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According to many a tax haven is a jurisdiction (a state, country or territory) where one or more type of tax is levied at a low rate or not at all. Others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven.

On that basis the United Kingdom is, and has been for decades, a tax haven. Indeed most other major economies would fit into this definition and it isn’t that long ago that Prime Minister David Cameron was inviting French nationals to move to the UK to avoid President Hollande’s 75% tax rate.

But this is nothing new. For as long as the UK has been a member of the European Community (now European Union) thousands of French and German businesses have set up operations in England in order to save tax. So when Chancellor Merkel attacks “tax havens” one can only wonder who she is attacking. And don’t forget that more French people live in London than in Bordeaux, Nantes or Strasbourg. London is France’s sixth biggest city in terms of population.

In December 2008 the US government published a report on the use of tax havens by American corporations but was unable to find a satisfactory definition of a tax haven.

However the report regarded the following characteristics as indicative of a jurisdiction being a tax haven:

  • nil or nominal taxes;
  • lack of effective exchange of tax information with foreign tax authorities; 
  • lack of transparency in the operation of legislative, legal or administrative provisions; 
  • no requirement for a substantive local presence; and 
  • self-promotion as an offshore financial centre.

The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven:

  • Nil or only nominal taxes. Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence.
  • Protection of personal financial information. Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction. 
  • Lack of transparency. A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayer’s situation is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. ‘Secret rulings’, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a government’s lack of legal access to financial records are contributing factors.

However, the OECD found that definition included many of its member states so its later work has focused on the single aspect of information exchange. This is generally thought to be an inadequate definition of a tax haven, but is politically expedient, because it includes many of the small tax havens (with little power in the international political arena) but exempts the powerful countries with tax haven aspects such as the USA and UK.

In its recent report on tax transparency the OECD awarded the Isle of Man (usually castigated in the media as a tax haven) the highest rating possible. In fact the Isle of Man was one of only 18 countries to achieve this rating; a better rating than that of the “major economies” of the UK, USA and Germany to name just three.

Frankly I’m beginning to wonder if this dash to evade the title “tax haven” is necessarily desirable. If you haven’t already realised it I live on the Isle of Man and earn a substantial part of my livelihood as a tax advisor. The fact is that the Isle of Man is a tax haven – in that it is a low tax economy.

So why are taxes low in the Isle of Man? A major reason is that we don’t have any national debt. The Isle of Man government always balance the budget and cannot spend more than they gather in taxes or have in their reserves. No debt means no interest payments – and it is the level of interest payments (and rates) that have caused so much of a problem for the UK.

Category: Isle of Man 

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