Guernsey may yet defy EU pressure

14 October 2010

Guernsey is reaching a critical point in its jousting with the European Union over its allegedly harmful zero-ten corporate tax regime.

In a review published on the Guernsey Finance website, Graham Parrott, a tax partner at Ernst & Young, notes that the zero-ten regime was  itself introduced (on 1 January 2008) in order to meet criticisms from the EU Code of Conduct Group.

In late 2009, Guernsey was told that "in the view of certain unidentified EU states" its new corporate tax regime was not "in accordance with the spirit of the EU Code of Conduct, whatever that means", says Parrott.

Though Guernsey has agreed to review the regime, with a provisional presumption that flat 10 per cent corporation tax will be introduced, it has not yet decided on the details.

According to Parrott, the favourite emerging from the consultation period is a move to a territorial system of tax, as in Singapore and Hong Kong. Under this system a company will be taxed in Guernsey only on income earned or sourced there (for some value of "sourced").

This may be the solution most politically acceptable to Guernsey's critics. But no-one on the island can be sure, Parrott says, "given the lack of clarity surrounding the concerns raised over zero-ten and the identity of those behind the move".

Other options are being considered, and Guernsey might even decide to ignore the EU's demands - although that is "increasingly unlikely", he says. The big question is whether Guernsey, with a non-zero tax system, has a future as an IFC.

The current uncertainty is not helping, he says: "Mistakes have been made in getting us to this point, [but] a workable solution will be found. It has to be."

Sources

Guernsey Finance