ONE of the greatest challenges for any jurisdiction is remaining competitive in an increasingly competitive global economy. UK Chancellor Alistair Darling has been finding that out the hard way as he continues to give ground on his various tax ‘initiatives’.

The latest, reported yesterday by the Financial Times, is bowing to pressure from multinationals over the repatriation of foreign profits and allowing them much more say in the eventual proposals. Although a dry topic, it has relevance for Guernsey. Allowing UK-based companies to remit  to head office profits from offshore subsidiaries tax-free makes the siting of those subsidiaries particularly important.

Anything that reduced the profitability of those offshore subsidiaries would make the location less attractive compared to territories that are more cost-effective in which to do business and is one reason why Guernsey adopted a zero-10 approach. Any change in that zero rate of corporation tax would make the island uncompetitive, which restricts it’s ability to raise extra revenue from business.

And the continuing difficulties of the banking sector following the credit crunch have highlighted a further problem: the island’s absence of a deposit protection scheme.

The enthusiasm of some banks to attract savers’ money with high rates of interest raises the issue of risk and, unlike some other territories, if a bank does collapse, there is no guarantee that individuals will get their money back.

That, in the mind of the Guernsey Financial Services Commission director-general at least, is a serious flaw and is denting the island’s attractiveness as a secure place in which to leave cash.

The banking sector, however, has been at best luke-warm to the proposals, which doubtless prompted the GFSC’s stronger than usual comments last month on the need for a guarantee.

For banks, the problem is that any such scheme has to be underwritten with hard cash or backed by secure assets should any institution default. In turn, that increases costs and, at a time when bank security and the asset base have never been harder to determine, it will clearly be resisted.

Yet the island needs to convince investors their money is safe just as much as it wants to avoid increasing the cost of doing business here – a clear case of conflicting competitive pressures.