The following submission was made to the Isle of Man's Treasury Department in response to the INCOME TAX (NUMBER 2) BILL 2003 CONSULTATIVE DOCUMENT. 16th April 2003

The consultative document can be found on the Isle of Man Government's website


 
INCOME TAX (NUMBER 2) BILL 2003 CONSULTATIVE DOCUMENT

Given the time available, Mec Vannin has had to limit the depth of comment to that of principle and relates only to sections A and D of the document.

Mec Vannin's taxation policy summary states:

"Mec Vannin is not committed to a single taxation rate, but believes that there should be a sliding scale and a tax on speculative gains."

This policy was made against a background of equal treatment of corporates and non-corporates for tax purposes: The reference to a lack of a single rate refers to income scale and not to differentiating between the nature of taxpayers.

Section A

Firstly, it is difficult to see how the perceived problem is related to the proposed tax changes: Those who the proposed legislation is aimed at have always had the opportunity to avoid their personal tax liability by the described mechanism.

We must further, however, question the Treasury's motivation in proposing this individual piece of legislation (Section A).

If the Treasury has deemed that it can afford to dispense with the income tax revenue of these companies, it is quite immaterial what subsequently happens to money that has been deemed to be tax-exempt. To be a loan, as opposed to income, there must be agreed terms of repayment. No matter how it is deferred, the money must eventually return to the company and this is the only matter that really needs addressing: It appears that the Treasury is attempting to address "loans" that are actually gifts.

Thus, the Treasury appears to be suggesting that loans be taxed as income. The attempts to exempt loans of less than £15,000 will not address the problem since the people most likely to be able to benefit from this mechanism are likely to be able to secure a range of "loans" from several companies and so circumvent the proposals in that fashion. It also raises the question of 
"loans" made by individuals from tax-exempt income. If income in the guise of loans from non-taxpaying companies is to be pursued, why not income in the guise of loans between individuals? It is clear that the Treasury proposals have crossed from income to capital transfer / gains taxation which is supposedly contrary to government policy.

If carried out on a regular basis, the company should be brought to heel by the FSC as a banking / lending operation or it is simply required that the Treasury has the power to deem that regular loans made to an individual without full repayment terms are, infact, wages or dividend and so become income. That certainly doesn't require the clumsy legislation proposed.

The fundamental problem is in an income tax system that selectively exempts companies. Mec Vannin wishes to take this opportunity to state its opposition to this regime and utterly rejects the notion that economic benefits will "flow" to the population whilst a disparate individual income tax exists: The system will simply encourage those with the most to gain and in the best position to do so, the company owners and directors, to avoid income tax by using the company to provide for them in as many 
ways as possible. The Income Tax Division will spend an increasing amount of time, money and human resource chasing its tail in an effort to trace tax-avoidance and the specific area of loans is only one of a vast number of tools available to those with a high degree of influence on a company to acquire its capital or assets outside the tax framework. The Treasury has become a victim of its own policies of creating a tax-avoidance economy.

We have not been able to acquire figures differentiating between company and individual income tax receipts, though figures available to us indicate a annual maximum income tax receipt from full time workers of £60,000,000 (census figures and wage statistics). The proposed legislation seems really to be directed at around 5,000 employer / self employed individuals with the capacity to acquire open-ended "loans" which then become gifts, but we reiterate that this mechanism has always been 
available: It is not related to the establishment of tax-exempted companies.

The objective of the Treasury must be questioned and established: Is the fear that tax-revenue will be lost? That argument does not hold water since, as already stated, we are referring to money that the Treasury has been happy to see go untaxed. In view of the figures given and the nature of the companies involved, it would seem to us that more money will be spent in attempting to recover these taxes than will be gained.

If the Treasury's problem is a matter of principle, in that most ordinary people are subject to income tax whilst there are a number who can use companies to avoid it, then we can support that sentiment but can only reiterate that the Isle of Man economy is now founded upon the the principle of tax avoidance and to raise this particular instance seems lacking in all objectivity and rationale. The best we can say is, "Go back and start again from scratch."

In the interim, the simple and effective way to deal with this is to deem that any loan made by a non-licensed company to another party must be stipulate repayment within 12 calendar months. If the borrower fails to repay within this time, he will be taxed on the outstanding amount.

Section D

The opening paragraph states:

"D.1 There is an argument that land on our small Island should be viewed as a national asset. It is as precious as any other natural commodity and everyone should benefit from the movement in its value and none should be held to ransom because of its scarcity."

This is a statement that we can happily endorse. Unfortunately, the document goes rapidly downhill from there and, in its desperation to avoid the notion of capital gains or speculation tax, reveals that the Treasury's only real intent is to "grab a slice of the action" from property deals. This will perform precisely the square root of zero towards protecting the Manx people from a scarcity of available land and, hence, fails to address the ethics expressed in paragraph D.1

To simply tax, at flat rate, land transaction will do nothing to curb or inhibit land / property price escalation. It will also positively penalise those who do not sell land at a profit. This path is not an option.

The only rational option is a land / property speculation tax and the eagerness of the document to reject such a notion confirms the Treasury's desire to see a continued high level of property transaction without regard to its effect upon the Manx people. Further, the dismissal of speculation "because any separate new taxation system would add complexity" is laughable in light of the extraordinarily complex UK and Irish legislation referred to as a model.

To genuinely benefit the Manx people in terms of curbing property speculation and to permit the Treasury to reacquire revenue thrown away by its ill-planned "tax strategy", speculation tax is the obvious and simple solution.

All property transactions should be taxed according to a sliding scale of tax upon the profit from sale less inflation from the period of purchase, less legitimate expenses incurred during its holding and diminished by the period between purchase and sale.

That is not complex, it taxes those who profit from speculative gains most, thus inhibiting the practice in the first place and it doesn't affect inherited assets.


 
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