The future of Jersey’s zero basic rate of corporate income tax is in renewed doubt amid heated debate in the Channel Islands and critical comments by the European Union and the UK Treasury.
Following a recent review of the compliance of Jersey’s and the Isle of Man’s zero-10 regimes with the EU Code of Conduct on Corporate Taxation, the Treasury has announced that it expects both islands to abolish them.
“We are ready to offer support to Jersey and the Isle of Man in implementing the changes necessary,” says a spokesman.
“Although Guernsey operates a similar regime, it is not being assessed as Guernsey was deemed by the Code of Conduct group to have made a strong enough public commitment to move away from its current system.”
The zero-10 tax systems impose a standard corporation tax rate of 0 per cent, with certain types of company paying a 10 per cent rate. The regimes also require companies to withhold tax at a rate of 20 per cent from dividend distributions to locally-resident investors.
The zero-10 regimes were introduced by the Isle of Man in 2006, Guernsey in 2008 and Jersey in 2009 in response to a previous review of harmful tax practices by the EU Code of Conduct group. The zero-10 formula was the crown dependencies’ response to demands that they cease discriminating between ‘offshore’ and domestic companies.
Until then, offshore companies were exempted from corporate income tax in the islands, whereas domestic companies were liable to pay it. The islands got round the problem by reducing the basic tax rate to zero for both types of company.
At the time it was believed that this arrangement satisfied the EU’s strictures against harmful discriminatory tax practices, but there appears to have been a hardening of attitudes since the onset of the financial crisis and what is seen in offshore centres as a scapegoating of the industry for the failings of onshore financial institutions.
While Guernsey has accepted that it will have to reform its tax regime, Jersey remains adamant that the zero-10 approach does not contravene the code of conduct. It argues that the EU criticism applies to a single aspect of its tax code – rules on deemed distribution – rather than the regime as a whole.
Geoff Cook, chief executive of industry promotional body Jersey Finance, claims that the situation has been misunderstood. “The entire zero-10 regime was reviewed, however any implication that the entire regime was viewed as harmful is not correct,” he says.
“As already confirmed by our government, my understanding is that the interaction of deemed distribution is the element considered to be potentially harmful, was subject to a paper by the EU Commission, and is now the key area of focus for Jersey.”
Jersey argues that whatever the unfairness or otherwise of the deemed distribution arrangements, they form part of its personal taxation regime and therefore are irrelevant to the Code of Conduct on Business Taxation with which the island has undertaken to comply.
Cook adds that the UK Treasury’s comments “use some very unclear language, but in no way contradict my understanding of Jersey’s stance”.
The review of the tax measures in Jersey and the Isle of Man by the EU Code of Conduct Group (Business Taxation) concludes that “the measures give rise to harmful effects” without specifying any particular elements within the regimes that are regarded as harmful.
The Guernsey government has exhorted the two other crown dependencies to instead work together to find an alternative to the current regimes. Chief minister Lyndon Trott says it is important for the crown dependencies to develop broadly comparable systems.
At this week’s British-Irish Council meeting UK deputy prime minister Nick Clegg pledged to support “transparent” tax jurisdictions, adding: “We will continue to promote and defend the crown dependencies, but only within the context of wider moves within the European Union to make sure there is full transparency.”
