Conflicting Messages from Isle of Man Government & HM Treasury

Fundamental review or Whitehall sabre-rattling?

The past two months has seen a somewhat confusing exchange of views between HM Treasury and the Isle of Man government. The Treasury, or more specifically Alistair Darling the Chancellor, has made a number of remarks critical of the island’s status as a tax haven. The Isle of Man government has vigorously responded with a strong rebuttal of Darling’s contentions. Chancellor Darling told the Treasury Select Committee in November the Government would review its relationship with what he described as “an offshore tax haven”, in the wake of the Icelandic banking crisis.

 “I actually think when we look at what has happened over the last few months we really do need a long, hard look at the relationship between this country and the Isle of Man tax haven sitting in the Irish Sea,” Darling said.
“We can’t have a situation where all sorts of tax advantages accrue to the Isle of Man but when things go wrong people say what about the British compensation scheme,” he added.

The Isle of Man government has expressed its “surprise” with regard to Darling’s remarks. In the circumstances, “surprise” is a thoroughly diplomatic observation.
Isle of Man Finance Director John Spellman said he hoped Darling’s remarks do not deflect the UK Government from representing the Isle of Man in its negotiations with Iceland to ensure Kaupthing depositors get their money back.

Spellman said: “We, in the Isle of Man, are very surprised by the comments made by Alistair Darling.

“Rather than being a “tax haven” we have actively sought to provide sound regulation and a competitive commercial environment. But we also play our part in the international fight against money laundering, terrorism and tax evasion.

“We have a good relationship with the UK and are a major contributor, via the City of London, to their economy.”
Spellman adds the Isle of Man has recently signed a Tax Information Exchange Agreement (TIEA) with the UK as proof of its commitment to working with Gordon Brown’s Government.

“The Isle of Man actually leads the way internationally on actively signing such agreements,” he said.

Darling dilemma

Isle of Man Chief Minister Tony Brown also sought clarification of the British Government’s position following the comments from Chancellor Darling.

The Chief Minister said: “Alistair Darling’s comments were most unfortunate, to say the least. He did not seem to be aware that the relationship between the United Kingdom and the Isle of Man has already been reviewed, and that an agreement reinforcing that relationship was signed by the Lord Chancellor on behalf of the UK Government in May last year.
“Mr Darling made no mention either of the new tax co-operation agreements signed between the Isle of Man and the UK on September 29.”

The Chief Minister continued: “While Mr Darling appears to be in the dark over this issue, the position of the Isle of Man Government is clear. We are not asking the UK for any favours, but they do have a constitutional responsibility to represent us internationally. We have also pointed out, in support of depositors with the local bank, that the closure of Kaupthing Singer & Friedlander in the Isle of Man was the direct result of actions taken by the UK Government.”

Tony Brown described his meeting with Lord Chancellor Jack Straw to discuss relations between the Isle of Man and the United Kingdom as positive and reassuring.
The meeting, held in London on Thursday November 13 2008 was requested by Mr Brown following the recent public comments by the Chancellor of the Exchequer.

The Chief Minister said: “Our meeting with the Lord Chancellor was most positive. I am pleased that we have received assurances that the United Kingdom has no plans to examine the constitutional relationship between us – a relationship which remains robust and is clearly defined by a framework signed between our two governments in 2007.
“As well, we had helpful discussions regarding the Kaupthing Singer Friedlander Bank situation.”

The Chief Minister added: “The United Kingdom Government recognises that the Isle of Man has been a leading proponent in efforts to bring greater transparency and fairness to cross-border financial transactions by signing Tax Information Exchange Agreements.  This was recognised by the OECD when the Isle of Man signed its TIEA with the UK.”

Regulatory review

The Government has said that Michael Foot, currently Chairman of the UK Office of Promontory Financial Group, will lead the independent review of British offshore financial centres announced at the Pre-Budget Report 2008.

The review will look at the immediate and long-term challenges facing British offshore financial centres in the current economic climate, including: financial supervision and transparency; taxation, in relation to financial stability, sustainability and future competitiveness; financial crisis management and resolution arrangements; and international cooperation.

The Government has been clear that the variety of existing constitutional arrangements in place across these territories will continue to be respected, including their independence in fiscal matters and the setting of their own rates of taxation.

Welcoming the launch of the review, the Financial Services Secretary, Paul Myners, said:
I welcome the appointment of Michael Foot who brings significant experience in financial regulation to this task. Offshore financial centres must play a responsible role in the global financial system.

This review will take a serious and constructive look at the challenges these centres face in the current economic climate, and how they can best respond to these.”

The Minister for the Crown Dependencies, Lord Bach, commented: “This review is an opportunity for the Crown Dependencies to demonstrate their strong track record in the regulation of their financial services industries. The review will allow the Crown Dependencies to participate in an open debate about how they can best be equipped to withstand the current difficult economic climate without calling into question their constitutional arrangements. In this regard, I am pleased to see that the review specifically excludes constitutional change from its scope.”

The Minister for the Overseas Territories, Gillian Merrion MP, stated: “I am impressed by the positive discussions I have had with the Overseas Territories on financial services regulation recently, and hope that the review may be helpful to those overseas territories, with significant financial services industries, to prepare for the challenges of the future.”

Michael Foot expressed his enthusiasm for his new role. “After working as a financial regulator in the UK and overseas, I have direct experience of the achievements of the Crown Dependencies and Overseas Territories. I am looking forward to working with them to see how best the important contribution of their financial sectors can be underpinned and strengthened for the future in these challenging economic times.”

Isle of Man Chief Minister Tony Brown has welcomed the review of Britain’s Crown Dependencies and Overseas Territories announced by the Chancellor of the Exchequer in his pre-Budget statement.

The Chief Minister commented: “The announcement of this review across the three Crown Dependencies and 14 Overseas Territories is understandable in terms of the turbulent economic climate being experienced around the globe.

“As far as the Isle of Man Government is concerned we welcome this exercise as another opportunity to show that the Island is well regulated, financially stable and internationally responsible.

“The Isle of Man has a strong record of compliance with the highest global standards in the areas of financial regulation, taxation, transparency and international co-operation. This has been confirmed by bodies such as the IMF and the OECD.”

Vince Cable is currently the Liberal Democrats Shadow Chancellor and Deputy Leader.
He was Acting Leader of the Liberal Democrats in 2007 before Nick Clegg was elected leader in December of that year. He is Member of Parliament for Twickenham and has been the Liberal Democrats’ main economic spokesperson since 2003, having previously served as Chief Economist for the oil company Shell from 1995 to 1997.

Vince was talking with Investment International Editor Jonathan Ball.

Investment International: What do you think is the future for the offshore financial centres, particularly given the apparent hostility of figures as diverse as Barack Obama and Alistair Darling? 

Vince Cable: The issue has certainly grown in prominence of late. I think most people feel it is untenable to have small tax havens, especially if they appear to have been structured solely as a mechanism of avoiding paying UK taxes. The arrangements certainly cause a great deal of resentment.
I also think there is the danger of money laundering in a situation where there is a lack of transparency and accountability.

Investment International: So you feel the current situation needs to be reviewed?

Vince Cable: Very much so. The present structure cannot reasonably be described as stable or satisfactory.
Also, I feel there is a lack of clarity regarding the question of domicility. It appears in some instances to have been used simply as a means of avoiding tax. Since many of the individuals involved in these arrangements are decidedly wealthy this has been a further source of dissatisfaction.

Investment International: What do you think is likely to happen with regard to the depositors on the Isle of Man who had accounts with the Icelandic bank Kaupthing Singer & Friedlander?

Vince Cable: This is a complex area and here I’ve been working closely with my colleague Sir Alan Beith, Chair of the Justice Select Committee. As you are doubtless aware, the bank’s Isle of Man operations were frozen along with the rest of the bank when it was taken over by the Icelandic Government. The final outcome depends upon negotiations between the Governments of the Isle of Man, UK and Iceland and there are attendant legal issues. I’m afraid I suspect it will be a lengthy process.          

Investment International: Finally, do you regret leaving the Labour Party in the early 1980s? After all, if you had remained with Labour, you might very well now be Prime Minister.

Vince Cable: I very much doubt that and in any case it would not have been for me to decide! I am pleased to say I enjoy good relations with politicians in all parties.