Guernsey, along with Jersey and the Isle of Man, is currently under pressure from the European Union to change what certain member states consider to be an unacceptable corporate tax regime. This article looks at the background to this, the alternatives currently under consideration, and what this might mean for the island and those that do business with it.

For those of us living in Guernsey listening to judgement being passed on the island's corporate tax structure is by no means new. A low tax environment, which those dealing with the island have enjoyed, has long had its critics, but it has been a particular issue for the last 10 years. A brief recap of what has happened in that time will put the current challenge in its proper context.

It was at the turn of the new millennium that we came under pressure from the OECD to 'raise tax rates or else', even if no one was quite sure what the 'else' was. Their concern was ring fencing, regimes available to non residents but not to those living here. However, following an unexpected positive intervention from the US, in the form of Treasury Secretary O'Neill who felt there was no justification for such external interference, the OECD drew back. In return Guernsey and other centres challenged in this way committed to entering Tax Information Exchange Agreements. The OECD would not intervene in our domestic tax arrangements as long as they were transparent.

However, no sooner had this threat been removed than it returned in the form of the EU Code of Conduct Group, which set out to identify harmful tax practices in the EU and elsewhere. This rather selective process came up with five in Guernsey.

This time there was to be no white knight, and Guernsey agreed to abolish these harmful practices, including the exempt company and international company regimes.

But recognising the need for the island to retain its competitive position on the international stage, the solution proffered was a zero rate of tax for all companies (therefore no ring fencing), with limited exceptions, which included taxing banks on part of their income at 10 per cent. This was the beginning of the island's 'zero 10' regime, introduced on 1 January 2008. It was fairly clear even then that this was not what the EU had had in mind, but it did appear that we had done enough to meet their demands.

And so, for a short time, peace broke out. There was a brief period of hysteria later in 2008 when international finance centres such as Guernsey were being blamed for single-handedly causing the crisis that spread across the financial world. However, it soon became clear that this did not do justice to the part played by the world's banks, particularly in the US, and a review of its own offshore centres carried out on behalf of the UK Government supported this more positive view on what places like Guernsey could offer.

Then, in the autumn of 2009, we were given the news by the UK Government that, in the view of certain unidentified EU States, our new corporate tax regime was not in accordance with the spirit of the EU Code of Conduct and therefore had to change.

Whilst Jersey and the Isle of Man, who were charged with the same crime, reacted cautiously, Guernsey quickly passed a Bill in its Parliament authorising a review of its corporate tax regime, barely after the ink on the previous one had dried. It went on to clarify that there would be an underlying presumption of a general rate of tax of 10 per cent, even though the implications of this had not at that stage been properly thought through.

This was seemingly exactly what the EU had been looking for, and whilst the zero 10 regimes in Jersey and the Isle of Man are to be reviewed by the EU Code of Conduct Group, commencing this month, Guernsey's is not.

However, look a little closer and all is perhaps not as the EU thought they had seen and you may have heard. Guernsey has made no final decision on how its corporate tax structure should change, and has issued a public consultation document, seeking views on the principles that should underline a new regime and what we see happening in competing jurisdictions, some of which may well have been behind the challenge to zero 10.

The document then sets out five options that might be considered as replacements for zero 10. At the time of writing, the consultation period is still open but a favourite seems to be emerging, which is a move to a territorial system of tax, as seen in Singapore and Hong Kong, and as suggested in the last Conservative manifesto. A company will be taxed in Guernsey on income earned, or sourced, here only. This is being seen by many as best able to address the twin priorities of political and commercial acceptability. Whilst the former is probably right, it is a little difficult to be certain, given the lack of clarity surrounding the concerns raised over zero 10 and the identity of those behind the move. Commercially it should be workable for many, although the key to its success would lie in the definition of 'source'.

Of the other four options, the treatment of a company as transparent, such that its income is taxable in the hands of individual shareholders does not seem to offer more than the territorial system and perhaps offers less political acceptability.

Another alternative in the document is a system of repayable tax credits, as most frequently associated with Malta and blessed, for now at least, by the EU. In simple terms this works by taxing the company at an acceptably high rate but giving much of this back to a non-Maltese shareholder when they are paid a dividend. In Malta this process turns the headline rate of tax of 35 per cent to something closer to five. You might question the longevity of such an arrangement.

The fourth possibility put forward in the document is a flat rate, or residence basis of taxation, what might be considered the traditional way of taxing a company. This is the suggested method put forward by the Island's government, so it should be acceptable politically. Whether it is commercially viable, however, is another matter.

The last option, or more accurately last resort, is to scrap corporate tax altogether and be just like Bermuda or Cayman - if not quite as warm. This is a very competitive solution but one that will further challenge the island's finances. And it does seem difficult to believe that those who object to our current system would accept something, which to them is presumably even less in accordance with the spirit of the code, whatever that means.

The options set out in the document do not encompass all the possibilities, hybrids and variations that could be considered. We could even try to resist changing what we have, although that does seem increasingly unlikely. So the corporate tax regime will probably change, and there is pressure to introduce a positive rate of tax, even if that might be considered a contradiction in terms.

But what does changing the tax system in this way mean for an island that has built its reputation on being a well regulated but tax neutral jurisdiction? Would it have a future as an international finance centre?

The simple answer is that it has to, without this it is very difficult to see any future for the island at all. There is no one business or any combination that currently can fill the gap. A former pillar of the economy, tomato growing will not support an economy as successful as Guernsey's is now; neither will tourism. We do have a prosperous e-gaming industry, but a number of those living here are not entirely comfortable with that and would be unlikely to support a significant expansion.

And whilst there are many who will not shed a tear if we did not, and I would include in that some people living in Guernsey, I sense a growing determination within the island to meet this challenge, knowing, again, there will be no Paul O'Neill to come to our rescue.

It is acknowledged that the current uncertainty over the Island's corporate tax regime is not good for business. Whilst those already here will give us time to resolve it, it must be a deterrent to those looking for a tax neutral location to move to or do business with.  To an extent this uncertainty has been replaced by the perception of a broad based 10 per cent tax rate, which is not helpful either. However, if the process is properly managed from here, it should be to the island's long term benefit.

For those individuals looking to move to Guernsey, which has many attractions over and above its favourable personal tax regime, this should in any case not be an issue. Even those that buy an open market property should be insulated by the law of supply and demand from any threat this might cause.

For business, whilst the uncertainty is not ideal and mistakes have been made in getting us to this point, a workable solution will be found. It has to be. Funds established here will remain tax exempt. Whether we eventually keep zero 10 or change to, for example, a territorial system, most doing business with the island should still be able to enjoy that tax neutrality which has been a feature of Guernsey as an International Finance Centre for so long. And whilst this work goes on, Guernsey most definitely remains open for business.

For more information about Guernsey's finance industry please visit

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