Island to defend zero-10 tax system before EU code group
Saturday 4th February 2012, 2:29PM GMT.
GUERNSEY will defend its corporate tax regime next week when European officials meet to decide its future.
Jersey and the Isle of Man were forced to change their zero-10 packages as a result of findings last year that they were not compliant with European standards because of an element known as deemed distribution.
But a Guernsey delegation will make a case at a code of conduct group meeting in Brussels that this part of the island’s regime is sufficiently different that it meets the standards.
A Policy Council spokesman referred to Chief Minister Lyndon Trott’s statements that it would welcome the clarity the review would provide because of the unique operation of Guernsey’s system of deemed distribution.
In his December Budget speech, Treasury minister Charles Parkinson revealed that work had been well advanced on a replacement for zero-10.
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“In his December Budget speech, Treasury minister Charles Parkinson revealed that work had been well advanced on a replacement for zero-10.”
Dear Oh dear,
So 0/10 was the in thing, cost us millions and still is.
Then a couple of minor noises in Europe and suddenly 0/10 had served its purpose and a debate in the states ended in T&R looking at nearer 10%
Then the EU are going to carry out a review of Guernsey, Jersey & the isle of Man. Guernsey rolls over and says we will do our own review. Jersey & the isle of Man stand up for themselves and with a couple of minor changes become Code Compliant.
Guernsey meanwhile, in limbo, says, we can’t do anything until the review of Jersey and the Isle of man is finished, so it remains in limbo.
Eventually they agree to a review, after the Jersey/Isle of man results come out, which by now has moved to February 2012.
They will now meet the code of Conduct and argue their case, that they are compliant and 0/10, (which had served its time two years ago) will once again , if they are lucky become compliant and Guernsey will continue to have a revenue shortfall of millions because of it.
But how long will the EU be happy if they agree, not long I suspect, they will soon be knocking at our door again demanding more tax changes to our system and our detriment.
The whole thing has been a farce. I suspect the Isle of man regret ever starting it.
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George
I’m quite sure that the Isle of Man does regret it but the zero part had to happen regardless because of the EU so there was always going to be tax revenue drop once the global recession occurred.
The zero bit needs to remain but I suspect zero-12.5 and widening the net to catch more companies paying the 10 or 12.5 is inevitable.
Not sure that the EU will still exist for much longer so that might not be am issue.
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Why try to defend the indefensible?
Let’s hope Europe crack down hard and make sure the corporate fat cats pay their taxes.
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George
The EU will never make up its mind what it wants, you only have to look at the mess the Eurozone is in, they are a bunch of ditherers trying to make a one size fits all economy fit 27 different countries that grow and prosper (as a rule) at different rates.
We are forced to listen to their views simply because our finance sector wants to trade within the EU, mostly through the City of London which is in a member state. It is their club and they have rules which they change when they feel like it and they are saying if you want to be in our club then you must play by the rules. I am hopeful this will be the last hurdle but you never can tell. We are at present trying to secure much more finance business outside of the influence of the EU and we have had some success with the growing economies in the East and far East.
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GM
forgive me if I misunderstand, but I was under the impression that the Isle of man turned to zero/10 to make itself more competitive, nothing to do with the EU (and of course it had huge VAT rebates from the UK then to offset it).
Jersey & Guernsey, to remain competitive had no option other than to take on zero/10,to remain competitive, and we were apparently advised by UK Treasury, was code compliant with the EU. The rest is history and we have been running a revinue deficit ever since and the EU have not been off our backs since.
We may be taking in a lot of extra business from the East or may not , I don’t know. But if they are rated at zero then we make nothing out of it, except from tax raised from people employed in the industry, but more finance businesses run on a minimum of staff these days and rely on technology to run the systems, so our tax take from that area probably isn’t growing much.
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George
That’s partially correct. The Isle of Man, artificially funded by a huge VAT rebate from the UK which has rightly been dramatically cut back, tried to steal our financial services business by starting the “race to the bottom”. We had no option but to follow suit.
The key point which you overlook is that for us to “remain in the game” we have to offer a zero-tax corporate product, otherwise we lose the entire fiduciary industry. Even a 1% corporate tax rate on profits for companies administered here for non-residents blows us out of the water. Why? Because multiple jurisdictions which are not influenced by the EU are not required to get rid of a zero tax regime. At a time when fiduciary fees are already under constant pressure from overseas competition, no client is going to stay to pay a 1% profits tax, let alone 5% or 10%. It’s the same effect as a massive fee increase and it will make Guernsey totally uncompetitive.
So we have to keep an effective zero rate for non-residents and we are not allowed to distinguish between residents and non-residents. That’s why it is such a massive conundrum to solve.
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The reason we originally had to change was because of harmful tax practices. These are when the local population are taxed differently and I would assume in an adverse manner to non-residents.
So we changed to zero/ten? This lead to a deficit for the local population to deal with. Now they want us to change the deemed distribution rules. I have heard whispers of GST being brought in to be brought in to deal the implications of that. A further tax on the local people. I would say by changing to suit the EU we have put ourselves in a worse position for the public which defeats the whole purpose of the exercise.
I may have it wrong but I wonder why as a community we are not able to decide what is best for ourselves. If charging non-residents better rates of tax brings in more money overall for anyone else it is not a harmful tax practice. If I was being cynical I would say it was harmful to over jurisdictions in the EU and that is the real issue. We should tell them to go for a walk.
The issue with the deemed distributions is that when paid to a local person they have to pay tax on them. When paid to a non-resident they do not have to pay tax. This does seem to be a harmful tax practice as it treats the two differently. How are they going to be o.k. with this?
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Dani
Unfortunately we have no opion but to adhere to the Code of Conduct, despite not being part of the EU. Sure, we could stick two fingers up and fight our corner but it’s a battle we can’t win as the EU can legislate against us by making it a criminal offence for EU residents and institutions to deal with us. We could be ostracised at a stroke. Seeing as we sit in EU waters, using EU ports, airports, telephone links and electricity links to survive and communicate, the two-finger approach would not be a prudent one. We might win the battle but we would lose the war.
The deemed distribution rules are not “harmful” but they are certainly unfair. Why should the locally owned chemist have to pay tax here when Boots does not?
There is an alternative and it’s called territorial tax. Every company which trades here would be subject to local tax on its locally generated trading profits, with no differing tax treatment based on ownership. Pure investment income is not trading income and so would be non-taxable, again regardless of ownership. That protects the core finance industry yet collects more corporate tax overall. A much fairer system all round. The corporate tax rate could even be 20%. Singapore and Hong Kong have operated territorial tax for years and it works perfectly. I understand that it would be EU compliant and the UK is itself moving towards a territorial tax system.
I don’t care what Jersey and the Isle of Man so. If they want to retain their unsustainable tax regime, then let them. We would not be uncompetitive by adopting territorial tax because the essential zero tax product would be retained, albeit my companies having non-taxable investment income as opposed to simply a nil rate of tax.
Are we brave enough to go down the territorial route without Jersey and the Isle of Man doing the same? I suspect not, but it’s the most sustainable way forward for Guernsey and sod the others!
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Great post
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GM
Why would they not deal with us? If we give a reasonable explanation surely they would be compelled to accept it through gritted teeth. External pressure would keep them in check alone? The term Code of Conduct sounds a voluntary term as opposed to a legal one.
However most importantly, that is definitely an interesting idea. My only initial opposition to it is I think the more we keep things the same the better, we want to be seen as stable and reliable. If we have to change however your idea would keep a lot of things fixed…
Who would lose out and who would gain?
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Just curious as well – what do you mean by your companies?
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Dani
We’ve seen how the EU operates. They are big and we are small and they bully us. The UK is put under massive pressure by the EU to in turn pressure us to “toe their line”. The EU does not deal with “reasonable explanations”. They have their own agenda and couldn’t care less about ours.
I would agree with you that staying as close as possible to the status quo would be great, but realistically that doesn’t appear to be an option. If we stay exactly as we are then if the global recession continues we will still be operating at a deficit which is only sustainable for so long. We’ve done well to cut public sector costs, but the global recession has thwarted the original intention to “grow our way out of the structural deficit”. We cannot control external events like a global recession.
Businesses actually trading from here would lose – they would all pay more tax. But that’s exactly what’s missing from the current system. If corporates pay more tax, then part of the tax burden is redistributed from the personal sector to the corporate sector, yet clients of the finance sector would be unaffected.
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Dani
Apologies, that was a typo caused by submitting my post via a dodgy wireless link.
“my companies” should have read “with many companies”.
Hope that clears it up.
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GM
That definitely will give me something to mull over. Thanks.
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GM – absolutely agree.
I have said for some time that we should move towards a territorial system. Zero-10 without the deemed distribution element is even less sustainable than the current system. Jersey and IoM are taking a big gamble in order to keep zero-10 alive.
I would much prefer that we made our own course – you can then bet that Jersye and IoM would follow within a few years, once their deficits have continued to grow.
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Even though, I detest the zero in zero 10, I might get happier with it, if something like this was introduced (and produced some significant tax revenue), together with a realistic move from the States to reduce income inequality within the Island.
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GM
you say;
“We’ve seen how the EU operates. They are big and we are small and they bully us. The UK is put under massive pressure by the EU to in turn pressure us to “toe their line”. The EU does not deal with “reasonable explanations”. They have their own agenda and couldn’t care less about ours.”
I think you sum that up precisely.
Why then are we spending hundreds of thousands of pounds each year on a Brussels Office. It will make no difference whatsoever. Another political white elephant.
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Sam
I understand where you are coming from, but the worst possible thing we can do is simply cave in altogether. What I am saying is that we cannot stop the EU trying to enforce their own agenda, but we can lobby to minimise the effect.
Let’s face it, if Jersey and the Isle of Man had caved in over the EU Code of Conduct re zero-10 then it would have been a fait accompli. It won’t of course stop the EU coming back for a second bite to achieve their agenda by a different means, but the EU might not even exist by then (or the UK may no longer be in it!).
The importance of external lobbying is massive, yet far too many people think CM Trott is simply “on a jolly” when he is lobbying. Believe me, he is doing a massively important and effective job for Guernsey, regardless of who does or does not like him.
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GM
you are now going back on your statement:
“The EU does not deal with “reasonable explanations”. They have their own agenda and couldn’t care less about ours.”
In other words lobbying is a total waste of time. The EU is so huge and bureaucratic and the members paid so much, they care little about a small place like Guernsey lobbying for rights.
We are being drawn into that EU world of unnecessary expense for nothing. The outcome will be the same whether there is a Brussels office or not.
We are led to believe that our Chief Minister has been lobbying the UK for the past two or three years on LVCR. What difference did that make, Not a Jot, we now have to take Legal proceedings against the UK (unknown cost) in an attempt to get a reasonable result.
We throw good money after bad all the time and achieve nothing
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Sam
No I’m not going back on my comment. I’m saying that we can’t stop the EU driving their agenda. I’m not saying that we can’t lobby against it.
Its like the old IDC – they never had to show any reasonableness until they were on the courtroom steps if anyone dared to fight their decisions. Didn’t stop them trying it on next time, and the next time…
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Guernsey, Jersey and IOM are all struggling to earn tax revenue at the moment.
I know we are all in competition, but surely it is not too hard to get all three jurisdictions to sit around a table and agree a very low rate of corporation tax which will help fill their respective black holes?
I am aware that other jurisdictions may retain zero tax rates, but if Guernsey is putting itself forward as better regulated and of higher quality than those other jurisdictions, then surely people will be prepared to pay a small premium?
Or is the high quality jurisdiction argument just nonsense put about by our Chief Minister in order to justify his jaunts around the world – are financial services ‘customers’ only interested in the cheapest jusrisdiction?
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High quality is vital, in order to ensure that we are top of the list of jurisdictions with 0% tax rates.
But 0% tax rates are vital in order to even be considered.
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Never mind justifying zero10 to the EU..Justify it to the hard pressed Guernsey residents now faced with some increased taxes and reduced services as a direct result.
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I see from yesterday’s Press the saga of zero-10 moves on.
It appears that our regime, of zero-10 was sufficiently different to require the full formal assessment process. (Didn’t we all think that would eventually happen anyway.)
That Guernsey’s deemed distribution element was different therefore met the required standards.
The next stage is for the EU Commission to write a formal assessment of zero-10 and they may decide by March or April whether deemed distribution is compliant.
If they did, then it has to be ratified by European Finance Ministers.( Heaven knows when)
And so the saga goes on and on…………
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What amazes me that if this is such good news, why haven’t we had an official statement from the Policy Council
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Gary B
Maybe it’s because the PC has not met yet to discuss any latest developments
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Well Dave the Press are ahead of you and I fine some of their comments a little ambigious. On such an impotant subject I am surprised that an official statement has not been issued, having been prepered straight after the meeting with the EU.
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I must get a new keyboard, apologies over typing errors
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Gary B
Guernsey’s ‘external relations’ delegations are driven by the finance industry lobbyists. Our politicians have little input other than to read prepared scripts. Trott is a puppet, a parrot with a big voice, with vested interests, who got around 1000 votes (how many were first or second preference; how many were seventh?)
The same goes for the rest.
You can’t expect the Policy Council to be able to release any information concerning the workings of Guernsey’s secrecy jurisdiction without the nod from the people who are actually directing Guernsey’s policies, and so the lives of Guernsey people.
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Guernsey is not a secrecy jurisdiction.
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