THE appeal of a tax system to business generally is judged against three criteria: competitiveness, complexity and certainty. The focus of attention in the zero-10 debate was largely on the first – how competitive Guernsey’s would be when compared with nearest neighbours and competitors. It is evident that Guernsey has gone for a tax system that is designed to be competitive. The challenge now for the States is to ensure that Guernsey’s future one satisfies the other two criteria.

The consumers of Guernsey’s business tax system fall into three types:

n businesses that are not based here but use the legal structures available for their wider international business activities (i.e. the offshore business)

n businesses that operate here but are owned outside the island

n businesses that are owned from Guernsey.

Each of these groups will be looking for something slightly different as far as the detail is concerned. However, as a general matter they will want to be able to comply with whatever tax obligations are placed on them with a minimum of time and expense and they will want to know that their understanding of these requirements will not change during their expected business cycle. They will want to be happy that there will not be any nasty surprises.

At the simpler end of the spectrum, the ‘offshore vehicles’, business will want to be certain of two things. Firstly that zero tax is here to stay and secondly that payments to and from those vehicles will not trigger any other type of tax burden, such as withholding taxes or a liability to goods and services tax.

While there is a general expectation that the issue of withholding tax will be dealt with before the abolition of exempt status, there is a pressing need for the matter to be put beyond any doubt as soon as possible. There is also a need for the uncertainties to be resolved as to how any possible future GST could impact ‘offshore vehicles’, possibly by making a straightforward statement now that they would be carved out of any such tax in the future.

The foreign-owned businesses that operate in Guernsey are potentially the principal beneficiaries of zero-10. However, if Guernsey wants to optimise the opportunities that this presents, it will be important that businesses of this type, both those that already operate in Guernsey and those that are considering setting up in here, can be certain as soon as possible how the tax system will affect them in the future. Specifically, they will want to know what profits will and will not be subject to income tax at a positive rate, precisely what remuneration of their employees will be subject to deduction of tax under the employees’ tax instalment scheme or liable to social security contributions and how any possible goods and services tax could impact their business.

The Guernsey-owned businesses will represent the greatest challenge. The distribution/attribution provisions approved by the States last June will by their very nature be complex. Potentially the income of a single Guernsey company could be liable to tax in the hands of the Guernsey-resident shareholders in that company in any one of three ways: as distributed, under some type of deemed distribution provision or under the proposed attribution provisions. This will be all the more complicated where the company concerned has foreign subsidiaries.

The challenge for the States is to find a method of implementing these provisions which takes account of the needs of the businesses concerned, which does not involve extensive complex legislation and which provides the certainty that the businesses concerned will need in order to encourage investment.

Businesses in Guernsey have been fortunate in that historically they have been able to discuss and agree issues in advance with Income Tax. This facility is likely to prove as important after the introduction of the zero-10 proposals as it has been to date.