Substance and beyond!

Substance and beyond!

Read Executive Consultant, David Parson's latest Substance article now.


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It’s almost 2 years since the Income Tax Division published their first “Key Aspects” guidance note on the Economic Substance legislation that was then being pushed through Tynwald. The legislation applies to accounting periods starting from 1 January 2019 and as such, 2 years on, we are now less than 2 months away from the first tax return filing deadline under this regime.

Many companies are unaffected by the rules and will see little practical difference in their tax return obligations. However, for a sizeable minority, these rules have had a substantial impact, with some still grappling with the consequences.

The financial consequences for failure to meet the substance requirements can be significant – a penalty of up to £10,000 in year 1 and £50,000 in year 2 (and even greater for certain high-risk companies with income from intellectual property). Whilst it is expected that the Income Tax Division will be prepared to show sympathy in many scenarios in terms of penalty levels, for example in the context of a company that has belatedly realised that it was failing to meet the rules due to a relatively minor technicality, it seems likely that the patience of the Division will not last forever. Furthermore, for companies with a 31 December year end that have not resolved their position by 1 January 2021, they could then be in their third year of failure and thus face cumulative penalties of £160,000 together with the prospect of strike-off from the Companies Registry. Clearly no company wants to be in that position!

Anyone wanting evidence of the seriousness with which the international community is taking these rules need look no further than the Cayman Islands, who at the start of October were finally removed from the EU’s blacklist of non-cooperative tax jurisdictions, having dealt with concerns in relation to its investment funds regime. 

As always in the tax world, our focus moves in part to new challenges. The OECD’s work in relation to its so-called Pillar One (allocation of cross-border taxing rights in the digital age) and Pillar Two (the GloBE proposals) continue apace, albeit the consensus that they had hoped to reach in 2020 is now not expected until 2021. One of the potential outcomes of this work is, effectively, an internationally accepted minimum corporate tax rate.

The concern for the Island’s economy, as the EU and OECD jostle with similar but not identical aims in the world of international taxation, is that minimum tax rates become the new battle ground and our Zero/ Ten tax regime, that has served us so well, comes under threat. As such, I would encourage you to watch out for developments in the coming months.

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