Going Dutch
8th November 2005
This article was written for The Lawyer magazine by Daniel Mackelden, a corporate lawyer who heads the London office of Cains.
The recent announcement of a bilateral tax information agreement between the Isle of Man and the Netherlands is a ground breaking achievement which has wider repercussions for the offshore world.
The suite of agreements and memoranda were signed in the context of the OECD’s continuing aim to promote the creation of a Global Level Playing Field. To the uninitiated, this involves the OECD’s championing of an open and multilateral trading system in which tax induced distortions on financing and investment decisions are reduced. Some may remember their 1998 “Report on Counteracting Harmful Tax Competition”? A further report followed in 2000 entitled “Progress on Identifying and Eliminating Harmful Tax Practices” and a year later certain offshore jurisdictions which had failed to give sufficient assurances as to their commitment to eliminate harmful tax practices were publicly listed as ‘Uncooperative Tax Havens’. This list now numbers only a few jurisdictions and does not include any of the mainstream offshore centres.
A key element of eliminating harmful tax practices is considered to be transparency and the effective exchange of tax information. To this end, in 2002 the OECD produced a Model Agreement on Information Exchange on Tax Matters. These pro-forma agreements are intended for bilateral or multilateral use and seek to promote exchanges of information which are ‘foreseeably relevant to the determination, assessment and collection of such taxes, the enforcement of tax claims, or the investigation or prosecution of tax matters’. Such instruments are not drafted to enable “fishing expeditions” – information requested must be relevant to the tax affairs of a given tax payer, and there are other safeguards such as the requesting authority must set out the grounds for believing the information requested is present in the requested country or is in the possession of a person in the jurisdiction, the name and address of that person (to the extent known) and confirmation that the requesting party has pursued all means available in its own territory to obtain the information.
So what is the impact of the Isle of Man entering into a tax exchange agreement with the Netherlands?
Well, importantly, this is the first such agreement of its type entered into by an offshore centre with an OECD county other than the US. By way of background, the US ‘negotiated’ agreements with certain offshore jurisdictions in the wake of 9/11 and the global War on Terror. Entry into these agreements was perhaps more a political necessity than a measured step to the required level playing field. The Isle of Man’s agreement with the Netherlands is thus the first non-US agreement and OECD Secretary-General Donald J. Johnston welcomed the agreement as an important step forward in the global effort to detect and deter abuses of the global financial system. “The agreement confirms the Isle of Man’s commitment to implement high international standards, thereby reinforcing its stature as a responsible international financial centre”, he said.
Secondly, unlike preceding agreements, the current documents display elements of reciprocity in that, by entry into a tax information exchange agreement, the Isle of Man has secured certain concessions in return. The tax information exchange agreement is part of a package of measures designed to promote international business opportunities between the Isle of Man and the Netherlands. Specifically the package includes elements dealing with shipping and aircraft taxation and transfer pricing when companies have operations in both territories and move goods and services between them. Given the importance of the shipping industry to the Isle of Man – in 2005 the territory’s register was ranked 2nd in the world on the prestigious “White List” ahead of the UK and the USA – then such agreements with respected OECD members can only strengthen this market. Likewise the proposed G-Reg aviation register for the Island would benefit greatly from equivalent agreements with other OECD members. Tax agreements with OECD members do not therefore have to be ‘one way’ streets. The Isle of Man remains fully committed to the OECD tax exchange initiative, however, it will where appropriate seek to ensure the promotion and protection of its own interests in return. Future agreements may consequently cover additional areas such as market access for Manx financial services and products.
Thirdly, the above concept is reinforced by way of the agreements also including a commitment that Manx subsidiaries of Dutch companies will not experience any tax issues as the Isle of Man moves to its ‘0/10’ company tax system in 2006. This understanding on the application of the so called “Dutch participation exemption” has struck the right note with international tax planners based on the Island. The Dutch authorities have agreed that the profits of a Manx subsidiary of a Dutch parent undertaking will remain tax exempt in the Netherlands notwithstanding that the Isle of Man moves to a zero tax rate for most corporate vehicles. At the moment the exemption only applies to the extent that the Manx subsidiary is ‘subject to tax on its profits in the Isle of Man’ – which clearly would not work moving forwards if no tax was levied.
The parties have also agreed to work towards a full double taxation agreement. Assuming this follows the same path then it would be likely that a Dutch subsidiary of a Manx holding company would also be able to distribute profits back to the parent with minimal or no withholding tax applicable. Given the tax leakage which is often encountered on cross border structures then the Manx/Dutch concessions could be a useful tax planning tool. According to Greg Jones, Head of Tax for KPMG in the Isle of Man: “Depending on the eventual rate of withholding tax chosen (zero or 5% would be nice) the availability of a full double taxation agreement between the Netherlands and the Isle of Man will give tax planners (particularly those based on the Island) a highly attractive and more tax-efficient alternative to the Dutch-Dutch Antilles structure, and enable Manx businesses with international operations to access the Netherlands’ own DTA network with minimal tax leakage. ” The fact that an OECD member is expressly acknowledging that a jurisdiction is moving to a zero rate of tax for general corporate activities is undoubtedly crucial for the continued international acceptance of similar low/no tax jurisdictions. Will other OECD members follow this lead in that if the figures ‘stack up’ – which they do in the Isle of Man in that a move to zero rate tax (and 10% for banks) can be fiscally maintained - then will they acknowledge this formally in other tax exchange information agreements and ultimately double taxation treaties? One might therefore conclude that a Level Playing Field does not necessarily mean all jurisdictions must maintain equivalent tax bases, one can legitimately keep taxes low so long as you are able to and are prepared to be transparent about the process. In the words of the Dutch deputy finance minister, Joop Wijn: “Because of the globalisation of the economy, taxpayers are generating more of their income abroad or transferring more of its across borders. That is why international exchange of information is so important for accurate tax assessment. All countries want to pursue competitive tax policies. There is nothing wrong with that, as long as the policies are transparent.” He added: “We can make progress one step at a time. The participating partners must give up the reassuring comforts of privacy banking secrecy and isolation. OECD countries must take a critical look at their old familiar assumptions. They must take a more realistic approach to low tax jurisdictions.”
Finally, the process has also provided invaluable exposure for the Isle of Man’s officials and key advisers on an international level. Notably the Isle of Man was one of the 11 jurisdictions that worked with the OECD countries to develop the Model Agreement on the Exchange of Information in Tax matters on which the Dutch bilateral agreement is based. Meeting the persons behind the policy cannot be underestimated. It should also be noted that the Isle of Man is currently negotiating similar agreements with ten other countries.
In summary, we would maintain that these agreements are an important milestone in the ongoing relationship between the OECD and the offshore international business centres. By seeking concessions in return for legitimate tax information, one would hope that the credibility of the offshore centres can be greatly enhanced but without unduly compromising their role in the modern business environment.
For more information contact: Daniel Mackelden. |
