax countries are aware of the importance of tax havens in preserving their ability to attract foreign investment".

12.7 The many billions of pounds collected by Manx investment and insurance businesses from expatriates around the world mainly find their way to the United Kingdom and in particular, the City of London. The profits earned by the various City institutions on this business contribute notably to the UK's tax take. Furthermore, from the resources of the IOM government, generated in large part by the success of the various IOM financial institutions, very significant sums have been spent of improving our infrastructure. The companies employed to complete this work are invariably UK companies, thus again enhancing the UK tax take, together with benefits for UK employment.

13. Are British Overseas Territories and Crown Dependencies well-regarded as Offshore Financial Centres, both in comparison to their peers and international standards?

13.1 We submit that the answer to this question in respect of the Isle of Man is a resounding yes.

13.2 In 2000, FATF conducted a review[292] into "non cooperative countries/territories". The findings of this review were that the Isle of Man passed the tests applied to it, and so did not meet the criteria for a "non co-operative country". In reaching this conclusion FATF commented that "the Isle of Man has a robust arsenal of legislation, regulation and administrative practices to counter money laundering. Perhaps more importantly, the authorities clearly demonstrate the political will to ensure that their offshore financial institutions and the associated professionals maximise their defences against money laundering and co-operate effectives in international investigations into criminal funds". The report added that "the standards set in the Isle of Man are close to complete adherence with FATF's 40 recommendations".

13.3 The Financial Stability Forum undertook a review in 2000 to consider the implications of OFCs on global financial stability. The Isle of Man was one of only eight offshore jurisdictions that were given the highest rating.

13.4 In 2003, the IMF's assessment[293] of the supervision and regulation of the finance sector concluded that "the financial regulatory and supervisory system of the Isle of Man complies well with the assessed international standards".

13.5 Commenting on the execution of the TIEA between the Isle of Man and the Netherlands, the Secretary-General of the OECD commented[294] that "this agreement confirms the Isle of Man's commitment to implement high international standards, thereby reinforcing its stature as a responsible international financial centre".

13.6 More recently, the execution of the Isle of Man TIEA with Ireland led the OECD[295] to "welcome these agreements as enhancing the international reputations of ... the Isle of Man as legitimate financial centres and thereby strengthening their integration into the international financial system" adding that "the trend towards greater transparency and tax cooperation continues as more and more countries and jurisdictions implement the OECD standards," and that "recent events have put international tax evasion in the spotlight, demonstrating the pressing need for action to tackle tax compliance issues in an increasingly borderless world. These agreements will better equip their signatories to address all forms of tax abuses."

13.7. From an investor protection perspective, the Isle of Man has led the way, with the introduction of a number of initiatives:

Banking Depositors

The Depositors' Compensation Scheme protects up to 75% of deposits, to a maximum of £20,000. Whilst this is now lower than the recently revised UK scheme, it is broadly in line with schemes in other EU member states, and covers both individual and corporate depositors, wherever located, and for deposits in all currencies.

Life Assurance Policyholders

The Life Assurance (Compensation of Policyholders) Regulations 1991 ensure that, in the event of a life assurance company being unable to meet its liabilities to its policyholders, up to 90% of the liability to the protected policyholder will be met. Unlike many other policyholder protection schemes, the Island's scheme operates globally, providing protection to policyholders no matter where they reside.

Investors in Authorised Collective Investment Schemes

The Scheme compensates investors in Authorised schemes for 100% of the first £30,000 of claim, and 90% of the remainder, up to a maximum compensation of £48,000.

Financial Services Ombudsman Scheme

The Island operates a free, independent dispute resolution service for customers worldwide with a complaint against an Isle of Man financial firm such as a bank, insurance company or financial adviser.

14. To what extent have Offshore Financial Centres ensured that they cannot be used in terrorist financing?

14.1 Given the proximity of the Isle of Man to Northern Ireland and to the Republic of Ireland, in an historical context the Isle of Man has long understood the risks of it being used for terrorism financing and its original anti-terrorism legislation—the Prevention of Terrorism Act 1990—predates more recent global initiatives and concerns.

14.2 In the modern-day context, the Isle of Man strives towards full compliance with international standards. In their November 2003 report, the International Monetary Fund commented[296] that "the financial regulatory and supervisory system of the Isle of Man complies well with the assessed international standards. The authorities are to be commended for the attention they have given to upgrading the financial regulatory and supervisory system to meet international supervisory and regulation standards in banking, insurance, securities and anti-money laundering and combating the financing of terrorism (AML/CFT), and the introduction of a comprehensive regime for the licensing of corporate service providers (CSPs)".

14.3 The report also concluded that "The jurisdiction has been assessed to have a high level of compliance with the four key standards. Moreover, the legal framework for company and trust service providers (TSPs) is fully consistent with the Offshore Group of Banking Supervisors (OGBS) Statement on Best Practices." The report did identify a number of shortcomings but noted that these "have not been a major concern to date".

14.4 Please also refer to the positive external endorsements of the Island's stance on Anti-Money Laundering initiatives, as set out in section 13.

15. What are the implications for the policies of HM Treasury arising from Offshore Financial Centres?

15.1 The Isle of Man is a key contributor of deposits and business referrals to the City of London. The Island (along with the other Crown Dependencies) is a significant component of the UK's proposition as the world's leading financial centre. We propose that it would be to the benefit of both the UK exchequer, and to the Island, for the Isle of Man to be promoted and endorsed internationally by the UK Government as a key contributor to the success of the City of London.

15.2 Looking to the future, the Isle of Man Chamber of Commerce would support the commencement of negotiations between the UK and the Isle of Man leading towards the execution of an OECD-model TIEA between the two nations.

15.3 However, given the disappointment and frustration that is felt within the Island that initiatives taken by the Island in good faith to meet agreed international standards over the past decade has not been fully acknowledged, we propose that the entering into of such an agreement would represent an ideal opportunity for the UK to support further its Crown Dependency on the international stage. Such support might include:

public recognition by the UK, and communication in all relevant forums, of the stance and position of the Isle of Man in terms of its commitment to international transparency and stability; and

the UK, working in partnership with the Isle of Man, communicating to and educating its European partners on the constructive position and stance adopted by the Isle of Man, in stark contrast to some other European centres.

16. What has been and is the extent and effect of double taxation treaty abuse within Offshore Financial Centres?

16.1 This is a difficult question to answer. A double taxation treaty is an agreement entered into by two nations. Almost invariably, where an individual or corporation has a presence in both jurisdictions, tax experts will endeavour to construct their clients' affairs in a legitimate manner in order to minimize taxation. If the tax planning is open and as is regularly the case prior consents from HMRC are sought this would seem to be symbiotic for both parties.

16.2 Research by academics such as Desai et al (cited above) suggest that without this relationship in the first place the group may choose another jurisdiction (ie not the UK) that offers this opportunity. This would clearly not benefit the UK.

17. To what extent do Offshore Financial Centres investigate businesses and individuals that appear to be evading UK taxation?

17.1 The Isle of Man certainly does not encourage this type of business.

17.2 If the UK authorities become aware of tax evasion they have avenues open to them which should result in the tax being settled, together with penal rates of interest, potential fines and in some cases, custodial sentences.

17.3 A schedule of the gateways available to foreign authorities is set out in Appendix one. In particular, the Island's Criminal Justice Acts, which date back to the early 1990s, facilitate the assistance of any country where the conduct constituting a taxation offence under the law of that country would also constitute the same or a similar offence under Isle of Man law or where the conduct constitutes serious or complex fraud.

17.4 The Island's Money Laundering legislation is extensive and is broadly equivalent to the third EU Money Laundering Directive. Given the nature of the Island's financial services proposition, any money laundering discovered is likely to have a cross-border element and there is, therefore, provision for legal assistance. In particular, disclosure of any suspected money laundering is made to the Financial Crime Unit ("FCU") of the Fraud Squad of the Isle of Man. The FCU liaises with the Serious Organised Crime Agency in London.

18. SUMMARY

18.1 In summary, we submit to the Committee that the Isle of Man:

Is in the upper tier of OFCs;

Has demonstrated its stated commitment to international engagement and co-operation with a series of positive initiatives over many years; and

Is a responsible member of the international community, a stance that has resulted in the Island being consistently well-regarded by international bodies undertaking reviews of the Island's activities.

18.2 Consequently, we believe that the Island poses no threat to international stability.

June 2008

APPENDIX ONE

19. INFORMATION GATEWAYS AVAILABLE TO THE ISLE OF MAN AUTHORITIES TO ASSIST IN INTERNATIONAL INVESTIGATIONS AND ENQUIRIES

19.1 The Isle of Man has the following gateways for the provision of information and evidence to foreign regulators, prosecutors and Courts:

19.2 Sections 24 and 25 Criminal Justice Act 1990

Section 24 grants considerable powers of investigation to the Attorney General ("AG"), which can be exercised where it appears to him that there are reasonable grounds for suspecting serious or complex fraud, where ever committed, and whether inside our outside the Island.

Under Section 25 the AG can disclose the information that he obtains for the purposes of investigation of an offence or a prosecution in the Isle of Man or elsewhere—see Section 25 (4)(c). Further, the AG can disclose this information to any person or body having, under the law of any country or territory outside the Isle of Man, functions which correspond to the Manx functions of an Inspector under the Companies Act or the functions of a regulatory body in any area of commercial activity. The AG does not have the power to disclose information that he has obtained under these powers to a private plaintiff for use elsewhere (see Section 25(5)).

19.3 Section 21 and 22 Criminal Justice Act 1991

Section 21 gives the AG the authority, upon receiving a request from a foreign jurisdiction, to appoint the High Bailiff to receive evidence for use in criminal proceedings abroad.

Section 22 grants the AG the authority to search for evidence within the Island.

19.4 Tax Information Exchange Agreements

The Manx Government has entered into TIEA's with Denmark, Faroe Islands, Finland, Greenland, Iceland, Ireland, Norway, Netherlands, Sweden and the United States. The Island is currently negotiating TIEA's with a number of other jurisdictions, including Australia, Belgium, Canada, Estonia, France, Germany, India, Italy, New Zealand, Spain and the United Kingdom.

By way of an example as to modus, the TIEA with the US has been incorporated into Manx domestic law through the Income Tax (USA) Order 2006 (SD169/06), which permits the US to approach the Chief Financial Officer in the Isle of Man, to seek information in relation to federal tax matters. It should be noted that under Article 5 of the 2006 Order, "such information shall be exchanged without regard to whether the conduct being investigated would constitute a crime under laws of the requested party if such conduct occurred in the territory of the requested party". In other words, there is no need for dual criminality of offences, whereby the criminal offence being investigated in the US would also be an offence under the law of the Isle of Man.

19.5 Section 17 Investment Business Act 1991

Section 17 allows the Financial Supervision Commission ("FSC") to enter into mutual assistance agreements with recognised regulators in countries or territories outside the Isle of Man, which exercise functions corresponding to those of the FSC. It is understood that the FSC has entered into a mutual assistance agreement with IoSCO in the US, but in our experience this section is used infrequently, because the FSC is bound by the provisions of Section 24(6) Financial Supervision Act 1988, which places restrictions upon the disclosure of information relating to the affairs of an individual customer of a financial institution, and can make disclosure quite cumbersome.

19.6 Section 24(1) Financial Supervision Act 1988

Section 24(1) permits the FSC to disclose certain restricted information (as defined at Section 23 of the Act) to other authorities, regulators and prosecutors through the various gateways listed in Section 24(1). The gateways are too numerous and complex to discuss in this note, but it should be noted that Section 24(1)(a) permits the disclosure of information by the FSC "with a view to the institution of or otherwise for purposes of criminal proceedings whether in the Island or elsewhere".

19.7 Section 14 and Schedule 3 Insider Dealing Act 1988

Under Schedule 3, if it appears to the Treasury that there are circumstances suggesting, amongst other things, "that there may have been a contravention of the laws of another country or territory relating to insider dealing and that a person in the Island, (i) may have been concerned (directly or indirectly) in any such contravention; or (ii) may have information or documents which may be of assistance in the investigation of any such contravention", it may appoint one or more inspectors to carry out an investigation.

19.8 Evidence (Proceedings in Other Jurisdictions) Act 1975

The 1975 Act is an Act of Parliament which was applied to the Isle of Man by Order in Council (SI 1979/1711). This act only applies to civil proceedings, and not to criminal investigations, and under Section 2 the Manx Courts are given power to obtain evidence in any way that the Court feels appropriate for the purposed of giving effect to the request of any Court outside the jurisdiction of the Manx Court, provided the Manx Court is in empowered to obtain evidence in that way for Manx proceedings.

Section 2 (2) of the Act sets out the type of assistance that may be requested in civil proceedings, which includes the examination of witnesses, either orally or in writing, the production of documents and the preservation of property.

The UK has issued a Declaration under Article 23 of the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters 1970, stating that it would not execute letters of request for the purpose of obtaining pre-trial discovery of documents, and the Declaration extends to the Isle of Man.

Whilst the 1975 Act only applies to civil proceedings, some foreign authorities (such as the US SEC) can obtain penalties in civil proceedings brought in the US, which may mean that it could seek to obtain evidence in the Isle of Man under the 1975 Act. Normally, however, the SEC will use Section 24 CJA 1990 or Section 21 CJA 1991 to obtain evidence in the Island.

19.9 Section 1 Bankruptcy Act 1988

Section 1 allows the Manx Court to grant an Order in Aid pursuant to a request made to it by a Court in any relevant country or territory.

Section 1(4) defines "relevant country or territory" as the UK or any part thereof, and any country or territory designated for the purposes of the Section by an Order made by the Council of Ministers. To date, no such Order has been made but it is anticipated that Orders will be made in the near future.

19.10 Foreign Trustees in Bankruptcy and Foreign Liquidators

The Manx High Court will also recognise a foreign trustee in bankruptcy, or the liquidator of a company appointed by a foreign Court, on the principles of international comity, thus enabling the trustee/liquidator to investigate the activities of the individual/company in the Island.

In the case of re: Regatta Trading Limited (21st July 1998) (unreported) Deemster Corrin CBE applied rules 167(2) and 169 in Dicey and Morris—"Conflict of Laws" (11th Edition) and recognised a trustee in bankruptcy appointed by a Finnish Court. This judgment was upheld on appeal by the Staff of Government Division, and is generally regarded as authority for the power of the Manx High Court to recognise a foreign trustee in bankruptcy or a foreign liquidator under the principles of international comity.

19.11 Mutual Legal Assistance Treaties ("MLAT's")

On 6 January 1994 the UK entered into a Treaty on Mutual Legal Assistance in Criminal Matters with the US, and that Treaty was extended to the Isle of Man on 5 June 2003.

Under the Treaty, the Central Authority for the Isle of Man is the AG, and he will normally use his powers under Section 24 CJA 1990 and Section 21 CJA 1991 to assist the US pursuant to the Treaty.

It is anticipated that the Island will enter into MLAT's with other jurisdictions, in similar terms, either directly or through the UK.

June 2008