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• Increased to 30%• £150,000 permitted maximum repealed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– General 0/10 regime for companies– “Harmful” regimes repealed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?