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IoM publishes comments on corporate tax liability capping proposals

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The Isle of Man Treasury has published details the comments received to its proposals on capping corporate tax liabilities.

The Isle of Man Treasury has published details the comments received to its proposals on capping corporate tax liabilities.

The comments were received in response to a consultation document ‘Capping Corporate Tax Liabilities’, which was issued on 16 March 2006. Seven responses were received in total: two from individuals, two from professional firms and three from professional bodies.

The aim of the consultation was to seek views about the proposal to cap corporate tax liabilities at a level above the current highest payer, therefore ensuring that current revenue receipts are not reduced. 
The Isle of Man now has a standard rate of 0% income tax for corporate taxpayers, however a small number pay income tax at 10%. This includes companies holding banking licences and those receiving income from land and property in the Isle of Man (which includes rental income, extraction of minerals and property development).

The concept of introducing a tax cap was very well received. No one was opposed to the idea; some responses were cautiously supportive, and several were very enthusiastic:
‘This is a fantastic idea – it will be incredibly beneficial for the Isle of Man.’
‘…this could be a good thing for the IOM…’
‘…an interesting idea and worthy of further consideration.’

One response did suggest that this should only be an interim measure that should not detract from the aspiration to make all of industry subject to a zero rate of tax. They also suggested that a ‘floor’ as well as a ‘ceiling’ would be appropriate and would attract smaller start ups, which would in turn bring more highly qualified staff with them.

A cap of at least GBP 6 million, just above the current highest tax paid by a company, had been suggested in the consultation document. Two responses requested that a cap should be revenue neutral and recognised that this would not affect established Island companies; however, it may attract new banking business:
‘…only possibly of relevance to the very largest deposit taking subsidiaries of the UK clearing banks.’
‘…as you have the information we rely on you to set the cap appropriately.’

One response expressed concern that, under the new provisions allowing banks to stream other sources of income (i.e. some of their profits may be taxed at 0%), the figure of GBP 6 million may no longer be appropriate and that this should be taken into consideration when the final figure is set. 

One response suggested the figure should be indexed linked so that companies ‘knew where they stood’ for the future.

Two responses mentioned the possibility of allowing subsidiaries or associated companies to pool their tax liabilities for the purposes of the cap. One suggested that such an approach should not use the existing group relief provisions within the income tax legislation:

‘By group I mean companies with the same ultimate parent…’

The IoM’s current definition of a group is found in Schedule 2 of the Income Tax Act 1980, and its key principle is that:

‘two companies shall be deemed to be members of a group of companies if one is the 75% subsidiary of the other or both are 75% subsidiaries of a third company’.

There were very few comments about the detailed timing of the proposal; however, one response referred to this growth incentive as benefiting all stakeholders: 

‘…we welcome an early introduction.’

The consultation document suggested that there should be no change to the existing annual tax cycle for tax cap companies; no comment was received on this subject.

One response suggested that if any existing company is adversely affected by the changes announced on Budget Day then Government should focus on this rather than trying to attract new business.

As the Isle of Man now has a standard 0% rate of corporate income tax, the corporate tax cap concept would be a further move towards applying the standard rate to all companies. A cap, being based on a level of income which, once exceeded, will then see the remaining income charged at the 0% rate, would further demonstrate the Treasury’s stated intention to move to an overall zero rate of corporate income tax when revenues permit.

The Treasury would like to thank those people who have contributed to this consultation process. The feedback received has been positive and Treasury will take this into consideration in future policy determination.

The level of the cap, whether it should be subject to annual review via the Budget process or index linked, and whether the cap should apply to the aggregate tax liabilities of Manx groups of companies, needs more detailed exploration and consideration.

The information gathered during this consultation will be used by the Treasury when considering the detailed policy issues surrounding the potential future introduction of a corporate tax cap

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