IT IS STRANGE to think that the island of Jersey is both a crown dependency and a tax haven, yet is only 100 miles from the coast of Britain. This, of course, makes it an attractive proposition for UK businesses. But the past week has shown that, despite their appeal, tax havens are struggling to resist the international community's clampdown on avoidance.
Jersey has been operating its 0/10 corporate tax system since the early 2000s. The island replaced its 20% corporate tax rate with a 0% rate to attract financial services, with rates of 10% and 20% applying to regulated sectors. It hoped that the £80m to £100m drop in revenue intake would be offset by the influx of businesses.
With this new regime, the state introduced deemed distributions, which meant that Jersey-owned businesses had to pay out 60% of all its profits in dividends – if they did not, Jersey resident shareholders would have to pay tax as if the dividends had been paid.
The UK and Jersey's view was that this was a personal tax anti-avoidance measure. However, the EU Working Party and Code of Conduct group decreed on 4 February 2011 that this was a way of maintaining a 20% business tax rate for Jersey companies owned by Jersey residents. This meant it fell under the scope of the EU Code of Conduct on Business Taxation - which, of course, does not cover personal tax. The tax regime had been considered "harmful" by EU member states because of its anti-competitive nature and, now that the official line stated it fell within the scope of the code, Jersey was acting contrary to EU regulations.
So, on 15 February 2010, chief minister Terry Le Seuer said that, although the state "disagreed with the findings" of the working groups, "the council of ministers believes Jersey should maintain its voluntary participation in the work of the Code Group as part of our 'good neighbour' policy with EU member states".
This could prove costly to the island. Its council of ministers claims that this will not reduce revenues in the long term, but "would lead to a cash-flow effect from 2013/14 which in any one year is not expected to exceed £10m".
But there are suggestions that this estimate is optimistic. Richard Murphy, director of Tax Research UK, warned that the island "is running a significant budget deficit and has shown no signs of being able to control that deficit" and this measure will "inevitably reduce its state income". He added that there was a danger of Jersey going bust and, if it does, the UK is liable to bail it out.
This is a very worst case scenario. Geoff Cook, chief executive of Jersey Finance, said Jersey "does not anticipate a significant loss of income" from the decision, and the worst case is that £10m of tax income could be deferred. He added this figure "should be put in context by the Island's £560 million strategic reserve, zero debt and plan to return to a balanced budget by 2013".
But, the fact that Jersey has contemplated such a measure because of fear of not being a "good neighbour" showed the power of the international community in keeping check on tax regimes.
Heather Taylor, tax investigations specialist at Grant Thornton, said that this option was "the lesser of two evils" for Jersey. The removal altogether of 0/10 "would stop in its tracks the present attraction as far as causing other companies to relocate to the island".
But action needed to be taken. As John Whiting, tax policy director at the Chartered Institute of Taxation, said: "What has happened over the years is the EU and OECD have been slowly twisting arms and getting territories to join the club."
It might be strange to think of the might of the EU showing such interest in such a tiny island such as Jersey. But despite the EU's power, ultra-competitive tax regimes will always punch above their weight.
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