Zero to hero

  • Author : Geoff Cook
  • Date : December 2011
ABOUT THE AUTHOR: Geoff Cook is Chief Executive of Jersey Finance Limited in St Helier, Jersey

The decision by the European Union (EU) Code of Conduct Group to approve Jersey’s amendments to its business tax regime is welcome news for intermediaries who use jurisdictions such as Jersey in their financial planning. Jersey’s business tax regime, known as zero ten, and similar schemes in the other Crown Dependencies, had been under review by the Code Group but, following amendments to certain aspects of the regime, it is now fully in line with the Code’s criteria.

Business tax

The EU Code of Conduct Group was established in 1998 to assess business tax measures in the member states of the EU. Those member states with dependent and associated territories were committed, within the framework of their constitutional arrangements, to ensuring the principles of the Code of Conduct for Business Taxation (the Code) were applied to those dependent and associated territories as well, and, as a result, the Crown Dependencies were drawn into the process.

‘The jersey authorities wish to be cooperative, but must preserve tax sovereignty’

While Jersey is not an EU member state, in 2002 the island authorities made a voluntary commitment to abide by the Code, as part of a constructive policy of being a good neighbour within Europe. One requirement set out by the Code Group was that when setting corporate tax rates, jurisdictions should not, in future, discriminate between onshore and offshore companies. To meet this condition, the Crown Dependencies introduced a zero ten regime as a replacement for existing business tax regimes that were no longer compliant. The overall basis of the regime is not to tax the user of the jurisdiction but to tax the service provider based on the revenue generated in the jurisdiction. Zero ten, in which, by and large, finance industry profits are taxed at 10 per cent while all other companies are zero-rated, was introduced in the Isle of Man in 2002, then by the other Crown Dependencies as a competitive response to that move.

Criteria met

Initially, the EU found no fault with the scheme, which it considered met its criteria. A 2003 report of an Economic and Financial Affairs Council (Ecofin) meeting stated that the measures had been reviewed by the Code Group and were not considered to be harmful within the meaning of the Code. But the zero ten debate did not end there because the EU reached this conclusion before the details of deemed distribution had been formalised.

As part of the zero ten regime, there was a provision for local shareholders to be taxed at 20 per cent on company profits, whether distributed or not. These were known as the deemed distribution rules, in which resident company owners would be zero-rated for tax but would pay income tax on dividends. The Jersey tax authorities introduced this provision because of concern that without it the cash flow from tax receipts may be curtailed by owners who decided to store their profits rather than take dividends. This last provision belatedly came under scrutiny by the Code Group.

However, the Jersey authorities felt at the time of its introduction that the deemed distribution rules sat within the personal tax regime so were not within the scope of the EU Code. In 2007, the UK Treasury supported this.

Therefore, the EU only reviewed this aspect of the zero ten regime at a much later date, and its opinion was that deemed distribution did fall within business taxation and, as such, did not meet the criteria entirely. The wording used at the time was that some EU member states considered zero ten to be in conflict with the ‘spirit’ of the Code, if not with the actual Code criteria.

Some politically motivated critics of the Crown Dependencies claimed at this point that the EU was opposed to zero ten and that wholesale change would be required. This was never the case. It was the deemed distribution measure that was of concern and then only because the EU had not considered it when it first reviewed the new regime in 2003.

Jersey agreed to engage with the Code Group once more and, following careful negotiations, the Jersey authorities agreed that the deemed distribution should be removed. It is fair to say that the Jersey authorities could have continued to argue that the deemed distribution measures related to the taxation of shareholders and were part of its personal tax regime and therefore outside the EU’s remit. But in the spirit of cooperation, Jersey agreed to drop the contentious measure. It is this decision that has now been endorsed by the Code Group and, as a result, Jersey now has a business tax regime that offers even greater certainty to clients. It now remains for the Code Group’s decision to be ratified by Ecofin in December.

Although the Jersey authorities have been more than willing to negotiate with the EU on these matters, tax sovereignty remains an abiding principle for Jersey, which the government will always defend vigorously. While it is important to be good international neighbours with the EU and others, equally there are certain principles in respect of tax sovereignty and self determination that are vital to Jersey’s long-term future. Ultimately, it’s important for the international investor community to know that placing client business in Jersey brings long-term certainty about the Jersey tax regime.

Private clients

The business tax regime does not usually affect the private client, but high-net-worth individuals are increasingly using company structures as vehicles for their investments, for example in forming a company as a financial planning tool in the composition of a trust. In such circumstances, private client structures may fall within the remit of the business tax regime. The EU moves bring greater certainty about zero ten and how it is applied. Advisors will also be reassured as there is a certainty to the tax regime and a commitment not to tax the non-resident on a personal or corporate basis.

The Jersey authorities wish to continue to be constructive and cooperative with their nearest neighbours in the EU and want to ensure they are aligned with the rules of the Code Group, but equally they must preserve this tax sovereignty. The international investment community can remain confident that Jersey will stand firm to protect a tax system it believes is compliant, and delivers simplicity and certainty for those doing financial planning for clients.

‘Crown dependencies are being asked to shoulder onerous obligations’
Harmful competition

The issue of business taxation and what is or is not suitable has arisen in Europe because of the EU’s desire to tackle what it describes as ‘harmful tax competition’. However, there is a wider, more substantive issue to address in this context, not least whether ‘harmful tax competition’ is a correct definition. It seems that the Crown Dependencies are increasingly being asked to shoulder the onerous obligations and accountability attached to members of a large trading club (the EU), with none of the associated benefits in terms of market access, trade, and double tax treaties. If the EU is really committed to fairness this needs to change.

The Foot review, the Organisation for Economic Cooperation and Development, the G20 white-listing process and the numerous International Monetary Fund/Financial Action Task Force reviews have proven that all three Crown Dependencies are cooperative, transparent and well-regulated centres that collectively provide a conduit for moving significant international capital into the EU. There is plenty of evidence of Jersey’s value to Britain and the EU, but little recognition in the EU’s corridors of power of its contribution to date. In time, with more frequent consultation and better understanding in Europe, this position will change.


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