Informed sources tell me that the word in St Helier this morning is that Jersey is looking for a territorial tax solution to its failure of the EU Code of Conduct.
I’m sorry to inform them that this won’t work. As I wrote recently:
Any new tax system in these islands must remove all differentials between the local population and those who seek to use these locations for tax abuse. A consistent tax rate must now be applied to business transactions, and that consistency must overflow into any personal tax system. In other words, the tax base for business and personal transactions must be similar. It is, I think, very obvious that the argument that they can be different has now been rejected by the Code of Conduct group. The decisions that have been reached would not have been possible if that were not the case.
There are some immediate advantages in this for the islands. Some glaring anomalies, such as UK High Street stores trading being untaxed in St Helier when their locally owned competition is taxed must go. But since there is no prospect, whatsoever, that Jersey could balance its budget without imposing a positive local rate of tax on companies this does imply that a consistent positive rate of tax will be applied to all profits arising in Jersey from now on.
This means, at the very least, that a territorial basis for taxation will be adopted in the Crown Dependencies, with all income arising in these places being subject to local taxation. But, remember, that these places do currently apply a residence basis of taxation to their warm blooded populations. To be consistent, and avoid the risk of abuse falling foul of the Code, a territorial basis might also be necessary with regard to the human population of these islands as well, especially if the corporate tax rate is lower than the income tax rate. That would have massive impact: the local population could easily ship income out of the local tax base if this were introduced. I think this may be a major constraint on the potential for a territorial basis for tax, at least with differential tax rates.
And there are, in any event, other risks. Take for example the recent trend for UK quoted companies to be incorporated in Jersey but be tax resident in a location such as Ireland or Switzerland. The assumption here was that the Jersey company would avoid all tax: that is not so obviously the case if a territorial system were to apply. The immediate of certainty which was the underpinning of these arrangements will have been blown apart.
And then there is something more significant still: if it were possible under a territorial taxation arrangements for a Crown Dependency company to still enjoy a 0% tax rate, which would be a significantly different rate from the standard rate of tax in the Crown Dependencies then the preamble test inherent in the Code of Conduct, which suggests that if there are major differential tax rates available to non-resident companies the existence of abuse does prima facie exist, will continue to be a problem, indicating that the Code may not be complied with if a territorial basis for tax is created with this deliberate intention of offering 0% tax to some companies.
I think there is a real chance this will be the case, and this shatters the complacent assumption in the Crown Dependencies that territorial tax will solve all their problems because none of the tax abuse they promote supposedly takes place on the islands — all of it, in the mysterious make believe world of the secrecy jurisdiction, supposedly taking place “elsewhere” (a concept I explain here).
Finally, territorial tax will, in any event, increase pressure on the Crown Dependencies to exchange information with other tax authorities. The simple fact is that if a company incorporated in one these places claims to have no trade arising in that place then its trade must be somewhere else. The Crown Dependencies would in that case be beholden to determine where that other place is and, I think, exchange information with it. If they did not then the opportunities for abuse would be enormous, and they would be deliberately facilitating it.
None of this puts the Crown Dependencies in a pretty situation. But I am not going to get upset about that. This is a problem of their own making, and one that they could have avoided if only they had been willing to listen.
Of course Jersey can ignore my opinion on this issue. It has done so before. The trouble is I’ve always been right and they’ve always been wrong — as have others who have advised them, such as John Whiting then of PricewaterhouseCoopers and now of the Office of Tax Simplification who told Jersey at a cost of £50,000 in 2004:
The 0/10 company tax proposals are sensible and are acceptable to the relevant authorities.
How wrong can you be?
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I note that you say that “the local population could easily ship income out of the local tax base if this were introduced” – what makes you think that the residents of the Islands would take such a view on tax compliance?
I would imagine they will want to pay the right amount of tax in the right place, that is where there economic activity is conducted.
@John
Now you may not have noticed this, but there are a lot of tax avoiders employed in Jersey…….
Is that really correct? Surely most of the Jersey workforce are not actually tax avoiders but are (a) either local or (b) have migrated to the island for work and not tax avoidance.
I would have thought most tax avoiders in Jersey are not bothered about working!
Richard
I’m struggling to see why a territorial tax system wouldn’t equally apply to the “warm blooded population” as you call it. I agree with you (there’s a first!) that it would seem inappropriate to have a territorial tax system for corporates and not for individuals.
Particularly with today’s very low deposit interest rates, the amount of tax leakage if some residents shifted their investments away from the island would be minimal. What would have more impact would be loss of Jersey tax on dividend income from holdings in non-local overseas trading companies, and situations where Jersey residents might be genuinely employed by overseas consultancy companies. But it is inevitable that some individuals would benefit and
others would lose out in any quantum shift of tax system.
It is also inevitable that any reduction in personal income tax receipts from adopting a territorial system could and would be recouped by raising the rate of GST. There remains huge headroom to do that, although personally I would combine a whole package with an increase in the income tax threshold for low earners to compensate them for the regressive aspect of. GST. All achievable as an overall package.
I think you miss a vital point about a territorial tax system. The same identical tax treatment would apply to all companies, wherever incorporated, if they derive trading profits in Jersey. This makes no distinction between companies owned by residents and companies owned by non-residents, which is precisely one of the key issues with the existing and previous tax system. A territorial tax system, treating all companies the same, deals with that issue.
You also talk (confusingly) about companies having a “place of trade” in Guernsey but claiming non-residence yet not stating where they are actually resident. The rules regarding residency of a Jersey company are different than they are in Guernsey, for example, but you overlook the fact that probably 95% of all companies administered in Jersey are not “trading” at all – they are passive investment companies, resident in Jersey and not taxable because they are owned by non-residents and have no Jersey-source income other than bank interest which is currently exempt. I strongly suspect that local bank interest would no longer be exempt under a territorial tax system, unless there was a specific carve-out, but in reality such investment companies will simply bank elsewhere and ensure that they have no Jersey-source income. That’s not a huge issue although it would adversely hit the bank deposit sector unless Jersey picked up deposit business from other territorial jurisdictions to compensate.
For the above reasons, one could probably make a case for Jersey having a 20% corporate (territorial) tax system and a 20% (territorial) personal income tax system, with a 10% GST. That could well be an ideal scenario although I suspect that there would be pressure to maintain a 10% tax rate for banks. If that’s not possible then a 12.5% or 15% rate would be equally feasible – in many ways it’s far less relevant what the rate is under a territorial system, which makes it perfect. GST will always be the safety valve, but with only a 3% rate now, soon to be 5%, compared with 20% -plus elsewhere, it’s a pretty solid safety valve.
Exchange iotax information, enhanced local tax collection
Sorry I pressed “send” too soon.
My last sentence was meant to say:
“Exchange of tax information and enhanced local tax collection provisions are unavoidable consequences of a territorial tax system”.