In the first of a series of five articles leading up to the next debate on zero-10 at the end of May, Treasury and Resources minister Lyndon Trott looks back at how corporate tax reform started MANY people seem to think that I am the architect of so-called zero-10 corporate tax reform and that it was something I personally dreamed up to enhance the competitiveness of the island’s finance sector.

However, as is so often the case, perception and reality are many miles apart. When this issue first came before the States at the end of 2002, I was as much in the political dark as everyone else outside the then Advisory and Finance Committee.

The first of the detail I saw was contained in a document published in November 2002 as a supplement to the 2003 Budget entitled Future Corporate Taxation Strategy.

That was probably the first most States members, and indeed most of the community, had ever heard about the proposed reform.

I remember vividly a presentation we, the backbenchers, were given at that time. A and F advised us about the need for significant tax changes and how these changes would need to be ‘structurally compatible’.

When I asked what exactly that meant, they couldn’t really tell me with any certainty and said that it was a matter for extensive public consultation.

My initial and lasting reaction was the desire to minimise the potential shock to our economy from the changes and to help ensure the softest possible landing.

The document stated: ‘Guernsey is facing new competitive pressures following proposed reforms in the taxation regimes of competing financial services centres, both onshore and offshore.

‘The Advisory and Finance Committee believes that the island will need to adopt a corporate taxation strategy which responds to these competitive pressures. It has become increasingly apparent that maintaining the status quo is not an option.’

The Isle of Man had already announced that it was moving to a general corporate taxation rate of zero, with a higher rate for certain sectors, in particular those within financial services.

What we had witnessed was the birth of the zero-10 initiative – actually the brainchild of one of our key competitors in the provision of financial services.

But our corporate tax reform wasn’t being driven exclusively by competitive pressures from elsewhere. International standards were a major factor, too.

At the same time, the European Union was aiming to reach final agreement on its collective tax package.

While it remains that Guernsey is not within the EU fiscal territory, nor within the EU single market for financial services, we cannot ignore the fact that much of our economic well-being derives from doing business with EU member states. A pragmatic level of cooperation with EU developments is thought necessary to protect our best interests.

What evolved from the EU’s desire for the removal of cross-border, and so-called harmful, tax measures was the EU Code of Conduct on Business Taxation.

The main reason this code identified certain Guernsey tax regimes as harmful was because they were ring-fenced. In other words, they were available to non-residents only.

The problem we and all other offshore finance centres faced was the need to continue to provide an ‘exempt from tax’ company. Without it, our main industry would quite simply wither on the vine.

So, in December 2002, the starting point for our fiscal and economic reform was that:

* the general rate of income tax paid by Guernsey companies should be reduced to 0% from 2008;

* the profits of certain licensed finance companies would be taxed at 10%;

* other taxation and revenue-raising measures would be considered and consulted on;

* VAT would not be introduced;

* and this would all come into effect on 1 January 2008.

In November 2002, I remember thinking that we would need widespread consultation on these issues and we ended up with an unprecedented public process, starting a couple of years later.

At that time, I was aware that States departments were spending excessively on the back of the huge public-sector surpluses being generated. This spending would need to be curtailed. The alternative would unduly burden the ordinary Guernsey man and woman with extra or even new taxes.

Although at the time I was still a relative newcomer to the States, I recognised that the Treasury minister would undoubtedly head the department with the hardest job in the States.

Little did I know that just 18 months later, that job would fall to me.

*Next time – the consultation process after 2004, when Treasury and Resources and the Policy Council came into being and how we came up with our package of measures.