However, scratch the surface and you will find differences in the ways in which both companies and individuals are taxed which can have an important bearing on the way that businesses may want to structure themselves.
Taxation Of Individuals
The starting point in both islands for determining the tax liability of individuals is residence. An individual resident in either island potentially is liable to tax there on his worldwide income. What constitutes residence for these purposes in Guernsey is set out in statue. In Jersey it is not and instead follows UK case law concepts. In both islands someone who spends more than 182 days on the island will become resident. However, the similarities stop there. In Guernsey an individual can maintain a home and spend up to 89 days in Guernsey without becoming resident. In Jersey anyone with a home on the island is resident even if he spends just one day on the island. In Guernsey an individual can become resident if he visits the island with the intention of setting up a home in Guernsey and in fact does so either in the same or the following year. No such rule exists in Jersey.
Ordinarily an individual is liable to tax on income as it arises, ie as he becomes entitled to it. However, individuals in both islands can benefit from a remittance basis of taxation m the non-local income under which a tax charge can be postponed or possibly avoided altogether if their connection with the island is sufficiently remote. In Guernsey the availability of this treatment depends on the individual concerned having a home elsewhere. In Jersey it depends on the number of days that the individual spends in Jersey and on his lifestyle. This can be attractive to wealthy individuals who only want to spend limited amounts of time in the islands.
For the majority who cannot make use of these sorts of opportunities an individual's tax liability will depend in part on the extent of the reliefs available to him. Both islands offer a wide range of reliefs. However, the approach to relieving the tax burden on individual large personal allowances. Jersey on the other hand provides smaller personal allowances but has adopted thresholds below which individuals pay no tax at all.
Set out in Box I is the comparative tax liability of a married individual earning £50,000 per annum whose spouse has no income, who pays interest of £2,400 per annum on a bank loan and who makes an allowable contribution of £7,500 per annum to a pension arrangement.
The tax advantage enjoyed by the employee living in Guernsey will potentially be offset by the fact that most fringe benefits, eg company cars and accommodation provided by an employer, are taxable in Guernsey but not taxable in Jersey. The individual in Guernsey will also pay his tax at an earlier date under the Employment Tax Installment (ETI) Scheme. In Jersey only Social Security payments are deducted from an employee's salary.
The other significant difference that affects employees is the prior year basis of taxation that applies to income from employment in Guernsey but not in Jersey. As set out in Box 2 most forms of income are taxed on a prior year basis of taxation in Guernsey. The major exception being in the case of investment income where the individual concerned has both Guernsey and non-Guernsey investment income. In Jersey only business income in taxed on a prior year basis of taxation.
Taxation on a prior year basis is beneficial where, as typically will be the case, the amount of the income is increasing each year. However, it can create anomalies. In particular the ability of the Income Authority in Guernsey to choose which year's income falls out of charge to tax can create unexpected results. It is essential to plan for such matters with care in Guernsey.
Taxation Of Companies
The starting point for determining the tax liability of a company in both Guernsey and Jersey is again residence. However, in the case of companies there are rather more marked differences between the definitions of residence for these purposes.
Jersey continues to follow the UK concept of central management and control so that the company is regarded as resident in Jersey if its directors control its affairs from Jersey. Although like the UK the place of incorporation is now also relevant. The residence of a company in Guernsey on the other hand is determined primarily by place of incorporation. Control can also be relevant. However in the case of Guernsey this means control in an ownership sense rather than in a strategic management sense. Thus the place where the directors meet and take decisions regarding the company's affairs is of no particular relevance in Guernsey. This difference in the definition of residence can have a fundamental impact on many internationals structures providing both planning opportunities and potential pitfalls.
There are also differences in the treatment of other fundamental matters such as the treatment of dividends, for example scrip dividends are generally taxable in Guernsey, whereas in Jersey they are not, However differences of perhaps greater practical significance affect the concessionary treatments provided to business carrying on international business.
In 1993 both Guernsey and Jersey introduced a new tax regime for companies wishing to carry on international business for the island concerned. In Guernsey, the companies concerned are referred to as companies with international status. In Jersey they are referred to as international business companies (IBCs). In Guernsey but not Jersey "international status" can apply to other entities such as limited partnerships.
In Guernsey companies with international status are subject to the, same tax treatment as any other resident or trading in Guernsey. The only difference is that provided they satisfy the conditions to qualify for international status they will be subject to tax at a rate agreed with the Income Tax Authority at somewhere above 0% up to a maximum of 30%. This rate applies to all the income they receive.
In Guernsey it is not possible for an entity that has previously been resident in or that has previously traded in Guernsey to acquire international status, ie conversions are not possible. By concession in Jersey conversions are allowed
The regime that applies in Jersey is different in a number of other respects. As already noted the status can only apply to companies. Secondly they are subject to fixed rates of tax which distinguishes between international income, ie income from activities carried on outside the Island and other activities. Income from international activities is subject to low rates of tax which depending on the level of the profit concerned vary from 2% down to 1/2%. (If a proposal currently under consideration is introduced it will be possible to agree a rate of taxation for income from international activities). Income from other activities, ie activities carried on in Jersey are taxed at 30%. However, in addition to these "headline" differences more subtle differences also apply. For example, in Jersey the income is taxed under Schedule D Case VI. This means that the income is taxed on a current year basis rather than the prior year basis that applies to other trading income in Jersey and applies to entities with international status in Guernsey. It also means that no relief is available in Jersey for losses incurred by such a company.
In Jersey but not in Guernsey it is possible, to establish a bank as an IBC, However, it is possible for a bank to achieve much the sane tax treatment in Guernsey by taking advantage of the concessionary regime, available to banks in Guernsey in respect of international business .
Computation Of Taxable Income
On the whole the basis of taxable income in both Guernsey and Jersey follows the principles established by case law in the UK. However, there are again a number of differences between the two islands.
Both islands have introduced a system of capital allowances. The prevailing rate for plant and machinery in Jersey is 25% and in Guernsey is 20%. However of particular interest in Guernsey is the repairs allowances available to landlords. This allowance is available at rates varying from 5% in respect of undeveloped land to 25% in respect of dwelling houses and glasshouses and is an attractive relief for landlords. There is no equivalent relief in Jersey.
The method of relieving interest and other similar payments also differs, In Jersey relief is given primarily by deducting tax from the interest or other payment concerned. In Guernsey there is no requirement to withhold tax unless the payment is made, to a person outside the island.
Both islands offer some relief for foreign taxes. However, with certain exceptions for UK and Guernsey taxes, in Jersey this relief is restricted to allowing a deduction from the income concerned in computing the amount of tax payable. In Guernsey subject to various restrictions a credit (ie a deduction form the tax payable rather than just from the income on which the tax is payable) is often available.
Guernsey has also recently introduced a formal arrangement for relieving losses against the profits of other group companies. In Jersey comparable relief has to be achieved by use of management charges or other similar means. However, Jersey allows a two year carry back of trading losses. Whereas Guernsey only allows a one year carry back.
As noted above, most income in Guernsey is assessed on a prior year basis. In Jersey only trading income is assessed on this basis. However, other differences in the ways that income tax is assessed and the time at which is becomes payable also apply.
Guernsey allows spouses to elect to have their tax liabilities to be assessed separately. This does not affect the amount of tax that they pay. However, it means that they become responsible for filing their own tax return and settling their own tax liability. A similar arrangement is not available in Jersey.
The basis on which the profits are assessed in the two islands also differs. In Jersey a single assessment is raised on the partnership for which all the partners are jointly and severally liable. In Guernsey each partner is assessed separately on his or her share of the profits.
Quite apart from the effect that the ETI scheme may have on the timing of the payment of tax in Guernsey, the time at which tax is payable generally in Guernsey is earlier than it is in Jersey. In Guernsey income tax is payable in two equal installments. The first half way through the year of charge and the second at the end of the year of charge. In Jersey income tax is not payable until some time after the year of assessment (ie. Jersey's equivalent of Guernsey's year of charge).
The precise time at which income tax becomes payable in Jersey depends on the issue of the relevant assessment and this tends to vary depending on the identity of the taxpayer concerned. However, in the case of individuals typically assessments are not issued until the September following the year of assessment.
The tax systems in both Guernsey and Jersey may appear to the outsider to be similar. However it is not safe to assume that because if something applies in Guernsey it will be done in the same way in Jersey.
There are many important differences which make consideration of how the two systems will apply to a particular situation important so that the best outcome can be achieved.
EXAMPLE OF COMPUTATION OF TAX LIABILITY FOR 1996
GUERNSEY JERSEY (NOTE 1) £ £ Income 50,000 50,000 Pension (7,500) (7,500) Loan interest (2,400) - Married person allowance (11,000) (5,200) Earned income allowance - (3,400) Total 29,100 33,900 Tax @20% 5,820 6,780 Less tax withheld on interest - (480) Total 5,820 6,300
Married person with income from employment of £50,000 paying loan interest of £2,400 and allowable pension payment of £7,500. Spouse has no income.
Note 1: Income assessable in Guernsey in the year of charge 1997.
BASIS OF ASSESSMENT
GUERNSEY JERSEY Business Preceding year Preceding year Employment Preceding year Current year Land and buildings Preceding year Current year Other sources Preceding year/ Current year Current year (Note 1)
Note 1: Income from sources outside Guernsey is assessed on an actual basis. If the taxpayer has income from sources both within and outside Guernsey all income is taxed on a current year basis.
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.
For further information contact Jonathan G. Hooley on Tel (indirect line): + 44 (0) 1481 721000, Tel (direct line): +44 (0) 1481 719544, Fax: +44 (0) 1481 722373.