A recent decision by the Isle of Man to abolish corporation tax was praised by a senior UK economist, but warned that the initial drop in revenue would not be completely replaced by new tax generating business.

The chief economist of the Royal Bank of Scotland's was complementary about the Island's decision to reduce corporation tax to zero per cent, stating that the Isle of Man was much better placed than other offshore locations to cope with lower corporation tax revenue. He did issue a warning that, despite economic theories to the contrary, extra business activity would not fully replace the estimated £23 million per annum losses in tax revenue.

The economist stated, 'Obviously the Isle of Man is anticipating that as it takes tax down, it will bring some increase from other tax sources. I don't think it will fully compensate for tax revenue losses as I am not one of those who believe that if you lower tax you will double revenue. I do know that the Treasury Minister will keep a close handle on public expenditure, and that there will be a natural increase in some revenue streams.'

The Manx government is committed to implementing the zero tax regime by 2006 in line with European Union tax package initiatives. The Treasury aims to strengthen the Island's international standing by complying with European standards.

The current economic strategy document states: 'The tax strategy is designed to secure the future economic well-being of the Island's community by sharpening the competitive edge of companies, helping to restructure the economy and meeting changing international standards.'

The Bank of Scotland’s economist has further advice for the Isle of Man on how to combat the current trend in the UK for offshoring. Since many businesses are relocating their manufacturing or service-based activities to cheaper countries such as India and China, he advocated that companies being undercut by offshoring competitors should differentiate themselves through value and specialism rather than cost.

'The lesson for the Island and the UK is to try to compete on value rather than the cost chain. It adds to the challenges but, whether it be service or manufacturing, it has to work with these low-cost regions and to keep the value- added element,’ he added.

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