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Isle of Man Treasury Income Tax Division Update Seminar

Isle of Man Treasury Income 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

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Isle of Man Treasury Income Tax Division Update Seminar

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  1. Isle of Man Treasury Income Tax Division Update Seminar January 2008

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. Taxation of Pensions (6) • Proposed Changes (2) • Tax free lump sum • Increased to 30% • £150,000 permitted maximum repealed • Take lump sum early and defer pension • Take pension and continue to work

  8. 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

  9. Attribution Regime for Individuals (ARI) • Background • The new regime • Comparison with the DPC regime • The Temporary Taxation Order • Next steps

  10. ARI (Background/1) • Commitment made in 2002 to the principles of EU Code of Conduct on Business Taxation • From 2002 0% rate gradually introduced for key business sectors • April 2006 • General 0/10 regime for companies • “Harmful” regimes repealed • Exempt and International Entities

  11. 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

  12. 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

  13. ARI (New Regime) • Attribution Regime for Individuals (ARI) • Assessor has worked closely with UK Treasury and EU Commission • Personal tax measure • Lessons learnt from DPC • Complexity • Copy the elements that worked

  14. 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

  15. 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

  16. 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.

  17. 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

  18. ARI (Example) Example A 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 attribution • Or - £50,000 attribution to each shareholder

  19. 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

  20. ARI (Comparison/1) Old Regime Pre DPC Salaries £10,000 A Company Ltd 10% taxpayer Gross profit £150,000 Net taxable profit £115,000 x 10% Mr & Mrs Owner Taxed on £35,000 Dividends £25,000

  21. ARI (Comparison/2) DPC Regime Salaries £10,000 A Company Ltd 0% taxpayer Gross profit £150,000 Distributable profit £140,000 DPC charge on £140,000 x 9.9% Mr & Mrs Owner Taxed on £35,000 DPC credit @ 9.9% Dividends £25,000

  22. ARI (Comparison/3) ARI Proposed Regime Salaries £10,000 A Company Ltd 0% taxpayer Gross profit £150,000 Distributable profit £140,000 No tax due Mr & Mrs Owner Taxed on £10,000 salary Taxed on £140,000 attributed income Dividends £25,000

  23. ARI (Comparison/4) Old Regime Pre DPC Salaries £50,000 A Company Ltd 10% taxpayer Gross profit £150,000 Net taxable profit £45,000 x 10% Mr & Mrs Owner Taxed on £105,000 Dividends £55,000

  24. ARI (Comparison/5) DPC Regime Salaries £50,000 A Company Ltd 0% taxpayer Gross profit £150,000 Distributable profit £100,000 No DPC charge Mr & Mrs Owner Taxed on £105,000 Dividends £55,000

  25. ARI (Comparison/6) ARI Proposed Regime Salaries £50,000 A Company Ltd 0% taxpayer Gross profit £150,000 Distributable profit £100,000 Mr & Mrs Owner Taxed on £105,000 No ARI charge Dividends £55,000

  26. 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 in • Introduces ARI • For accounting periods commencing after April 2008

  27. ARI (Temporary Taxation Order/2) • Provides for transition • DPC collection • Credits • Assessor power to call for information required to calculate the attribution

  28. 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 Guide • Income Tax (Amendment) Bill

  29. International • EU • OECD • Tax agreements • General

  30. 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

  31. International (OECD) • Major meeting of members this month • Future of harmful tax practices initiative in balance • We need to stay close and act strategically

  32. International (Tax Agreements) • Two years of solid achievement • Why a phased approach? • Negotiations to complete • What about DTAs?

  33. 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!

  34. 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

  35. 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)

  36. 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.”

  37. 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

  38. 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

  39. 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

  40. QUESTIONS?

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