Guernsey Publishes Tax Consultation Feedback

by Amanda Banks, Tax-News.com, London

09 November 2010

The Guernsey government has published preliminary feedback received from the consultation with the island's stakeholders on the proposed overhaul of the island's Corporate Tax regime.

There were 50 formal submissions to the consultation: 12 were responses of industry associations, nine were from individuals (including two States Deputies) and the remaining 29 responses were individual institutional responses (banks, fiduciaries and professional services firms).

The States of Guernsey resolved in October 2009 to conduct a review of its corporate tax regime. It was then publicly confirmed that, given Guernsey’s commitment to the review process with the presumption of the adoption of a standard rate of 10%, the EU Code of Conduct Group on Business Taxation (CCG) would not be conducting a review of Guernsey’s current 'zero-ten' regime.

As is the case with reviews ongoing in neighbouring Jersey, the consultations asked interest parties to consider which of five proposals would best establish a sustainable tax regime for Guernsey.

The five options highlighted include the adoption of a territorial system of taxation; transparent treatment of companies for tax purposes; a residence-based system with repayable tax credits; a flat rate/residence basis tax; and the abolition of corporate tax altogether, with revenues recouped through other means such as payroll taxes, business licence fees or a greater emphasis on indirect taxes.

Detailing responses received, the Guernsey government said that:

“There was overwhelming support for the suggested principles to underpin Guernsey's corporate tax regime as set out in the consultation document. Particularly the view that income should, as far as is practical, be taxed only once and also that the adopted tax regime should not act as a disincentive to, nor distort, economic activity. The view that taxation on savings and investment, by raising the marginal cost of capital, are generally distortionary and thus reduce investment and long run economic growth and that financial products should therefore be tax neutral to encourage investment and capital market efficiency and liquidity, was also overwhelmingly endorsed."

“A clear majority of those expressing an opinion suggested that a 'flat rate/residence' regime does not safeguard tax neutrality; therefore without significant exemption such a regime is unlikely to maintain Guernsey's internationally competitive position.”

There was a general consensus that the abolition of corporation tax was unlikely to be the basis of an internationally acceptable regime of taxation for the future.

Respondents however recommended that a tax system, as in place in Malta, whereby tax credits are offered to companies to reduce liability would be “too complex to administer, and unlikely to be internationally acceptable in the long term.”

Other respondents suggested that the review should also include an examination of other taxes, in particular the Tax on Real Property, with an emphasis on removing regressive elements of the tax regime. There was also a sizeable minority of locally owned businesses that expressed their displeasure of having to face an effective income tax liability of 20% on their profits whilst actively trading companies with a non-Guernsey parent (eg UK retailers) were subject to a rate of zero percent.

Of particular note was the opinion expressed by some respondents that Guernsey, as part of discussions with the EU, should push for reciprocal benefits if it is deemed that a change to the island's corporate tax regime is required. On this point, respondents suggested that as a result of its current proven commitment to internationally agreed Organization for Economic Cooperation and Development standards, Guernsey should be automatically removed from any so called “blacklists” held by any individual EU member states and also be included on the white lists of any EU member states. Other specific suggestions included:

• Full Double Tax Agreements with other EU member states (France, Germany in particular); and with Switzerland, the USA and Australia;
• Access to EU Interest & Royalties Directive;
• Access to EU Parent-Subsidiary Directive; and,
• General market access to EU markets and recognition of the Guernsey regulatory regime.

This review process has not been completed and is expected to continue at the Code of Conduct Group's next scheduled meeting of November 19.

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