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| Fairness and equity for all
| MALCOLM CAMPBELL
Comptroller of Income Tax |
ON first arriving in Jersey to join the Income Tax Department, having worked for a London firm of chartered accountants and prior to that the United Kingdom Inland Revenue, one of the first things that struck me was the generally constructive and positive relationship that the Comptroller of Income Tax had with the professions here in Jersey and with the taxpaying population.
This was a fairly sharp contrast to what had previously been the experience of my professional tax life, as the relationship in the United Kingdom between the Inland Revenue and the professions and taxpayers could, I think it is fair to say, be confrontational and, at times, hostile.
I am pleased to say that, as far as I am concerned – and I do hope that the professions and the vast majority of taxpayers agree – that constructive and positive relationship has continued to this day. For example, I make a point of giving written rulings to professionals within a couple of days, sometimes even within hours when there is a particular urgency about an international transaction, to help facilitate business coming to Jerse. We are in a highly competitive international environment and rapid rulings from the Income Tax Office do, I believe, contribute to some degree to that business coming to Jersey, rather than to a competitor jurisdiction such as Guernsey or the Isle of Man. I also give rulings on a regular basis to individual taxpayers so that they have certainty when handling or rearranging their personal affairs.
But that constructive relationship does not mean that we at Income Tax don’t have a compliance role to play. As in any democratic country in the world, there are those who try to avoid and evade tax. So we have to combat abuse of the tax system, because it is extremely unfair to the vast majority of honest taxpayers that some do avoid and evade tax.
The following statistics give a real flavour of the work Income Tax does to combat abuse, avoidance and evasion:
Abuse by controlling directors. Since December 2002 challenges have resulted in remuneration claimed as a taxable deduction being reduced by £4.5 million.
Tax evasion. Over 530 taxpayers were investigated in 2003 with income totalling £6.4 million brought back into charge to tax and back tax and penalties of £1.3 million recovered.
Private expenses claimed in business accounts. In 2003 challenges against private and personal expenses in business accounts resulted in an increase to taxable profits of £22 million.
Tax avoidance. 404 cases with a total value of £42.9 million were ruled on in the year ended April 2004 under Article 134A, the anti-avoidance article of the Income Tax (Jersey) Law. Of those, 145 transactions with a total value of £20.1 million were wholly or partially counteracted under Article 134A and 259 transactions with a total value of £22.8 million were allowed.
Compliance efforts at the Income Tax Office are virtually certain to shift up in gear when the zero-ten corporate rate proposals are approved by the States Assembly.
It is likely, for example, that the Finance and Economics Committee will ask the States Assembly to approve new information and enforcement powers for the Comptroller of Income Tax so that all those Jersey resident participators in corporates are, firstly, fully and properly identified, and secondly, properly taxed under what are commonly termed the proposed ‘look through’ provisions. These provisions will ensure that the Jersey resident participator is taxed on the share of the corporate profits which he has the ‘power to enjoy’. ‘Power to enjoy’ will have a wide meaning attributed to it in the Income Tax (Jersey) Law. Such new powers are thought essential for the good and proper administration of these proposed ‘look through’ provisions and to ensure that there is no leakage of tax revenues through the use of offshore structures.
As an example of the new powers likely to be introduced when the zero-ten proposals are approved, the Comptroller of Income Tax will ensure that a return is issued to all Jersey resident taxpayers, asking for a declaration of all the Jersey resident corporates, as well as all the foreign corporates, in which local residents participate.
There will be a de minimis limit so that a Jersey resident participator with a participation of less than the limit will not have the corporate profits applicable to that holding imputed to him. There will also be special provisions to ensure that, where a Jersey resident is a participator in a foreign corporate and his participation in that corporate and the corporate itself has been established for a bona fide commercial reason and not designed in any way for the avoidance of Jersey tax, the corporate profits will not be attributed to that Jersey resident participator. However, all dividends received by him from that foreign corporate will be charged to tax. Special purpose vehicle companies used, for example, in ‘off-balance sheet’ financing, will also have specific provisions relating to them.
It is likely that new and increased penalty provisions will be introduced and imposed on any taxpayer who makes a false declaration under these new provisions.
In addition to these new information and enforcement powers for the proposed ‘look through’ provisions, it is likely that the Finance and Economics Committee will also ask for the States Assembly to approve a revision to Article 134A, the general anti-avoidance provision, so that any person who enters into a financial or investment scheme or transaction that will result in the avoidance of tax will have to report such transactions to the Comptroller for a ruling.
It is envisaged that there will be a pre-clearance system, much as happens now for hundreds of schemes or transactions every year, so that a taxpayer can have certainty as to the tax position before entering into any such transactions.
Any such revision to Article 134A will not be designed to catch or overturn bona fide commercial transactions entered into which do not have as their purpose the avoidance or reduction of tax.
Some may argue that these likely new powers will destroy the constructive and positive relationship that currently exists between the Comptroller of Income Tax and the professions and the taxpaying public. This need not necessarily be the case. The current general anti-avoidance provision, for example, has existed for some 35 years so it is unlikely a revision will cause huge conflict. And any new information and enforcement powers that are introduced which are used for the detection of abuse, avoidance and evasion must surely be the right thing to do, so as to ensure that the honest taxpayer is protected and does not have to pay more tax than he otherwise would have to do.
Most taxpayers accept that we have to pay tax so as to ensure that the public services we all value continue to be provided and it is the provisions of the Income Tax (Jersey) Law 1961 that allow the legal assessment and collection of that tax. There is no doubt that the effective operation of our tax system here in Jersey depends on the co-operation of the taxpaying public so it must be seen to be fair and equitable. The changes proposed by the Finance and Economics Committee in relation to the ‘look through’ arrangements and Article 134A are designed to enhance even further that fairness and equity.
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