Guernsey Treasury Proposes 'Flat Tax' Charge

by Robert Lee, Tax-News.com, London

13 January 2009

Guernsey’s Treasury and Resources Department is proposing to lower the ‘tax cap’ for wealthy residents and to introduce a new ‘flat tax’ charge for residents who do not spend the majority of their time on the island.

The Department’s proposals will be discussed by the States at the end of January. They could prove attractive to high net worth individuals seeking a low-tax lifestyle and could eventually benefit the Exchequer.

The proposals follow a consultation exercise carried out last autumn and are presented to the States as part of a wide-ranging package of amendments to the Income Tax Laws.

The Department consulted last year on the tax cap, which was introduced at the same time as the zero-10 tax changes were implemented.

The overwhelming response was that the present cap, GBP250,000 on income arising outside of Guernsey (and Guernsey bank interest) was uncompetitive in a global context and a disincentive for high net worth individuals to stay with the island. The industry was aware that other jurisdictions were actively targeting Guernsey residents encouraging them to relocate for a lower tax cap.

"If we did nothing, we could lose significant taxes in this way," said Deputy Parkinson.

The new proposals would see a reduced liability cap of GBP100,000 (income tax paid) for an individual or a couple on non-Guernsey income, increased to GBP200,000 if an election is made for the cap to apply to worldwide income (including Guernsey source income).

This would mean that, for the first time, some current Guernsey residents could fall into the tax cap limit and see a reduction in their tax bill.

“But the majority view from our consultation was that unless the level of the existing cap, and the types of income it applies to, are brought into line with other jurisdictions, our tax cap won’t be any incentive at all and some current residents may leave,” said Deputy Parkinson. “The proposals may mean that we lose some tax revenue in the short term, but doing nothing could make things a lot worse. If adopted by the States, these proposals would make Guernsey more attractive to wealthy migrants.”

Guernsey wants to be able, by regulation, to set a ‘flat tax charge’ for individuals resident but not solely or principally resident on the island (i.e., people who spend most of the year off the island) who elect to pay the charge. At present such people pay tax only on Guernsey source income and any overseas income they bring to the island.

The Department issued a consultation document on this matter in September 2008. The outcome was general support for a minimum level of tax payable, given concerns that some people could use the current system in order to pay nothing, or very little.

Concerns were raised over the position of individuals who may be resident, but not solely or principally resident, who were here mainly for employment. It has been agreed that they should be protected.

It is proposed that the minimum level of tax liability will be initially GBP25,000. People would have to elect to pay the GBP25,000 charge and, if they do so, they have to make a declaration relating to their Guernsey source income and satisfy certain requirements. If they could not qualify for the GBP25,000 charge, they would be liable to tax on their worldwide income, or they would need to satisfy the Administrator that they were only in Guernsey to undertake employment, in which case the existing rules would continue to apply. The rules used to determine residency will not change.

“We hope that the simplicity and clarity in the new system we are proposing will prove acceptable to all,” said Deputy Parkinson. “It will reduce the compliance burden for taxpayers making the election, as well as at Income Tax, and could generate more interest in the open market.”

“The zero-10 regime requires quarterly returns of distribution events, but these reporting requirements can be onerous, particularly for small firms.”

“Some companies have asked if they can continue to pay tax as they did prior to 2008 in lieu of forms and taxes collected on distributions, but this is not possible without endangering the position of the Guernsey zero-10 regime,” he explained.

To relieve the administrative burden, the Department is proposing a law change to allow companies to elect to distribute at least 65% of trading profits each year. They will no longer have to report deemed distributions, just deduct and account for Guernsey tax on distributions actually made. Some anti-avoidance measures are included as part of the proposals.

The Department sees benefits in reduced levels of compliance and cost for companies making the election, reduced levels of administration at Income Tax, and the likelihood of increased cash flow to the States.

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