UK And Jersey Resolve Row Over 'Designer' Taxation

by Jason Gorringe, Tax-News.com, London

23 April 2001

The UK Government has finally allowed Jersey's 1998 Finance Act to receive royal assent, after holding it up for two years because it contained wording related to the practice of allowing companies to agree their rate of taxation with the Jersey authorities - known as 'designer' taxation.

In common with many offshore jurisdictions, Jersey allows its International Business Companies (which have to be owned by non-residents who have declared their beneficial ownership) to set their own rates of tax, with a minimum of 2%, in order to climb over the bar of any minimum tax rate specified in the owner's country of origin.

'Designer' taxation was already permitted informally in Jersey, but was regularised by the 1998 Finance Act. Unfortunately for Jersey, this was the year in which the OECD started its pogrom against offshore jurisdictions, and in which the UK Treasury was preparing a battery of measures against offshore, including a ban on 'designer' taxation, offshore mixing, and other techniques used by companies with foreign income flows.

Even though a UK company was therefore unable to use a 'designer' tax through Jersey, the island's rules are still useful to companies from other countries, and the Home Office (Jersey's 'patron' in the UK government) held up the Finance Act, until finally, after more than two years of squabbling, culminating in a threatened Court action by jersey, it relented, and the Finance Act received royal assent on 14th February. The news didn't become public until it was broken in the Jersey press last week - neither the Jersey nor the British government had anything to gain from publicising their spat.

"The issue was whether the UK should, through giving Royal assent, appear to condone a predatory tax measure," said the Home Office, "We are happy to resolve the matter and Jersey will no doubt be reviewing its taxation measures." This veiled wording suggests that a deal has been done, so it will be interesting to see what legislation results in Jersey. Long-term, it is thought that Jersey, like other offshore jurisdictions, will have to harmonise its onshore and offshore taxation rates, but this is not expected to happen for a few years yet, and may not happen at all if the US breaks step with Europe and effectively vitiates the OECD's 'unfair tax competition' initiative.

Jersey finance chief Senator Frank Walker said the island raised the prospect of legal action in part to protect its fiscal autonomy from Britain. "After making no progress for quite some time we decided action was necessary to protect our position," he said. "We are glad it's behind us and we are moving forward in a spirit of co-operation."

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