Watching this activity from the sidelines with interest will be Guernsey, the third UK Crown Dependency, which also has a zero-10 scheme. It has already said it is willing to replace its zero-10 scheme, which is why it is not under the microscope as well, but with what exactly has yet to be determined, according to officials there.
“Guernsey…cannot determine its preferred direction of travel until the outcome of the Code Group processes are known definitely,” the Government said in a statement.
Under zero-10 schemes, most businesses pay no corporation tax, while some industries, such as banks, pay 10%, and a few pay 20%.
The Conduct Group reviewed Jersey and the IoM’s tax regimes last year, as it believed both jurisdictions’ personal taxation laws, when combined with the zero-10 tax regime, were in conflict with the Code of Conduct on Business Taxation laid down by Europe’s Council of Economics and Finance (Ecofin).
The Code is not legally binding, but it has political significance both within the EU and outside of it.
At issue are so-called “anti-avoidance” provisions in both Jersey and the IoM’s tax codes, under which, in certain circumstances, local residents are deemed to have received a dividend from a profit-making Jersey or IoM company in which they own shares, whether they actually have or not. Such ‘distributions’ – which the islands said had been designed to keep these local residents from delaying the receipt of dividends, in order to defer their tax liabilities – are then taxed as personal income.
At tomorrow’s meeting, the Code Group members will have a chance to ask questions of Jersey and IoM representatives about their plans to change their schemes to make them compliant with Europe’s tax code, which the Code Group exists to enforce.
In theory the Code Group members may decide at that point as to whether the changes Jersey and the IoM have agreed to make are sufficient, according to a source familiar with the matter.
However, it is understood that the Group is more likely to postpone a final decision to its next meeting, in October or November, in order to give its members more time for reflection.
In November, Guernsey published results of a consultation which indicated that a territorial tax system could form the basis of a zero-10 alternative, but it noted that consideration should also be given to modifying the current regime to meet the concerns of the Code Group.
Under a territorial system, tax is imposed only on income earned within a jurisdiction’s territorial borders. This could be good for Guernsey in that many UK companies, for example, with Guernsey businesses will begin having to pay corporate tax on the island, but it could also damage the island’s appeal to other businesses that currently pay no tax under zero-10.
Similarly, a 10% flat rate, unless a “carve out” is provided for certain financial services companies, might also damage Guernsey’s ability to compete globally, Guernsey officials point out.
For such non-EU jurisdictions as Jersey, Guernsey and the Isle of Man, compliance with regulations such as the EU Code of Conduct on Business Taxation is considered increasingly important, as scrutiny of offshore financial centres by the likes of Britain, the US and Europe intensifies.
