Jersey and IOM To Keep 'Zero-Ten'

by Jason Gorringe, Tax-News.com, London

18 February 2011

The governments of Jersey and the Isle of Man have announced simultaneously that they will rescind their deemed distribution and attribution rules in an effort to appease the EU Code of Conduct Group on Business Taxation, but both governments have said that their zero-ten corporate tax systems are otherwise compliant.

In a statement made to the States Assembly on February 15, the Jersey's Chief Minister, Senator Terry Le Sueur, said: “This action allows us to retain our corporate tax regime while meeting the concerns of the EU."

"Maintaining tax neutrality in a simple and transparent way provides stability and certainty for businesses operating here and sends a clear signal that Jersey continues to provide a competitive tax system which will safeguard the island’s future economic well-being.”

On the same day, Isle of Man Treasury Minister Ann Craine told the Manx parliament that the tax anti-avoidance mechanism was likely to be declared harmful under the European Union Code of Conduct for Business Taxation. Removing the ARI (attribution regime for individuals ) should therefore end concerns over the Island’s zero-ten company tax system, she said.

The Minister pointed out that the group set up by the European Union to monitor compliance with the Code of Conduct (Code Group) and the EU’s Economic and Financial Affairs Council (ECOFIN) had agreed in 2003 that zero-ten systems were not harmful.

"The Isle of Man government considers that with the removal of the ARI, our business taxation system does not have features which can be considered to be harmful under the provisions of the Code of Conduct, and we have today communicated that view to the Chair of the Code Group," said Craine.

"We remain committed to our policy of being a good neighbour, which encompasses being responsive to the views of the European Union. At the same time, the Isle of Man is fiscally independent, and participates in the Code of Conduct process on a voluntary basis," she added, continuing:

"It is not in the Island’s interests to have aspects of our tax system which the EU sees as causing difficulty, and so I have today taken what I feel is the right course and moved to abolish the ARI."

Jersey's deemed distribution regime, contained in the island's personal tax code, seeks to ensure the taxation of individuals' holdings in profit-making companies as their respective holdings appreciate. A 'deemed distribution' is presumed by the government and individual income tax is liable on the amount irrespective of whether a distribution is disbursed to the company shareholder. The withdrawal of deemed distribution rules is subject to the agreement of the States Assembly, as legislation will be needed. Work will continue to monitor the impact of this change, but Treasury forecasts estimate it will create a temporary cash flow issue rather than a reduction in the total tax take.

The Manx ARI is designed to deter local shareholders from avoiding Manx personal tax by rolling up income in companies subject to the 0% tax rate. This piece of legislation has been under review since late 2008 by the Code Group, in order to determine whether it could be considered a harmful measure.

After monitoring the Code Group’s work in 2010, and being mindful of the views of ECOFIN when it met on 7 December 2010, the Isle of Man government indicated that it would wait for the report requested by ECOFIN from the Council High Level Working Party for tax issues (HLWP) on its review of the scope of the Code of Conduct before determining its position.

A recommendation made on February 15 by the HLWP to ECOFIN is that the “attribution provisions are effectively designed to provide an alternative means of taxing domestic business profits and are therefore within the scope of the Code and must be included in an evaluation under the Code of Conduct for business taxation”.

In view of the likelihood that the Code Group will move quickly to declare the ARI a harmful measure, the Isle of Man has decided that the ARI should be repealed.

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