Courtesy Sea Containers

Seacat, linking the Isle to England, is owned by American Sea Containers.

A place which – in addition to low taxes and a business-friendly government – sports only 200 registered lawyers should be paradise for every American investor. Yet very few Americans can be found doing business on the Isle of Man, a well-known international financial center, and the reason is Uncle Sam.

The United States is one of the very few countries whose tax code barely recognizes the notion of an expatriate, and taxes the worldwide income of all its citizens wherever they reside, complains Steven Beevers, who is in charge of developing the North American market for the Manx Treasury Ministry. That deprives the Isle of a significant competitive advantage, its very low income and corporate tax rates. The world-renown financial center does not call itself home to a single American bank or insurance company, and regulations prohibit financial institutions from even advertising in the United States. “The hoops a company has to go through keeps most Manx companies effectively out,” says Beevers.

Of course, the Isle can ship goods into the European Union without duties, while on the other hand not having to comply with all the tedious EU regulations. But manufacturing on an island only works for products with very low transportation cost and high added value.

One firm has specialized in providing Manx financial services to Americans. Skyefid, run by Charles Cain, goes to great length in analyzing U.S. legislation. “Many banks say ‘this product is not available in the United States,’ but I ask ‘why not,’” says Cain, who also teaches international tax law at St. Thomas University in Miami.

Cain takes the view that a company manager is under a legal obligation to get the best deal for his company. Taxes are a cost, and a director who does not try to reduce this cost would be failing in his responsibility to his shareholders. “That is an issue you will not address by going backwards and by building moats around your economy,” he says. “We need to look at the issue of taxation in an entirely new way.” The U.S. government will have to come around and accept that taxing its non-resident citizens is wrong in a globalizing world. Anyway, in the long run, there is nothing the IRS can do. “Water will find its own level.”

It would be a sign of progress if the Manx and the U.S. government talked more, and more productively, Cain thinks. “It would be good to have a permanent IRS representative here,” he says, “or at least someone at the Embassy in London with an Isle of Man portfolio.”

Treasury Minister Allan Bell hopes things will be better in the future. “We are always looking for new markets, and the U.S. market is attractive to us, obviously,” he says. His ministry is working on negotiating an exchange of information agreement and hopes for a double-taxation treaty with Washington. While some businesses, especially banks and trust providers, are skittish about sending financial data to Washington, Income Tax Assessor Ian Kelly does not fear more transparency. If attracting legitimate business requires such exchange, the government may do it, he says.

On the other hand, Washington has refused to exchange information with other countries in the past, and many here feel the United States just wants to impose its own rules. “The U.S. regulations are protectionist, that is all there is to it,” says Larry Keenan, an attorney.

There has been enough business outside the United States, says Anthony Long of Capital International. “There was no need to wake the sleeping giant. We are not authorized to market into the United States, but if an American walked in here we would certainly take him on – but we would advise him that he is responsible for his taxes himself.”