Jersey Considers Tax Future

by Amanda Banks, Tax-News.com, London

25 June 2010

The Jersey government has released its long-awaited consultation document, prepared in cooperation with neighbouring Guernsey, as part of the EU Code of Conduct Business Taxation Group's review of its 0/10% corporate tax regime.

Announcing the release of the consultation, Jersey Treasury Minister, Phillip Ozouf, said:

“This consultation document sets out the background to, and reasons behind, this review of business taxation, as well as the principles that should determine Jersey’s corporate tax regime."

“It focuses on technical aspects of corporate tax and sets out possible alternative structures that could be considered. I would like to know what islanders think the impact of any changes would be on Jersey as a place in which to do business.”

“International views on tax are changing and Jersey needs to be ready to respond. But it will only do so having properly considered the impact on the Island’s economy and only then if it is in the Island’s best interest."

“When zero ten was introduced the island lost a significant amount of corporate tax revenue. This review will investigate whether an alternative regime can be identified which taxes more companies with business activities based in Jersey, to replace some of that revenue."

“There is no presumption that any specific one of the alternatives set out in the consultation document will be adopted and this is an open consultative process.”

In the consultation document, Jersey has underlined seven objectives for the new Corporate Income Tax regime, that it must be: compliant with international standards; competitive; tax neutral; provide an appropriate revenue contribution; sustainable; simple; and provide businesses with certainty.

As part of an investigation by experts in international tax law, five proposed structures for Jersey's forthcoming tax regime have been offered:

• Flat rate of corporate tax: The corporate income tax rates currently imposed would be replaced with a positive standard rate of tax applicable to all companies, at a rate of no lower than 10%, imposed on the worldwide income of all Jersey resident companies, and on the local source income of Jersey branches of foreign companies. This regime is similar to regimes operated in numerous countries.
• Transparent treatment for tax purposes: A tax transparent company would not be subject to Jersey corporate income tax but effectively treated the same as a limited partnership for tax purposes. This would mean that a company’s income would be assessable upon each beneficial owner in proportion to their holding in the company. The tax treatment of the company’s income would then be determined by reference to the residence of its beneficial owners. Where the beneficial owner is not resident in Jersey, it would be subject to Jersey tax only on certain Jersey source income.
• A territorial system of tax: Companies would generally only be subject to tax on income that has its source in Jersey. Non-Jersey source profits would not be subject to Jersey corporate tax. Currently, Jersey operates a residence basis of taxation, whereby the liability of a company to Jersey tax is defined by reference to the place of residence of that company. A Jersey resident company is subject to Jersey tax on its worldwide income while a non-resident company is only taxable on income arising in the Island. In a territorial system, the concept of residence becomes largely irrelevant. A company’s tax liability is calculated by reference to the source of its income, with only profits sourced from that jurisdiction being subject to tax in that jurisdiction.
• A repayable tax credit system: Jersey resident companies would be subject to tax on their worldwide profits at the standard rate, with a credit for overseas tax suffered. On distribution, shareholders can reclaim a proportion of the tax suffered, leading to a lower effective rate of tax overall. This regime is operated in Malta, where resident companies are subject to tax at the standard rate of corporate income tax of 35% on the majority of their profits and companies are required to divide their income into five separate accounts. The Maltese tax system in general is more complex than that which could be operated in Jersey.
• Abolition of corporate tax: Lastly, Jersey has proposed abolishing corporate tax entirely. Its consultation document notes that a number of jurisdictions, including the Overseas Territories of the UK, impose no direct taxes. Under such a system, Jersey resident companies would no longer be subject to income tax on their profits. In order to recover the tax revenues lost by abolishing corporate income tax, it would be necessary to introduce other taxes and/or charges such as those which exist in other jurisdictions which have no or zero corporate income tax, such as payroll taxes, business licence fees, bank transaction taxes, and commercial property taxes.

The government's consultation is open for comment until August 30, 2010.

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