The Hindu Business Line : Isle of Man would welcome a tax treaty with India

Lokeshwarri S. K.
Vidya Bala

Offshore financial centres have been posing a stiff challenge to regulators across the world even as investors have willingly embraced these routes to mitigate tax incidence. The Organisation for Economic Co-operation and Development (OECD) has been trying to balance the interests of the investors and the sovereign countries by setting out standards on transparency and exchange of information.

Isle of Man is one such offshore centre that many Indian companies have been flocking to, en route to raising money on London’s Alternative Investment Market (AIM). Mr Daniel Mackelden, Head of London operations, and Mr Mike Edwards, Director, of Cains, a 100-year old international law practice incorporated in the Isle of Man, in an exclusive interview with Business Line spoke about Isle of Man and issues relating to offshore centres.

Excerpts from the interview:

Why are companies drawn to Isle of Man for routing their funds to other destinations?

For a number of projects, Isle of Man companies are the vehicles of choice. Of all the Indian companies listed on AIM, 75 per cent was incorporated in the Isle of Man. The benefits of companies listed on the Isle of Man are that they are not subject to corporation tax, capital gains tax, stamp duty or any other form of taxation. Dividends paid to investors are not subject to withholding tax. They can pay the dividends in full. Even on interest on loans, they need not withhold any portion. So they are very attractive companies from the fiscal sense.

Besides the fiscal incentive, Isle of Man has a strong legal system, a good international reputation and institutional investors understand the legal system since it is very close to the British legal system. It also has a well-regulated environment.

Does the tax benefit for companies incorporated in the Isle of Man accrue irrespective of the country where they actually operate?

The zero rate of corporate tax applies to all the Isle of Man companies irrespective of where their business is being carried on. If they carry on business in Southern Africa, India or Isle of Man, the rate of corporation tax is zero.

That does not mean that the underlying business is not paying tax. Quite often they pay tax on labour and other expenses. This is a tax effective platform. It is not about evading tax.

Why do companies use tax havens to route their investments into other countries?

OECD has acknowledged that the tax havens — as they are called in India, while we will call them low or no tax destinations — have an important part to play in world trade.

If you were an Indian company that does not have any business interest in the UK but want to list in London, you do not need to set up an English company or pay English tax. The offshore route is easier and fairly well acknowledged.

Of the top 100 AIMS companies, 15 are established in the Isle of Man, that is £4.5 billion of market cap. So it is a fairly well-established route. For international institutional investors, if the tax incidence is mitigated, it becomes a more attractive investment. It is money saved for investors in India.

If an Indian company were to acquire assets around the world, in the last couple of months significant acquisitions have been made by Indian companies in the UK, having a holding company in a zero tax jurisdiction often plays a part in the cost structures.

Many sovereign wealth funds too invariably route their investments through a low tax jurisdiction.

There was talk just before the 2008 Union Budget that the CBDT (Central Board of Direct Taxes) was concerned about tax evasion through this route. Do you see stringent action being taken by countries to plug this conduit?

Isle of Man wants to be involved with transparent cross-border business. Days of people hiding information from the Government are long gone.

Isle of Man has had some very early discussions with various key countries about tax treaties. We have entered into tax treaties with the UK, the US and Nordic countries and there are more in the pipeline. We would welcome the opportunity to have a tax treaty with India.

It is about being transparent. If you fraud the sovereign country of tax revenue, then you tend to get black-listed and that affects the ongoing business.

How transparent can you get if a country wants details about a particular entity incorporated in the Isle of Man?

The signed agreements are already in place. Based on a witness in the UK, the UK tax authorities requested details of the bank account of a company holding assets in Channel Islands and the Isle of Man. That information was provided to the UK tax authority.

People in the UK were then written to by the UK tax authorities, asking to explain the income and assets that they owned in these low-tax destinations.

These kinds of tax exchange agreements are used to ensure that legitimate business is carried on in offshore centres and they are not used for tax evasion.

Gone are the days when companies used offshore centres to hide assets from their balance-sheets that were not disclosed to the shareholders. In the modern age, these assets are disclosed in a fairly lengthy detail about why they are using an offshore jurisdiction and how it is beneficial to the company.
What are the regulatory requirements that an offshore company registering in the Isle of Man has to follow?
It has to have a registered office in the Isle of Man. There should be a regulated entity under the Isle of Man government that has the oversight over the company in terms of its administration. In offshore companies in the Isle of Man the directors are nominee directors who have been appointed to act for that company, whereas in AIM-listed companies, because it is a listed company, the directors are very experienced in the industry. As far as Indian companies listed on AIM are concerned, the majority on the board are Indians and they are joined by directors from the UK and the rest of the world.
So the directors of a company registered in the Isle of Man need not be physically present in the country but in the case of AIM-listed company, the quality of directors have to be good enough to meet institutional expectation.
As the market and disclosure requirements (for AIM listed company) are superimposed on top of an offshore company thus bringing it under the UK regime, the investors have a greater degree of comfort. The institutional investors in the company also require full disclosures and make sure that the directors are competent enough to meet their expectations.

More Stories on : Accountancy | Interview | Taxation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page