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| Crossing the tax Rubicon
| SENATOR TERRY LE SUEUR
President, Finance and Economics Committee |
For this year’s supplement, I would like to concentrate on what for me is the major political and commercial issue of the year. I refer to the reform of the Island’s taxation system and, in particular, the zero-ten company tax component of the reforms.
It is no exaggeration to see the difficult choices that the tax reforms pose as something of a Rubicon for the Island to cross, failing which a very uncertain future opens up before us. Without wishing to over-dramatise, I feel that we are playing for high stakes, in a new international fiscal environment that is alien to some and hard to grapple with even for the most initiated. We certainly do not intend to fail the test but I hope that many, including the readers of this article, will have a degree of sympathy for those confronting the difficult decisions which are required and appreciate what I consider to be my committee’s patient and inclusive approach.
For me to give full reasons for the zero-ten debate here would take up most of this article. Thus, I shall assume a high degree of knowledge among readers about the background to, and need for, the introduction of zero-ten. For those who have not yet had the chance to read through our proposition to the States on the tax reforms – currently posted on the Jersey Government website – and to reinforce my point about the committee’s determination to implement zero-ten I offer the following selected quotes from the text:
‘The committee has concluded that the future economic wellbeing of the Island is dependent on ensuring that Jersey is, and remains, internationally competitive as a place to provide international financial services.
‘There are two key elements which influence the competitiveness of Jersey’s financial services industry in the current international environment in which the industry must work. These elements have arisen independently of each other but do interact in terms of the solution to be proposed to the different challenges they pose. These two elements are:
Tax competition generally by rival jurisdictions competing for the establishment and/or retention of large financial services providers such as banks and fund managers. (This establishes the need for the 10% rate for financial services companies.)
Changing EU rules on harmful tax practices, applicable to corporate taxes only, which affect the corporate vehicles used by customers of financial services providers. (This establishes the need for a general 0% rate to ensure that the international consumers of financial services continue to benefit from tax neutrality in their investment structures transacted through the Island.)
‘Thus, in order to safeguard as much as possible of the tax revenue generated from corporate profits tax, those entities regulated by the JFSC, and a few others, will be excluded from the 0% rate and a higher rate applied to them. In particular the 10% internationally competitive rate will be applied to the financial services sector.
‘And in order to keep the financial services sector competitive, the zero profits tax legal entity must, in general, be made available to all companies, irrespective of the place of residency of the beneficial owners. This involves setting the general rate of corporation tax at 0%.’
This is such a fundamental issue that it is important that we are absolutely clear on the reasons and the necessity for the move. Behind the basic explanation lies a fundamental reappraisal of the international environment in which Jersey must live and work, and a realisation that trying to work outside new emerging norms may well be a ‘Canute-like’ strategy with enormous risks and no certain benefits.
Firstly, tax competition in general is ever more a force to be reckoned with in a world where flows of financial capital recognise no borders. So, putting it simply, in an export industry such as financial services we must compete on quality, value for money and ultimately on cost recognising that tax both for customers and providers of financial services is an important component of cost.
Secondly, it does now seem evident that the major national trading powers have come to understand that tax competition is reasonable. Most now accept that if a country can have a 0% corporate tax rate and still finance its essential services then this should not be attacked. However, what they are not accepting is any artificiality in the tax system which gives a better deal to external investors or shareholders than is available to the country’s own citizens. This is the core reason why we need to level the treatment available to outside investors under our Exempt Company and International Business Company (IBC) regimes so that no such discrimination remains in the future. At the same time 0% for Exempt Companies and IBCs is an absolute essential to keep our status with investors as a tax neutral jurisdiction. Thus 0% treatment will become the norm for all companies, except that, by agreed concession, one area (and we have chosen financial services for obvious reasons) can be excepted from this requirement and taxed at a higher rate.
Thirdly, we must recognise that competitiveness is inherently a matter of perception in cases where outsiders have a less than perfect understanding of our circumstances. Because many investment decisions are as often made on the strength of instinct, perception or one isolated element as they are based on concrete advice or comprehensive research, then we also have to present a positive image. In doing this, we avoid giving ammunition that would suggest our competitiveness is declining compared to other financial centres. Conversely, we really need to do the opposite and demonstrate that our competitiveness is actually improving or, at the least, demonstrate that the price compares favourably with rivals whilst the quality of the product is increasing. This is a demanding agenda and one where falling behind is not really an option since to do so risks losing business. Once business is lost it is all the more difficult if not impossible to recover.
In the debate so far on zero-ten, we have received input that questions whether we need to be exactly the same in rate terms as our competitors. We know that Guernsey, Isle of Man and Singapore are moving to a 10% rate on the profits of financial services providers and that all these, together with Bermuda, Cayman, the Bahamas and numerous other centres, impose no tax or levy on the movement of capital through their financial systems – indeed neither do major centres such as London, New York and Tokyo. This in itself suggests that Jersey would be inviting scrutiny and criticism if it differentiated itself either by having even a tiny percentage levy on client funds held, or a higher rate for financial services providers than 10%.
Some point to Dublin having a 12% rate for their financial institutions or to the Taxe d’Abonnement levy of between 0.05 and 0.1% that Luxembourg imposes on collective investment funds held there. However, these are perhaps the two exceptions that prove the rule and are exceptions, I would suggest, because they can command a premium by virtue both of their European Union membership and the specialist nature of the product they offer. I do not see premium price status as so easy to achieve for Jersey. We are not in the EU; we have a wide product array and are traditionally compared to those other centres I have listed above. Some market operators and customers see us as expensive already, hence our room for manoeuvre is more limited than one might believe.
I am personally convinced that Jersey must earn its way in international markets and that means we must compete. We are not large enough nor dominant enough to set the price and whether we like it or not, large multi-national institutions that use us, (and other centres at the same time), have more ‘buying power’ or ability to move their business around than ever before. We do not have to be bullied nor forced to provide services at a discount compared to others. But we do need to aim for strategic parity in an increasingly cutthroat competitive world. All of this creates and reinforces a powerful incentive to pursue a zero-ten policy.
In most of this article I have tried to deepen our understanding of the rationale for zero-ten and of the form it will take. To conclude, it would seem sensible to explain what will happen next. As I have said, my committee has lodged a proposition in the States to debate and hopefully to approve zero-ten. This debate is expected to take place this month. If approved, we then aim to pass legislation within the next 12 months to give legislative effect to the reformed corporate tax system. Once that legislation is on the statute book we shall then decide on the operative date for the actual introduction of zero-ten and whatever other fiscal measures are approved to deal with the financial consequences it engenders. This we can do recognising that our negotiations with the UK and the EU mean that we have some five years – up to the end of 2008 – to complete the whole process. This will be a long and complicated process, and whatever substitute tax measures we may need to bring in to make good the deficit from moving to zero-ten whether GST alone or others, we are going to need every minute of that intervening time to make a success of what is without doubt a lengthy and complex endeavour. I hope we can count on the understanding and support of all involved in ensuring that theses changes are delivered successfully.
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