Zero Rate Business Tax

[Ripsaw]

Please can somebody of superior intelligence tell me if I understand the system correctly and correct any errors? Please forgive me if this is a aimless ramble.

 

In responce to pressure to level the tax levels on business the Isle of Man was expected to raised taxes on businesses registered here and were exepmt.

 

Rather than do that and basically turn away business, the Treasury leveled the playing field by making more businesses exempt. The Treasury instead receives annual administration charges/fees and hopes that it will encourage more business to set up on the Island to make up the shortfall in taxation.

 

To work properly, the new (and existing) businesses would also have to import labour basically so that more income tax and indirect taxes can be collected from more employees.

 

If there is none, little, or even worse negative growth in business registrations then it will create a shortfall in revenue.

 

Government are already cutting back on expenditure in some areas and I am sure that Mr Bell has warned that the Government have to tighten their belts for at least a couple of years until the new legislation has kicked in and is up and running to gauge business responce.

 

In Jersey a few months ago, members of the public turned out onto the streets to protest increases in their taxes. Jersey was waking up to the likelyhood of a financial "blackhole".

 

Now Jersey is threatening to introduce Sales and Service Taxes on the residents. A shortfall of £100m is being predicted for 2008.

 

This Is Jersey.com, the Islands Online media site carries articles about a recent Public Meeting for local businesses and residents...

 

Speakers accused the States {Jersey's equivilent to Tynwald} of incompetence over the last few years, leading the Island to the point where it faced a £100m tax gap and rising inflation.

 

One told Finance and Economics president Senator Terry Le Sueur (pictured) that he would not back a goods and services tax to cover the incompetence of the States. Another said the States suffered from a 'malaise of management mediocrity'. 'You are asking us to correct your errors,' said the first speaker. 'If you get this tax in, with your incompetence from the past you will just say "Up the tax, up the tax, up the tax." All these taxes started at five per cent and crept up and you will do the same thing to cover your incompetence.'

 

In another article, Estate Agent Roger Trower who leads the industry pressure group 'StatesWatch'...

...has joined the audience from Tuesday's consultation meeting on goods and services tax in telling the States that they should take the crackdown on public spending a lot more seriously before they start levying a goods and services tax, increasing stamp duty and removing tax allowances.

 

My questions/thoughts are:

 

Bearing in mind the housing situation, (alledged) lack of infrastructure and attitudes to comeovers (term used loosely) where will the money come from on the Isle of Man to make up the antisipated drop(?) in business tax revenue.

 

Jersey has 5% tax rates on sales and services (a rate that favoured it's tourism as well as the locals) which is now threatened with being increased, a rate that we don't have, so in a way they will still offer 'cheaper' living than us, but does the whole scenario serve as a warning to our politicians, will they take notice of Jersey, can we trust ours not to put us in a situation where we residents end up cross subsidising non residents?

 

I personally am irritated by all the money spent on consultants and subsidising niche markets on the offchance that they may generate some inward income. My wory is the old worry that Government have spent too much time and money pushing one area of financing the Islands wealth and anything else is a petty lip service to give the perception that we are "diversifying" our ecconomy.

 

Can somebody please tell me that we have nothing to worry about?

[FCMR]

Zero tax on Companies is just a word that the Government are using, I was told something about this from our accountants and from what I understood it only meant that profits were tax free while they remained on the Island and that interest earned from the profits would be taxed at a higher rate. I may be wrong.

[Addie]

Can somebody please tell me that we have nothing to worry about?

<{POST_SNAPBACK}>

Like you Ripsaw, I await an assurance.

[Observer]

I will try and answer it as best as I can. We were caught between a rock and a hard place in that under our current tax scheme we are viewed to have tax measures in place that exist soley to attract non resident business that benefits from favourable rates of tax that are unavailable to local businesses. The fact that the favourable rate is not available locally (effectively a two tier tax system) is frowned upon and must be addressed to meet with the requirements of OECD to ensure we are excluded from their list (effectively a black list) of unco-operative tax havens.

(Organisation for Economic Co-operation and Development - web site here for those interested http://www.oecd.org/home/ )

 

For those of you who are unaware of the islands commitment to the OECD, the following is a link to our letter to the OECD in respect of this and is very informative. It details what we have committed to achieve and also the timetable for making those achievements. http://www.oecd.org/dataoecd/12/53/1903624.pdf

 

I personally think the measures taken with regard to tax are a bold move, but something had to be done either way. We could either withdraw our current tax exempt scheme (available to non resident Isle of Man companies not operating within the island for a flat rate tax exempt fee of £450 per company) International Business Company Rates and so on, which would lead to the probable withdrawal of the business from the island which impacts on local employment and also the loss of revenue from tax paid - or - we try and make our current schemes available to local business so that we are no longer viewed as having the two tier harmful tax practice.

 

Which would you choose?? I have to say, I would go with the second option.

 

Not all local business will be exempt from tax, for instance banks and I think CSP's and similar - and it is hoped that the zero rate will attract new business to the island, the benefits of which extending to employment, local resources and so on and so forth, even tourism possibly. I am not sure if there will still be a flat rate applied to all companies similar to the current tax exempt scheme, it would make sense to me to have one.

[The Old Git]

At the moment we tend to pay out all profit as dividends to shareholders

 

This means to company pays little or no tax and the shareholders pay the tax

 

Because of the tax changes we're now going to not pay a dividend but pay out a sum equal to that as a capital distribution of retained profits, on which that shareholders will not pay any tax.

 

However, from 2006, that tax people are introducing the concept of a "deemed distribution" of dividends whereby they will assume that at least 50% of the company profit has been paid out as a dividend and will tax shareholders accordingly.

 

From that date we will then pay out 50% dividend and 50% capital distribution.

 

We expect the whole exercise to save around £100,000 in tax over the next few years or so.

 

That's from one small company.

 

It's going to be interesting times for the IOM and the Channel Islands

 

(Please don't take any of the above as tax advice, consult your accountants!)

[The Old Git]

from what I understood it only meant that profits were tax free while they remained on the Island and that interest earned from the profits would be taxed at a higher rate.

 

Once the profits are paid out then the recipient will be taxed on them. If they're non resident taxpayers you have to withold the tax due and then pay that over to the tax people

[FCMR]

from what I understood it only meant that profits were tax free while they remained on the Island and that interest earned from the profits would be taxed at a higher rate.

 

Once the profits are paid out then the recipient will be taxed on them. If they're non resident taxpayers you have to withold the tax due and then pay that over to the tax people

<{POST_SNAPBACK}>

 

Dont off Island residents pay 18% tax on unearned income.

[The Old Git]

Dont off Island residents pay 18% tax on unearned income.

 

Yeah, I have to deduct 18% from their divi and pay it over to the tax people here

[FCMR]

So its a scam then, in other words Im correct in what I said Zero Tax for Companies is just a word the Government use. Nice little earner for the Government

[The Old Git]

As far as I understand it -

 

Pre zero company tax if you don't pay your profits out as a dividend then the company pays tax on the money. If then decide to pay the money out at a later date as a divi then recipient pays tax on it. In effect, the money has had tax paid on it twice

 

Post zero company tax a company can hold the profits and not pay tax on them. However, the deemed dividend tax on 50% of the profit (comes in 2006 I believe) means that you basically have to pay out 50% of your profit to the shareholders as you're going to be taxed on it anyway.

 

Seems a bit tough if the company wants to build up some profit to spent on a big expansion or something but I'm sure a good accountant will think of something