Taxation In the Falkland Islands

The Falkland Islands are a dependency of the United Kingdom, located about 300 kilometres off the coast of Argentina. Argentina claims the islands as part of its territory and invaded the islands in 1982. The population mostly has its origins in the UK and appears to wish for the islands to remain a dependency of the UK, as evidenced by a referendum in 2013.

Clearly, the Falkland Islands are not part of Africa. But we thought our readers might be interested in hearing a bit about their tax system anyway, as this is not something that gets much coverage.

Introduction to the Falkland Islands

The Falkland Islands have a very small population, of about 3 700, including those involved with the UK military base. The main language spoken there is English. The capital is Stanley, and this town also accounts for most of the population. The climate is mild, but somewhat windy.

The economy is largely based on primary production, with fishing accounting for more than 50% of GDP. Traditionally, sheep were the most important aspect of farming. Some companies have been exploring the seas around the islands for hydrocarbons, and it seems likely that oil will be produced in the reasonably near future. The islands can be described as affluent, as the GDP per capita is very high. The islands claim an exclusive economic zone of 200 nautical miles.

The islands have an international airport, which is served by flights from the UK and Chile, at low frequencies. So, not very accessible, but probably slightly more so than St Helena, which we wrote about earlier in the year.

The currency is the Falkland Islands Pound, which is linked to the UK pound, and has the same value. There is no exchange control system. The UK pound can be spent in the Falkland Islands, but the Falkland Islands pound is not generally accepted in the UK.

Tax System

The income tax system owes part of its design to the UK, but it is different to the UK system. One significant difference is that all tax returns are examined manually, and this generates frequent questions from the tax authority, the Falkland Islands Government Taxation Office. But the really vital point is that the Falkland Islands are not part of the UK and have their own tax laws.

Before we return to income tax in more detail, some useful differences to the UK are –

The Falkland Islands does not have a VAT, nor any other form of sales tax. There are duties on tobacco and alcohol, and some customs duties.

The Falkland Islands does not generally tax capital gains (except for gains from disposal of fishing and oil licences).

Withholding tax is levied at 10% on interest paid to (or credited to) a company that does not carry on business in the Falkland Islands. Certain transactions involving the hydrocarbon exploration and production industry can be subject to withholding tax.

Stamp duty is levied on property transactions, and on some legal documents.

Finally, the Falkland Islands does not impose any inheritance or wealth tax.

Caveat – this article is a very high-level summary of taxation in the Falkland Islands and should not be taken as advice.

Income tax for Individuals

Any individual who spends more than 183 days per year in the Falkland Islands is regarded as resident there for tax purposes. Permanent residents of the Falkland Islands who spend less than 183 days in the territory in a year might also be regarded as resident. Non-residents who earn income in the Falkland Islands are taxed on their Falkland Islands income. A resident is taxable on their worldwide income.

Any individual who is resident for a tax year must file an income tax return, by 31 July. The tax year is the same as the calendar year, ending on 31 December.

The personal allowance (tax free amount) is £ 16 860 per year, but this is pro-rated for non-residents, depending on how long they spend in the Falkland Islands in the year. It is good to see that this was increased recently, unlike the position in the UK.

The next tax rate is 21%, on the next £ 18 000 of income. Above that, any income is taxed at 26%. This maximum rate is considerably lower than the UK and many other countries. As an illustration, an individual who earned £ 100 000 would pay income tax of £ 20 716. The same individual would pay £ 27 472 in the UK, or £ 17 051 in the Isle of Man.

Most benefits in kind are taxable.

Employers are required to deduct income tax from remuneration, under the Payment on Account of Tax (POAT) system. This is simpler than the PAYE system used in many countries, which is why all taxpayers must file a tax return. Employers also collect Retirement Pension Contributions from their employees’ remuneration.

Interest earned on deposits in interest-bearing accounts with a bank in the Falkland Islands (such as Standard Chartered Bank) is exempt from tax.

Income earned by a person employed on a fishing vessel, who is not a resident of the Falkland Islands, is exempt from income tax.

An individual who receives a dividend from a Falkland Islands company is taxable on the “grossed up” amount of that dividend, which is the amount received divided by 0.79. The individual is then granted a tax credit, to set against the income tax on the dividend, equal to the difference between the amount received and the grossed-up amount. So, if the company was taxable at the 21% rate, and the individual is also taxable at the 21% rate, there will not be any additional income tax for the individual to pay. If the tax credit is larger than the recipient’s tax liability, the surplus can be claimed as a cash repayment, carried forward for future years, or carried back to set off against the previous year’s tax liability.

Income Tax for Companies

Income tax on companies is called Corporation Tax. The rate is 26%, but the first £500 000 per year of profits are taxed at the reduced rate of 21%. However, this threshold is reduced depending on the number of worldwide associated companies. So, if the Falkland Islands company is part of a group with 10 member companies, the threshold will be reduced to £50 000.

A company is resident in the Falkland Islands if it is incorporated there, or if its place of central management and control is located there. A resident company is taxed on its worldwide profit.

Special rules and rates apply to companies operating in the petroleum extraction industry. The corporation tax rate for oil production companies is 26%, with no reduced rate band. This applies to the exploitation anywhere in the “designated area,” which is the area of the sea in which the Falkland Islands asserts a right to exploit hydrocarbons. There is also a rental payment, and a royalty of 9% on the market value of production. There are some circumstances in which the royalty rate can be reduced, including during a period of extraordinarily low oil prices if the full 9% royalty could lead to a field being abandoned. This is a useful measure which helps to address one of the major problems that a royalty system can cause. Capital gains on transfers of licences are taxable. The licence holder can be responsible for taxes payable by their contractors, if they are in default.

The Falkland Islands applies transfer pricing rules, so that transactions with connected parties should be at an arm’s length price.

Losses can be used against other income in the same year, carried back to the previous tax year, or carried forward without a time limit. For a company which is part of a group (of other Falkland Islands companies), there is a group relief system, so that losses can be transferred to another group company. This aspect is much more generous than seen in African company income tax systems!

Expenses are deductible, broadly, if they were incurred wholly and exclusively for the purposes of the business, and were not of a capital nature. One interesting restriction is that remuneration expenses can only be deducted if they are paid within nine months of the end of the accounting period. There are some restrictions on deductions for interest payments to related companies.

There is no longer any withholding tax on dividends. Dividends from a Falkland Islands company which are earned by another Falkland Islands company are not subject to corporation tax.

Summary

The Falkland Islands cannot be described as a tax haven, but the income tax rate is lower than many other jurisdictions. There is no VAT, and no estate duty. However, bear in mind that it is a small territory in terms of population, is not very accessible, and the climate may not be to everybody’s taste.

Get in touch if you’d like to chat further or have more specific questions about this topic.