Isle of Man TreasuryIncome Tax Division

Update Seminar

January 2008

Taxation of Pensions (1)

Current Legislation – Statutory Schemes

• Approved by Tynwald– Occupational Schemes

• Income Tax (Retirement Benefit Schemes) Act 1978– Personal Pension Schemes

• Part 1 Income Tax Act 1989– International Schemes

• Section 50B Income Tax Act 1970

Taxation of Pensions (2)

Income Tax (Pensions) Bill 2007– House of Keys Second Reading 4

December 2007– Consideration of Clauses 22 January

2008 (tbc)– Regulations and Orders in draft form– To be effective from 6 April 2008

Taxation of Pensions (3)

Why Change? – Modernise – Taxation strategy since 2000– Greater incentive to encourage

individuals to make or increase provision for retirement

– Changes in the UK implemented April 2006

Taxation of Pensions (4)

Current legislation– Contributions restricted– Compulsion to purchase an annuity– Personal or occupational pension, not

both – Pension has to be taken on retirement– Lump sum must be taken with pension

Taxation of Pensions (5)

Proposed Changes (1)– Contribution limits relaxed

• £300,000 annual allowance• No lifetime allowance• Tax relief up to 100% NRE• £3,600 minimum allowance

– No compulsion to purchase an annuity– Draw pension from fund directly– Allow concurrency

Taxation of Pensions (6)

Proposed Changes (2)– Tax free lump sum

• Increased to 30%• £150,000 permitted maximum repealed

– Take lump sum early and defer pension– Take pension and continue to work

Taxation of Pensions (7)

Proposed Changes (3)– 7½% tax charge on remaining funds

• Unless pension to surviving spouse/dependents• Equivalent rates elsewhere 35% / 82% / 20% / 10%

– International Personal Pension Schemes

Attribution Regime for Individuals (ARI)

BackgroundThe new regimeComparison with the DPC regimeThe Temporary Taxation OrderNext steps

ARI (Background/1)

Commitment made in 2002 to the principles of EU Code of Conduct on Business TaxationFrom 2002 0% rate gradually introduced for key business sectorsApril 2006

– General 0/10 regime for companies– “Harmful” regimes repealed

•Exempt and International Entities

ARI (Background/2)

April 2006 Distributable Profits Charge (DPC) introduced– Anti-deferral measure– Charge on members paid by company– Expert opinion obtained – Code

compliant– Complex (public guide 73 pages)

Early 2007 indication of EU issue with DPC

ARI (Background/3)

Working Group of the Tax Liaison Committee– Critical that solution was Code compliant – ‘Least risk’ solution and key components

identified

October 2007- EU Code Group found DPC to be contrary to the Code

Proposal Document issued October 2007

ARI (New Regime)

Attribution Regime for Individuals (ARI)Assessor has worked closely with UK

Treasury and EU CommissionPersonal tax measureLessons learnt from DPC

– Complexity– Copy the elements that worked

ARI (Scope)

Only resident individual shareholders having an interest in a relevant company

Certain types of company excluded– List similar to that for distributing

company under DPC

ARI (Attribution/1)

Trading company– Attribution where the company has

distributed less than 55% of distributable profit

– And does not pay 10% company rate

Non-trading company e.g. investment holding– Attribution in all cases

ARI (Attribution/2)

Mixed company treatment – Very complex within DPC regime– Simplified within ARI

• Trading company one whose business consists wholly or mainly of carrying on of trade or trades

• Companies having more than 50% of their income derived from an investment source or sources will be treated as non-trading companies.

ARI (Attribution/3)

The attribution from all companies will be 100% of the distributable profit– Whether distributed or not– No tax on dividends if ARI applies

ARI (Example)

ExampleA trading company has distributable profit of £100,000 and two resident shareholders each owning 50%Company pays dividends of £55,000, no attribution Company elects for 10% tax, no attributionOr - £50,000 attribution to each shareholder

ARI (The Individual)

Profits attributed 12 months after the end of the relevant accounting period or if earlier-– Date of ceasing residence– Date of death

Treated as income received in the tax year for all purposes

Personal allowances, deductions and lower rates can be utilised

ARI (Comparison/1)

A Company Ltd

10% taxpayer

Gross profit £150,000

Net taxable profit £115,000 x 10%

Salaries £10,000

Mr & Mrs Owner

Taxed on £35,000

Dividends£25,000

Old Regime Pre DPC

ARI (Comparison/2)

A Company Ltd

0% taxpayer

Gross profit £150,000

Distributable profit £140,000

DPC charge on

£140,000 x 9.9%

Salaries £10,000

Mr & Mrs Owner

Taxed on £35,000

DPC credit @ 9.9%

Dividends£25,000

DPC Regime

ARI (Comparison/3)

A Company Ltd

0% taxpayer

Gross profit £150,000

Distributable profit £140,000

No tax due

Salaries £10,000

Mr & Mrs Owner

Taxed on £10,000 salary

Taxed on £140,000 attributed incomeDividends

£25,000

ARI Proposed Regime

ARI (Comparison/4)

A Company Ltd

10% taxpayer

Gross profit £150,000

Net taxable profit £45,000 x 10%

Salaries £50,000

Mr & Mrs Owner

Taxed on £105,000

Dividends£55,000

Old Regime Pre DPC

ARI (Comparison/5)

A Company Ltd

0% taxpayer

Gross profit £150,000

Distributable profit £100,000

No DPC charge

Salaries £50,000

Mr & Mrs Owner

Taxed on £105,000

Dividends£55,000

DPC Regime

ARI (Comparison/6)

A Company Ltd

0% taxpayer

Gross profit £150,000

Distributable profit £100,000

Salaries £50,000

Mr & Mrs Owner

Taxed on £105,000

No ARI charge

Dividends£55,000

ARI Proposed Regime

ARI (Temporary Taxation Order/1)

Temporary Taxation Order approved at December Tynwald

Repeals the DPC– DPC will continue to apply to accounting

periods until new regime kicks inIntroduces ARI

– For accounting periods commencing after April 2008

ARI (Temporary Taxation Order/2)

Provides for transition– DPC collection– Credits

Assessor power to call for information required to calculate the attribution

ARI (Next Steps)Orders and Regulations to be approved by

Tynwald– Relevant Companies Order– Distributable Profit Order– Attribution Regulation– Attribution Certificate Order– Groups Regulations

Attribution GuideIncome Tax (Amendment) Bill

International

EU

OECD

Tax agreements

General

International (EU)

Savings Directive- working effectively- no apparent adverse effect on economy- retention tax up to 20% on 1 July

Code of Conduct- rollback achieved- DPC issue dealt with- commitment fulfilled

International (OECD)

Major meeting of members this month

Future of harmful tax practices initiative in balance

We need to stay close and act strategically

International (Tax Agreements)

Two years of solid achievement

Why a phased approach?

Negotiations to complete

What about DTAs?

International (General/1)

The debate about tax evasion and avoidance almost always includes a focus on “tax havens”, “offshore” and “offshore finance centres (OFCs)”

Increasing acceptance that there is nothing intrinsically wrong with being a financial centre of excellence!

International (General/2)

If everyone knows that they cannot define a “tax haven”, “offshore” or “OFC”, why do they bother trying?

Stigmatisation serves a useful purpose – the scapegoat carries the sins of others

International (General/3)

“…some OFCs will have a secure future, not as “concealment” centres, but as “service” centres that have carved out niche markets in which activities can thrive in a lightly regulated, tax-neutral environment. Those that continue in the old way of offering themselves up as places in which home taxes can be avoided will, however, in the author’s opinion, face extinction.” (Jeffrey Owens, OECD, December 2006)

International (General/4)Owens again (January 2007): “…if you want

to be a serious player in the international environment – not going for sort of the dark side of this game, the illegal activities, the money laundering, the tax evasion – if you want to be a serious offshore financial centre, the key thing is reputation. And if you have a reputation for being a place that’s a bit seedy, without transparency, being prepared in fact to take on illegitimate transactions, then what you’ll find is that the legitimate business will not come your way.”

International (General/5)

Global financial crime, including tax crime, is a major problem running alongside the legitimate international financial system

Ultimately, effective action to combat global financial crime will be founded on international cooperation, but may also require individual countries to make domestic legislative changes

International (General/6)

Benchmark standards in international tax cooperation should be developed by a broad coalition of countries seeking to understand the underlying problem areas and treating each other with respect

Standards should apply to all, and should define the legitimate global economic community

Future Strategy

Proposals set out in November 2007- continue to simplify the Island’s income tax system- focus on individual taxation and encourage savings and investment through products provided on the Island- continue to build the Isle of Man’s international reputation- encourage economic growth

QUESTIONS?