A Tax Structure For 2020
Jersey, like the UK’s other Crown dependencies of Guernsey and the Isle of Man, is facing up to a moment of truth as it struggles to fit its corporate tax regime within the Iron Maiden of the EU’s Code of Conduct Committee. For the last few years, Jersey has been operating a ‘zero/10’ regimes in which the financial sectors is taxed at 10% while other types of company are exempt from income taxation.
Jersey hoped this would be enough for it to escape the reach of the Committee, but it was not to be – the island has been too successful, so its competitors in Continental Europe insist on ‘transparency’ and a ‘level playing field’, hoping to force Jersey into taxing all companies the same.
You might wonder what power the EU has to force the Jersey to knuckle under, and indeed the formal answer is: ‘none’. The reality, however, is that the island is reliant on approval or at least tacit acceptance of its regime by the OECD, the G20 and other embodiments of today’s global moral financial police. And indirectly, pressure is exerted through the UK, which has an ill-defined but still fairly potent relationship with Jersey.
So Jersey, small but increasingly wealthy, must choose from a number of options, none without their difficulties. It could secede from the UK altogether, but no-one talks about that nuclear option; it could make all its corporate forms tax-transparent, like US LLCs or Limited Partnerships; it could impose 10% tax on all companies; or it could abolish corporate tax altogether.
The last option is the one the finance sector would like, probably, which would cock a massive snoot at the EU, but the revenue Jersey now gets from corporate tax would have to be replaced; and that is what the government is currently agonizing about. Will the island’s citizens put up with major increases in taxes in order to favour the financial sector which is the backbone of the economy?
Theoretically, it should be possible: there are plenty of other ‘low-tax’ jurisdictions across the world which manage without corporate tax.
The Jersey government itself has outlined a number of new tax proposals in a Green Paper, summarizing the findings of a Fiscal Strategy Review, as part of a consultation with islanders on how best to generate additional tax revenues, and it’s the outcome of that consultation which will largely determine its eventual choice among the various corporate tax options.
The four major possibilities, as discussed in the document, involve increases to:
- Goods and Services Tax (GST);
- Social Security contributions;
- Domestic property rates; or
- Income Tax
Each of these could provide at least GBP30m to government coffers, says the document. Other possibilities include hikes to company registration fees, the introduction of business licence fees, and the removal of mortgage interest relief on a transitional basis.
In a parallel consultation aimed mostly at the business community, the government has set out five proposals for change to the corporate tax regime:
- Flat rate of corporate tax: The corporate income tax rates currently imposed would be replaced with a positive standard rate of tax applicable to all companies, at a rate of no lower than 10%, imposed on the worldwide income of all Jersey resident companies, and on the local source income of Jersey branches of foreign companies.
- Transparent treatment for tax purposes: A tax transparent company would not be subject to Jersey corporate income tax but effectively treated the same as a limited partnership for tax purposes. This would mean that a company’s income would be assessable upon each beneficial owner in proportion to their holding in the company.
- A territorial system of tax: Companies would generally only be subject to tax on income that has its source in Jersey. Non-Jersey source profits would not be subject to Jersey corporate tax. Currently, a Jersey resident company is subject to Jersey tax on its worldwide income while a non-resident company is only taxable on income arising in the Island.
- A repayable tax credit system: Jersey resident companies would be subject to tax on their worldwide profits at the standard rate, with a credit for overseas tax suffered. On distribution, shareholders would be able to reclaim a proportion of the tax suffered, leading to a lower effective rate of tax overall.
- Abolition of corporate tax: Lastly, Jersey has proposed abolishing corporate tax entirely. Its consultation document notes that a number of jurisdictions, including the Overseas Territories of the UK, impose no direct taxes. Under such a system, Jersey resident companies would no longer be subject to income tax on their profits.
Last but best! The government however is keeping its cards close to its chest, and everything probably depends on the response of the islanders themselves to the prospect of increased personal taxation, whether that be through more income tax, more sales tax, more property tax or even all of them at once. It’s going to be a very interesting time, if you live in Jersey.