This Is Guernsey

By Nick Mann

A KEY part of the alternative tax strategy backed by Deputy Charles Parkinson would not have worked, the States has been told. Treasury minister Lyndon Trott said it would not have been compliant with European Union standards.

This follows a ruling on the Isle of Man tax strategy by the EU Code of Conduct for Business Taxation review group saying that part of it was non-compliant.

‘A distributable profits charge, introduced as part of the Isle of Man’s changes in April of last year, has been found to be non-compliant with the principles of the EU Code of Conduct for Business Taxation,’ Deputy Trott told the House today.

‘Members will recall that an amendment to the Policy Council’s Future Economic and Taxation Strategy placed before the House in June last year sought to introduce similar measures on companies. At that time, we advised that such an amendment was extremely unlikely to be code compliant.

‘We can now be absolutely certain that it would have been considered non-compliant by the group.’

The development will delight the Treasury team, which has been increasingly irritated by support for the zero-20 proposal in recent weeks.

The Isle of Man created the DPC in response to the concerns that adopting the standard corporate income tax rate of 0% would lead to a broader loss of revenue.

It was worried that residents owning companies taxed at the standard rate could have chosen to leave profits in the company, rather than pay them out as distributions, which would be taxable as part of their personal income.

The DPC was introduced specifically to limit the impact of this sort of tax planning.

‘Our understanding is that the EU Code Group believed that the tax-collection mechanism, where the company paid the tax in these cases where a certain level of distribution was not made every year, was effectively a tax on the company,’ said Deputy Trott.

‘This is not the approach we have taken in the development of our zero-10 regime in Guernsey.’

Here, taxing will take place only on distribution of profits.

This allows businesses to ‘roll up’ and retain profits to reinvest, for their benefit and that of the wider economy. Businesses will still pay tax on the investment income derived from these reserves.

‘We are extremely confident that our proposals will continue to be viewed as being code compliant, but this case shows the length of time which it can take to be reviewed by the EU Code Group,’ he said.