Guernsey: The Implications for Guernsey of the Challenge to its Corporate Tax Regime

Last Updated: 11 October 2010
Article by Graham Parrott

Most Read Contributor in Guernsey, September 2018

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 www.guernseyfinance.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions