TAX3 MEPs visit Isle of Man to investigate VAT avoidance scheme

Following the revelations of a widespread VAT avoidance scheme in the Isle of Man in the Paradise Papers leak of documents from the Appleby law firm, the European Parliament’s TAX3 special committee on financial crimes, tax evasion and tax avoidance organised a fact-finding mission to the Crown Dependency, which took place on November 22-23 2018. Irish MEP Matt Carthy participated in the mission for the GUE/NGL group.

Appleby refuse to meet MEPs

Speaking following the mission, Matt Carthy criticised the refusal by Appleby’s Isle of Man branch to meet with MEPs.

“This is the second time that the law firm at the centre of the Paradise Papers, Appleby, turned down our request to engage with the TAX3 committee. First both Appleby and Baker McKenzie refused to attend a hearing on the role of intermediaries in the Paradise Papers in June,” he said.

“Now Appleby’s Isle of Man branch has refused to attend a meeting with MEPs during our visit to the island. Appleby, along with accountancy firm EY, was at the heart of the VAT avoidance scheme revealed by the Paradise Papers leak to be operating in the Isle of Man. The firm’s refusal to meet with us is more than disappointing – it is unacceptable.

“The European Commission has begun infringement procedures this month in relation to the VAT avoidance scheme, which has denied VAT revenue to several member states. In this context, it is just not acceptable that the firm that designed this scheme has point-blank refused to engage with the elected representatives of countries across the EU who are seeking information about how these institutions operate, and what changes have been put in place since the Appleby leak.

“Appleby is one of the key players in the Isle of Man financial services industry, and their refusal to engage with us demonstrated their contempt for transparency and public accountability. It is clear that self-regulation of the legal and accountancy profession is not working, and it is well past time that the lawyers and tax advisors who enable, design and promote these damaging schemes are properly regulated and held to account.”

 VAT avoidance

During the visit, the Isle of Man government officials repeatedly insisted that it did nothing wrong in relation to the VAT avoidance scheme revealed in the Paradise Papers that provided exemptions from VAT for private jets. The Appleby leak showed that the Crown Dependency allowed multinational corporations and ultra-rich individuals to avoid paying £790 million of VAT on more than 200 aircrafts and yachts that were imported to the EU since 2011.

As always, law firms and one of the Big Four accountancy firms – in this case, Appleby and EY – devised the detail of this scheme for billionaires, which was facilitated by the Isle of Man’s government and customs agencies.

The most well-known example of this scheme in the Paradise Papers was Formula One racing driver Lewis Hamilton.

Private jets purchased outside the EU are subject to 20% VAT on importation in order to qualify for free circulation within the bloc. While the Isle of Man is not part of the EU, it is a British Crown Dependency and forms a common area with Britain for VAT purposes. As a result, an aircraft imported via the IoM is granted full access to the EU. To try to get around EU and British rules banning VAT refunds on aircraft used by private individuals, Hamilton’s advisers formed a VAT-registered leasing business on the Isle of Man.

If private usage of the jet is being disguised as business usage of the jet, this is clearly evading VAT – people are required to pay taxes on private consumption. It’s clear from the images Lewis Hamilton posted to Facebook that his jet was being used for private trips.

Carthy commented: “I raised specific examples of the Irish businesspeople revealed to have availed of this scheme, including Denis O’Brien, Jerry Kennelly and Ray Nolan. Top corporate law firm William Fry solicitors in Dublin referred these businessmen to Appleby to use the Isle of Man scheme to import their jets for one reason – that they would not have to pay the VAT on jets they used for business activities if they registered the aircraft through the Isle of Man.

“The British government inquiry into the Isle of Man VAT scheme has concluded but the results have not been made public; MEPs would like to see the results of this inquiry made public immediately. Earlier in November the Commission launched an infringement procedure against the British government over the Isle of Man VAT scheme.

“It seems from our discussions during the visit that no change in policy has resulted from the revelations. Officials seemed to be in denial, claiming that all of these cases were on jets used for private purposes only. We know from the Hamilton case that this is not true. This attitude was one of the most disappointing aspects of our trip, and I hope that the government will be forced to clamp down on this scheme as a result of international awareness of the issue and the infringement procedure.”

Shell companies and beneficial ownership

Carthy outlined some of the other key issues with the Isle of Man’s regulatory system.

“One of the key issues I raised was the ease with which shell companies can be set up in the Isle of Man. I specifically raised the issue of LinkedIn using a subsidiary in the Isle of Man as part of a Double Irish tax avoidance structure,” he said.

“It was positive to hear of the government’s plans for new legislation on economic substance, aimed at tackling letterbox companies, due to come into place by the beginning of 2019.  I appreciate the frank and open discussions that we held with island officials from across various departments during our visit about these issues, which are by no means limited to the Isle of Man. But as in other jurisdictions, the test of the economic substance requirement will be in the detail and in the effective enforcement of the rules, so this is something we will monitor with interest.

“But it was very concerning to hear that there are no plans for the Isle of Man to follow the EU, British and Overseas Territories commitment to making the existing beneficial ownership register public, and they will only do so if or when it becomes the international norm (ie, at OECD level).

“There is no beneficial ownership register for trusts and no plans to create one. These issues – the lack of public access to the beneficial ownership register for companies, and the lack of the beneficial ownership register for trusts – were two of the key limitations in the Isle of Man framework for tackling tax fraud and avoidance that were raised by MEPs on their visit.”

Non-charitable purpose trust

Another big issue MEPs were informed of during their visit was the use of a particular form of trust in the Isle of Man, which has been in use since 1996. The non-charitable purpose trust allows the total disguising of beneficial ownership as it doesn’t require the actual beneficiaries to be listed and technically speaking, no-one owns the assets in the trust. This instrument is going global and is becoming very popular as a means to disguise beneficial ownership – for example, the Bahamas Enterprise Entity and the Cayman Star Trust.

Transfer pricing

The Isle of Man government claims it is BEPS-compliant but does not have any transfer pricing legislation in place. Both government officials and parliamentary representatives refused to discuss this at all, simply saying they did not want to discuss it whenever MEPs asked questions about it.

The delegation of MEPs met with Isle of Man officials including Chief Minister Howard Quayle, Treasurer Alfred Cannan and head of Customs and Excise Sandra Skuszka, as well as representatives from law enforcement bodies, financial services regulators, the financial intelligence unit, local MPs, the law society and author Paul Beckett.