Guernsey Working Group Puts Case For Corporate Tax Reform

by Jason Gorringe, Tax-News.com, London

24 March 2006

An Independent Working Group established by the States of Guernsey in November 2005 has delivered the first of a series of papers that puts the case for adopting a 'zero/ten' corporate tax rate for Guernsey and Alderney.

The Working Group, which comprises John Roper (Chairman and expert on the Guernsey financial services sector) and Rosemary Radcliffe (UK economist and off-island expert) with support from the Policy and Research Unit and the Treasury and Resources Department argues that Guernsey’s financial services industry is pivotal to the future of the Bailiwick’s economy, and that the zero/ten regime is essential to maintain the industry's international competitiveness.

"The Bailiwick has no option but to respond to international pressure and reform its corporate tax regime," the paper asserts.

Under the tax reform proposals, Guernsey's businesses and corporate entities will be subject to income tax at 0% from the 2008 tax year. However, businesses regulated by the Guernsey FSC will be charged tax at 10%.

While the paper conceded that there would be a "significant negative impact on public revenues" after the introduction of the new tax system, (the so-called ‘Black Hole’ problem), it argues that this loss is likely to be "significantly less" than the decline in the financial services industry that would ensue if no changes are made.

According to the Working Group, in 2003, financial services in Guernsey accounted for around 36% of GDP and almost one quarter of employment. What's more, over two thirds of financial services companies outsource such functions as ICT maintenance, security, human resources and payroll administration to local firms, and in 2001 they spent around GBP92m in this way.

The group also noted that the financial services industry is Guernsey’s major exporter, accounting for an estimated 60% to 70% of export earnings.

Furthermore, the group points out that changes in policy on the part of the European Union (EU) with regard to unfair tax competition provide "a key driver for all jurisdictions having an international finance centre to pursue tax reform".

EU rules on harmful tax practices (the Code of Conduct on Business Taxation) seek to eliminate tax structures that discriminate between residents and non-residents. This pressure on the Bailiwick has also impacted, to varying degrees, on several other small island economies such as Jersey and the Isle of Man.

In response to these international pressures, these competitor jurisdictions have announced changes to their tax regimes in order to comply and retain market share; these have taken the form of variants of zero/ten regimes.

In the light of these developments, the Working Group argued that: "We consider that...Guernsey and Alderney have no option but to respond and make changes to the tax structure, particularly in view of the fact that many financial service companies are highly mobile and will seek out competitive advantage to gain greater profit margins, by relocation if necessary."

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