Rewards and Fairies

It may be an offshore tax haven, a center for high finance and home to more than 60 banks, but the Isle of Man remains a down-to-earth place. Exile millionaires live quietly amid the 72,000 Manx residents, and the sense of affluence that pervades its sister tax havens, like the more southerly and glamorous Channel Islands, is less evident in this wind-battered scrap of land lying roughly equidistant from England, Ireland, Scotland and Wales. "We have a northern, gritty approach to things here," says John Cashen, chief financial officer to the Manx Treasury. "We have to work harder for every pound."

That independent spirit has kept the Isle of Man out of the European Union. Though it's a Crown dependency reliant on Britain for defense and foreign relations, it runs its own, near-autonomous 1,000-year-old system of government. (To the Manx, Britain is not the mainland; the island is the mainland, and Britain is obliquely referred to as "across," as in "What's the weather like across?") True, this separateness has encouraged only slow social change: birching, or beating with a birch rod, for crimes of violence against a person was still going strong in the 1970s, homosexuality was not legalized until 1992 and abortion has been permitted for mothers at risk only since 1995. Crime levels belong to '50s Britain, and even a minor mugging will make the front page of the local weekly newspapers.

So it's hardly surprising that the Isle of Man works hard to demonstrate that its offshore business is clean and tightly regulated. It has to: financial services — banking, insurance and asset management — account for 42% of the island's income. Its former big earner, as a seaside resort for the British, lost out decades ago to cheap travel and the Costa del Sol, and though there is farming, fishing and some light industry, it is the island's status as a tax haven that powers the economy. Being an offshore center these days means living under constant scrutiny from industrialized nations anxious about money laundering and their tax revenues. In a globalized, Internet-connected world they worry that the flight of investment and savings to lower tax centers will accelerate. In recent years, the European Union, the Group of Seven richest nations, the International Monetary Fund, the U.S. Federal Bureau of Investigation, the Organization for Economic Co-operation and Development and the British government have all looked into tax havens and tax regulation.

The investigation that has ruffled the Isle of Man the most just recently is the OECD's "harmful tax competition" review, which demands more transparency, greater exchange of tax information and an end to ring-fencing, under which nonresidents enjoy preferential tax treatment. In June it produced a provisional black list of 35 jurisdictions that included Nauru, Barbados and Liberia — and the Isle of Man. This triggered much indignant huffing and puffing from the island, which maintained it had no reason to be on the list and that other inquiries had put it in the top division for good practices. Says Gregory Jones, tax partner at accountants KPMG: "We genuinely believed we weren't the sort of jurisdiction at which the OECD was aiming its initiative."

Concerned about possible OECD sanctions and mindful of how being on the list could hurt business, the Manx government offered some concessions on issues like transparency. To general relief, the island has just heard it will not appear on a new blacklist due in July. Just the same, says Cashen smoothly, "Our commitment is qualified. We are prepared to change certain of our regimes provided there is an international level playing field, but we're not going to proceed unless others do." Those others, he says, must include OECD members, particularly Switzerland and Luxembourg.

There is a feeling that double standards exist and that the OECD allows more leeway to its own members than to those outside. But the Isle of Man has made a pre-emptive strike of its own. It announced that taxes in general would come down, with the corporate levy slashed to 10% over the next few years and the top income tax rate falling from last year's 20% to 15%. Universally low taxes should pre-empt claims of ring-fencing.

The Isle of Man is a quirky sort of place with its tailless cats and Celtic traditions coexisting amiably with its sophisticated financial life and cutting-edge technology. Next month the island will launch Europe's first third-generation mobile phone network, allowing users to surf the Internet and download video clips while on the move. Yet the Fairy Bridge, on the highway south of Douglas, the capital, didn't get its name for nothing. Here the locals lift a hand ever so slightly and mutter "Hello, little people," to propitiate the fairies underneath. Transparency, lower tax rates and G3 phones may help, but when it comes to preserving their hard-won prosperity, the Manx aren't taking any chances.