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Guernsey Businesses Oppose Goods And Services Tax

by Amanda Banks,, London

18 July 2014

The Confederation of Guernsey Industry (CGi) has released a new report on the impact of the introduction of a goods and services tax in Guernsey.

The CGi said the report – commissioned from Professor Dominic Swords of the Henley Business School – reinforces the views of the CGi, the Guernsey International Business Association (GIBA), and the Chamber of Commerce that the introduction of a GST is inappropriate for a small economy like Guernsey.

The report was sent to lawmakers in Guernsey on July 16, 2014, as part of an ongoing debate on tax measures to ensure the medium-term sustainability of Guernsey's finances.

A 'work-in-progress' paper, which included proposals for a broad-based consumption tax, was handed to members of Policy Council in early May, but the paper was leaked, and was therefore later released publicly on the Government's website.

The paper noted the over-dependence of the current tax base on direct taxes on income, and proposed that the tax base be diversified to reduce the reliance on direct personal tax. On consumption tax, the paper recommended that: "Treasury and Resources should be directed to undertake further work and report back to the States, no later than June 2017, on the implications of introducing a broad based consumption tax no earlier than 2019."

The island's Finance Minister, Gavin St Pier, subsequently spoke of the benefits that a consumption tax could bring, including funding personal income tax cuts to attract more talent to the island. Speaking to GIBA members, he said: "Diversification of our tax base presents Guernsey with a number of opportunities. These opportunities include lowering both the direct and total tax burden of the hard-working majority of the population in middle income brackets by increasing their tax-free income tax allowances; providing a more stable and sustainable tax base to provide the services which many in our community and many other jurisdictions now regard as 'standard,' but which we will struggle to provide so long as we seek to fund everything from an increasingly narrow tax base; and increasing the contribution from that part of the corporate sector, which consumes goods and services in our islands but no longer pays corporate income tax," he said.

He added: "If in due course any proposals are tabled for a broader-based consumption tax, it would be essential that they are accompanied by measures to ameliorate [the impact] on lower income earners."

GIBA and the two other Guernsey business associations, however, are not convinced. In their new report to lawmakers, published on the CGI's website, Swords writes that GST is inappropriate for Guernsey for three reasons:

  • It is likely that there would be a very negative impact of a GST on some key sectors for the islands. In particular, the retail, travel, tourism, and hospitality sectors rely on a distinctive reputation as a 'low tax jurisdiction' in general and a 'No VAT' status in particular as a significant part of their competitiveness.
  • As a small and open jurisdiction, and with a large proportion of small and micro businesses within its economy, the impact of a GST would have a disproportionate and negative effect on growth and innovation in these important sectors. This unique business demography of a large proportion of small businesses would make a GST particularly expensive and inefficient to operate on the islands as it would place a large administrative and compliance cost on these important local businesses.
  • A GST is a regressive tax in that it has a pronounced impact on the consumption and living standards of the lower income. While measures can be taken to offset this impact, it causes greater complexity and costs in the tax system which will both distort employment market incentives and also further damage the islands' low and simple tax reputation.

"It is the overall conclusion of the report that a GST should not be introduced at this time as a part of a new fiscal strategy because of these potential detrimental features. It would pose major risks for the future prosperity of the islands. Before deciding whether or not to introduce a GST, it is urged that a more thorough re-assessment of the future vision for public services on the islands should be at the center of the task of solving the fiscal challenge," Swords writes.

"Taking a fundamental strategic review of spending should be a precursor to a decision about the revenue side of the equation. One important principle that has emerged in the consultation process that has been at the center of the production of this report is that decisions need to be seen against the context of the whole tax and spending system and not assessed on a tax by tax basis." The report concludes by suggesting some alternative ways in which Swords believes the fiscal imbalance could be reduced without harming the longer term commercial health of the islands.

Guernsey does not currently levy a sales tax or VAT, unlike the other Crown Dependencies, Jersey and the Isle of Man, which both levy VATs.

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TAGS: Isle of Man | compliance | Finance | tax | small business | business | value added tax (VAT) | sales tax | law | Guernsey | Jersey | micro business | standards | retail | services

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