An overview by Nicholas Williamson
The Isle of Man has, for many years, had the tax legislation in place to make it an attractive location for international business. It has been a stated aim of the Isle of Man Government, to ensure the right legal and regulatory framework exists to attract high quality, high value added business to the shores of the island and it is this framework that should be attractive to the new generation of internet entrepreneurs as well as established corporations seeking a low tax jurisdiction in which to place their electronic commerce subsidiaries.
Since 1984 companies have been established in the Isle of Man to conduct international business, that is business where income is derived from wholly outside the Isle of Man. These companies can register for complete exemption from Isle of Man tax. The question of where electronic commerce is being conducted from, is being considered by tax authorities all over the world, generally from the perspective of preservation of their tax base but also in ensuring they can collect a fair share of tax on electronic commerce carried on in their country. The Isle of Man, to a large extent, does not have this problem as the tax exempt environment is available and so an electronic commerce business is likely to argue it is conducting trade from the Island rather than elsewhere.
To substantiate that trade is being carried on from within the Island, it will be necessary for at least the purchase decision (order or credit card payment) to be made on a server based in the Isle of Man. The location of the server which acts as the shop window for the selection of goods or services need not be in the Island for Manx tax purposes, however this function may represent a permanent establishment in the country where it is located and therefore give rise to a tax exposure there. The tax rules of this country will have to be considered in connection with each particular set of circumstances.
There are two conditions required to be satisfied for exemption to be granted from Isle of Man tax.
- The ownership of the business must rest wholly outside the Isle of Man. The exempt company therefore is going to be available to international corporations that are not based in the island.
- No income can be derived from Isle of Man resident individuals or local trading companies. A problem is presented in this respect. With the Internet being available to residents of the Isle of Man, how does a new business prevent Isle of Man residents from purchasing goods or taking advantages of the services offered?
This is an issue, which the Isle of Man Tax Division has been considering closely. The answer is that each individual business has to be considered on its own merit. Certain internet trading businesses, which have been granted exemption from tax, had only to state clearly on their Website that the goods or services are not available to residents of the Isle of Man.
The Income Tax Division are taking the line that it is up to the companies themselves to demonstrate that they are not trading in contravention of the exempt company legislation – that is with local residents. Where technology enables local residents to be barred from access, then this will be one way of demonstrating that no local trading is being carried on. Where technology does not enable this, electronic commerce business will have to devise appropriate procedures to ensure that business is not carried on with local residents.
The exempt company therefore will be of interest to international concerns who may be looking for a tax efficient jurisdiction in which to place their Internet business. However, non-payment of Isle of Man tax is usually only half the story for such concerns. Many well-developed tax regimes have controlled foreign companies type rules (CFC's). These seek to prevent an international company from gaining a tax advantage by placing part of its business in a low tax jurisdiction sited subsidiary by imputing the profits of that subsidiary back into in to the parent company's accounts. Most countries' rules do, however, have a commerciality let out. That is if the overseas subsidiary is carrying on bona fide commercial activities, then the rules may not apply. This is certainly the case in respect of the United Kingdom CFC rules. The question is, therefore, whether a business of selling goods or services via the Internet would fall within the exempt activities test.
It is understood that the Inland Revenue has not dismissed that the locating of the Internet trading is an eligible exempt activity for CFC purposes and indeed a strong case can be made for the commerciality of the position.
The advantage to the international corporation is not only tax-free accumulation of profits in the Isle of Man of the Internet trading subsidiary, but also control of when the profit is repatriated to the parent company. Repatriation can happen as a straight forward dividend or else other more tax efficient ways of using the money may be identified, such as the making of loans, purchasing and then leasing of equipment, the establishment of an offshore treasury operation, and many other secondary uses of Isle of Man exempt companies.
The Isle of Man therefore should be of interest as a centre for the location of this business to many international companies wishing to establish a separate Internet trading business.
But what about the new generation of Internet entrepreneurs? These people may not have been in business on their own before but they may have grasped the opportunities that the worldwide shop window of the Internet produces. Typically, if an individual established a business, trading via the internet or perhaps providing services through his Website and he was located in a mainstream tax jurisdiction, then from first principles it would seem clear that the whole of his activity would be subject to tax in that country. Indeed the same is true if an individual came and established such a business in the Isle of Man, he would be subject to Isle of Man resident tax (he would not quailify for exemption as he would fail the ownership test). However, the Isle of Man may be preferable due to its highest rate of personal income tax being 20%.
The Isle of Man, as a low tax jurisdiction, has significant attractions over its near geographical low-tax neighbours in that its doors are still open to welcome new residents. Anybody entitled to live in the European Union can take up residence in the Isle of Man and there are no asset tests to meet or other restrictions on acquisition of property.
When one then considers the limited physical resource required to establish electronic commerce is minimal, the possibilities for the fiscally aggressive to locate themselves in the Isle of Man certainly exist.
The Isle of Man is part of the European Union in respect of VAT and customs duties and therefore any business located on the Isle of Man, providing services to or selling goods to customers in the United Kingdom, will have to add VAT as appropriate to their charges. Indeed the export of goods and services to customers in the European Union will be subject to VAT unless the provision to the customer is in its business capacity and that customer is VAT registered. With careful planning, however, the instance of VAT can be minimised although this is an area that particular specialist help is required.
The portability of electronic commerce therefore is perhaps the key as to why the Isle of Man may evolve in to the centre for such business. The Isle of Man Government are considering very carefully the existing legal and regulatory framework to ensure that an environment exists where proper electronic commerce business can be carried on and the direct tax advantages which already exist can be enjoyed. The Electronic Transactions Act 2000 has just been brought into legislation. Whilst still in its infancy in terms of the amount of electronic commerce being located on the island, the local software industry is rising to meet the challenge of both individual entrepreneurs and multi-national corporations looking to take advantage of what the Isle of Man offers.
Electronic Commerce presents a number of new and complex tax issues particularly in respect of VAT and these should be considered carefully by anybody wishing to establish such business in the Isle of Man.
The author is a Tax Director in the Douglas office of Deloitte & Touche, the Isle of Man member firm of Deloitte Touche Tohmatsu.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.