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Jersey and Guernsey say EU tax group sees zero-10 conflict with its code

Jersey and Guernsey say zero-10 regimes may not be found code-compliant by EU Code of Conduct Group.

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However, Jersey said it had been informed that there "has not yet been a formal assessment by the Code Group", and that there is a "further process to go through" before the EU decides on its official position with respect to zero-10 tax regimes.

According to Jersey, the Code Group is proposing a review by what it calls "a high level tax group", which would "determine what the code means by business taxation and whether this definition goes beyond corporate tax to include shareholder taxation."

" Jersey has been told that there was consensus on the part of Code Group members in support of the commission’s paper and that the present zero-10 regime, as it stands, was harmful", the Jersey statement, posted on the States of Jersey website late yesterday, said. 

‘Harmful effects’

In a similar statement, the States of Guernsey’s Policy Council also referred to a unanimous agreement by the Code Group that "the zero-10 corporate tax regimes have harmful effects”. 

“It is understood that, while the formal assessment process has not technically been concluded, the expectation is that the crown dependencies will be required to introduce revised corporate tax regimes," the Guernsey Policy Council statement added.

Guernsey’s zero-10 tax regime was not considered by the Code Group during its most recent deliberations because it had indicated it was prepared to review the zero percent tax, possibly with a view towards replacing it with a flat 10% rate. In its statement yesterday, Guernsey acknowledged that "the implications of last Friday’s conclusion by the Code Group will need to be thoroughly reviewed and assessed".

Issue is personal tax element

According to Jersey’s statement, the European Commission’s view seemed to be that the problem with its zero-10 arrangement was “Jersey’s anti-avoidance [personal income tax] measure" which was found to "come within the definition of business taxation rather than personal taxation", and therefore was considered "discriminatory" and "in conflict with the code”.

Jersey treasury minister Philip Ozouf noted that with the exception of this single aspect of Jersey’s corporate tax regime — which is also sometimes referred to as its ‘deemed distribution’ rule — Jersey’s zero-10 tax structure “has not been formally addressed by the commission or the Code Group”.

As a result, “with the exception of measure, nothing has been conveyed to [Jersey’s] authorities that would indicate that the present zero-10 tax structure is in conflict with the code criteria”, Ozouf said.

“This is fully in accord with the view expressed by the [Jersey] authorities to the Code Group and the commission."

Jersey’s deemed distribution rule refers to anti-avoidance provisions in the jurisdiction’s personal tax code under which, in certain circumstances, Jersey residents are deemed to have received a dividend from a profit-making Jersey company in which they own shares, whether they actually have or not. Such ‘distributions’ are then taxed as income.

The Code of Conduct Group is an advisory body that makes recommendations which in turn are  considered by Ecofin, an EU Council body comprised of the economics and finance ministers of the 27 EU member states. Ecofiin’s next meeting is scheduled for 7 December. 

Zero percent corporation tax

Under zero-10 regimes, most businesses pay no corporation tax, while some industries, such as banks, pay 10% and a few pay 20%.

As reported, the Code of Conduct Group is looking into the zero-10 regimes of the crown dependencies in response to concerns from some EU officials that they are ‘predatory’. However, they are a major element in the incentive package these jurisdictions use to attract businesses to their shores.

The zero-10 concept was actually conceived in response to concerns by the Code of Conduct Group over other tax codes, such as the International Business Company/International Company and Exempt Company structures, which allowed companies owned by non-residents to pay low or no tax on their profits.

The Isle of Man was the first of the three crown dependencies to introduce a zero-10 regime in April 2006, and it was initially examined by the Code of Conduct Group and found to be sound.

Guernsey and Jersey subsequently adopted their own versions of zero-10 in 2008 and 2009 respectively.

According to Richard Murphy, a vocal opponent of zero-10 tax systems, low tax regimes and tax havens who heads up the Norfolk-based Tax Research organisation, the Code of Conduct criteria the zero-10 codes are thought to be "failing" are:

• whether the advantages of the tax system “are accorded only to non-residents or in respect of transactions carried out with non-residents”;
 

• whether the advantages “are ring-fenced from the domestic market, so they do not affect the national tax base”; and

• “whether the advantages are granted even without any real economic activity and substantial economic presence within the [EU] member state offering such tax advantages”. 

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