Guernsey Not Rushing Zero-Ten Decision

by Jason Gorringe, Tax-News.com, London

06 July 2011

The Guernsey government has underscored that no decision has yet been made on the future of the territory's corporate tax regime, following agreement by the EU Economic and Financial Affairs Council (Ecofin) that aspects of the zero-ten regimes in Jersey and the Isle of Man contain 'harmful' elements.

In a statement on the corporate tax review to the States, Chief Minister Lyndon Trott said that discussions initiated with industry stakeholders on the format of a future tax regime aim to achieve consensus on an agreed way forward should zero-ten as a whole be deemed 'harmful'. By undertaking this approach, Guernsey decision-makers will be able to implement a swift corrective response, to ensure that the island maintains a regime that provides certainty for investors and remains internationally competitive, Trott stated.

The Chief Minister continued:

"Guernsey has always maintained that it will not undermine its economy, through either the timing or outcome of the review process, and thus cannot and will not determine its preferred direction of travel until the final outcome of the Code Group review is known."

"Formal and informal consultation, and technical and economic assessment, has been ongoing since October 2009. That there has been no definitive conclusion of our review process to date is as a result of the protracted nature of the Code Group review of the Jersey and the Isle of Man zero/10 regimes."

"It is now known that the zero-ten regimes in Jersey and the Isle of Man have been judged harmful by the Code Group. The February 2011 judgment of the Code Group was endorsed by Ecofin in June 2011."

"What is also well known is that, in its assessment, the Code Group focused on the discriminatory aspects of the treatment of shareholders of the regimes (their deemed distribution and attribution regimes), but that does not preclude further issues. Both islands have proposed ‘rollback’ provisions, the Code Group [deferred] any assessment of [this decision] until Ecofin was given the opportunity to formally welcome the harmful judgment of the Code Group, as it has now done."

"Until proposed ‘rollback’ provisions of Jersey and the Isle of Man have been formally assessed by the Code Group, the final judgement on zero/10 remains an unknown."

"The UK has provided an opinion that, in principle and without the use of any other anti-avoidance measures that replicate the harmful effects (ie. the replacement of the deemed distribution and attribution regimes), a zero/10 regime on its own could well be Code-compliant. But this comes with the caveat that it is the view of other key Member States that will be key in the formal assessment of ‘rollback’."

"The UK has also separately stated that it would support the introduction of a territorial regime in the Crown Dependencies, as it has for Gibraltar: whose new territorial regime will be informally assessed by the Code Group in September."

While the Code Group launched reviews in October 2009 of the business tax regimes in Jersey and the Isle of Man, Guernsey agreed with the European Union that it would conduct its own review and implement measures necessary to bring its tax regime into compliance with international standards. According to the government, feedback on a consultation undertaken in the summer of 2010 was clear that a territorial regime could form the basis of a competitive alternative to a zero-ten regime, with exemptions retained for some items.

Importantly, that feedback, the government said, also stated that it was paramount to ensure any revised corporate tax regime was internationally-acceptable and sustainable economically and fiscally in the long-run and to ensure that any changes made to the regime would ‘future-proof’ Guernsey against further pressure and subsequent rounds of changes. This, the government said, would provide clarity and stability going forward and prevent any undermining in the confidence of business and investors in Guernsey in the long-term.

Trott continued:

"The five key objectives of Guernsey’s corporate tax review have remained unchanged since it was initiated 18 months ago: that is any regime for Guernsey must be competitive; internationally acceptable; sustain the economy; be simple and straightforward; and give rise to reciprocal benefits. These have remained constant despite the continuing uncertainty surrounding the Code Group review process of the last 18 months."

"Clearly the first three of the objectives of our review (competitive, internationally acceptable and sustain our economy) are key and are to a certain extent symbiotic. A competitive regime sustains the economy; an internationally acceptable regime sustains the economy. Sustaining our economy means ensuring that a regime provides a competitive platform for business but also generates sufficient taxation revenues for government. These are the factors to be taken into consideration when evaluating the best course of action for Guernsey. What also needs to be taken into consideration is the preference of industry for the regimes of the Channel Islands to be operated on the same basis, be it zero/10 or territorial."

He concluded:

"Events over the course of the next few months will provide a greater degree of clarity of the views of the Code Group on both the zero/10 and the Gibraltar territorial regime for that evaluation to be properly undertaken. Until that clarity is obtained, any decision and accompanying publication of any Green Paper would be premature."

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