Contents
Background:
Previous Scrutiny reports
Unfair
competition between local and foreign owned businesses
Would
Jersey-owned businesses be disadvantaged?
Creditable
against United Kingdom tax
Taxing
deemed rents on owner-occupied business property
Compliance
with EU Code of Conduct
a. Jersey
sole traders & partnerships
c. Financial
services companies
Is
creditability against UK tax essential?
Extension
to domestic property
Related
issue: exemption for Pension Funds
Appendix
– credibility against UK corporation tax
A) UK
companies with a Jersey branch
B) UK
companies with a Jersey subsidiary
The Corporate Services Panel has already presented
two reports to the States on the Zero/ten Design proposal:
· Interim Report (S.R. 4/2006), presented to the States on 28th September 2006. This report was based on the initial consultation document, dated 5th May 2006.
· Second report (S.R.3/2007), presented to the States on 23rd January 2007. This report examined the Treasury and Resources Minister’s revised proposals contained in R.80/2006 and the first part of the draft Zero/Ten legislation[1]
The Corporate Services Panel subsequently reconstituted the Sub Panel to conduct the next stage of the review which was to examine the shareholder legislation.
In particular, thetThe Sub Panel also wished
to follow up one of
the major concerns identified in its earlier reports, namely the fact that non-Jersey
owned businesses would escape tax liability in Jersey. The Sub Panel believes
that this wcouldould give non resident
owners a competitive advantage over local firms, particularly if
they are also avoiding or postponing tax in their own jurisdictions, and could encourage them to seek to buy out
locally owned businesses.
The Sub Panel believes that a proposal from Jurat Peter Blampied (the ‘Blampied
proposal’) for aits
recommendation to the Minister that he investigate the proposal
to tax on
owner-occupied business property (in effect a re-introduction of Schedule A) is a workable solution
to the problem of collecting a tax contribution from foreign-owned trading
companies. in
order to collect a tax contribution from foreign-owned trading
companies, the ‘Blampied proposal’.
The Sub Panel was
pleased to see that Tthe
Treasury and Resources Minister has acknowledged that this proposal is the
only potentially viable ‘effectively
the only solution I can see on the table which has anything going for it at
all’[2]. option
The
Sub Panel was pleased to see that and that he
has agreed to investigate the economic impact and the estimated potential yield.
This interim report is presented to the
States by the Sub Panel in advance of its further review of the draft
shareholder legislation[3]
in order to share with States members its adviser’s analysis
of this proposed solution.
The Corporate Services Scrutiny Panel is
constituted as follows –
Deputy P. J. D. Ryan, Chairman
Senator J. L. Perchard, Vice
Chairman
Connétable
J. Le Sueur Gallichan
Connétable
D. J. Murphy
Deputy C. Egré
Officer support: Mr M. Haden and Miss S. Power
For the purposes of this review the Panel
formed a Sub Panel, which was constituted as follows –
Senator J. L. Perchard, Sub
Panel Chairman
Senator B. Shenton
Deputy P. J. D. Ryan
The Panel engaged the following advisers to assist it with the review –
Mr. Brian Curtis, FCIB, MSI (dip.), PFS,
FInstD, has worked in Jersey's Finance Industry for some 35
years and is currently involved with a number of activities
within the industry and the voluntary sector.
Mr. Richard Teather, BA, ICAEW, a senior lecturer in Tax Law at Bournemouth University; a Freelance Tax Consultant and a writer on Tax Law and Policy.
The Corporate Services Scrutiny Panel approved the following terms of
reference for the third phase of the review of the Zero/ten design proposals:
To review the second part of
the Zero/Ten Draft Legislation, and any areas of concern raised by the Zero/Ten
system as modified by that draft law, with a particular focus on the following
areas –
1. The
provisions for taxing Jersey-resident shareholders;
2. The
provisions (or lack thereof) for obtaining revenues from non-Jersey owned
companies;
3. The
distributional effects and equity of the proposed Zero/Ten system;
4. The
effectiveness and fairness of any anti-avoidance measures and disclosure
obligations;
5. The
extent to which the proposed legislation meets the concerns raised in the
Panel’s first two reports on Zero/Ten; and
6. The
extent to which the obligations under Jersey’s agreement with the EU have been
satisfied.
The following documents are available on the
Scrutiny website
http://www.scrutiny.gov.je/research.asp?reviewid=56
BDO Stoy Hayward LLP - Review of the ‘Blampied
proposal’
from a United Kingdom tax perspective, 21 December 2006.
What is the economic and distributional impact of
an owner-occupied immovable property tax? Note prepared for States of Jersey by
Oxera, 22nd
May 2007
Note prepared by Jurat P.G. Blampied on the Oxera
Paper: What is the economic and distributional impact of an owner-occupied
immovable property tax?
The following witnesses
attended hearings with the Sub Panel:
7th August 2007
Jurat P.G. Blampied
16th August 2007
Senator Terry Le Sueur, Treasury and Resources
Minister
Mr. Malcolm Campbell, Comptroller
of Income Tax
Verbatim transcripts are
available on the Scrutiny website
‘RUDL’ charge
1.
The Under
Zero/Ten the profits of Jersey-owned businesses would be taxed (as deemed
distributions to the shareholders), but non-Jersey owned businesses (including
many High Street operations) would escape any tax liability in Jersey. The Sub
Panel believes that this would give non
resident owners a competitive advantage over local firms, particularly if
the owners are also avoiding (or postponing) tax in their home country..
2.
Furthermore, the Sub Panel believes
it is vital
that the Island continues to receive some form of tax contribution from non-Jersey
owned companies trading in the Island, and that it is equitable for them to continue to make some
form of contribution to States revenues.
3.
The
Treasury recognised at an early stage in their design proposal that there was problem herefailing to tax
foreign-owned businesses would cause problems for the Island.. The initial
Zero/Ten Design consultation document therefore contained a proposal which was
aimed at ensuring that off-island owned businesses continued to make a
contribution to the Island’s tax revenues once the standard rate of corporate
income tax was reduced to 0%. This became known as the ‘RUDL’ charge as it was to be levied on all businesses registered
under the Registration of Undertakings and Development (Jersey) Law 1973.
4. In RC 80/2006 it was stated:
The charge would avoid unfair competition between local and foreign
owned businesses and any tendency for locally owned businesses to sell out to
foreign investors (16.2.3)
5. The charge would not have impacted on locally-owned companies as it was intended that it would be creditable against income tax paid by resident shareholders. The problem for foreign owners, however, was that the charge would not be a creditable tax in their home territory and would have been an additional cost of doing business in the Island.
6.
The Sub Panel, while agreeing with the concerns that had prompted
the RUDL charge, had strong concerns with this proposalproposal itself,
and felthearing from
witnesses that it would be excessively complex, administratively
expensive for both businesses and government, discourage new investment into
the Island, and increase prices for consumers.[4]
The Sub Panel was therefore pleased to note that the Treasury removed
the RUDL charge from the Revised Design Proposal as a result of the opposition which
had been voiced during the consultation and Scrutiny period.
7.
8.
It has been said by the Treasury that non-Jersey
owned businesses would not gain any advantage under 0/10, because their tax reduction
in Jersey will be balanced by additional tax in their home
country, leaving the total tax on
their profits unchanged.
9.
For example a Jersey business owned by a
UK company currently should pays
20% tax
in Jersey plus a further 10% in the UK (the UK’s usual rate of 30% minus the
credit given for the Jersey tax paid).
Under 0/10 there willshould be no Jersey tax,
but also no tax credit in the UK, so the full 30% tax will be due in the UK. The tax would be paid wholly to the
UK Treasury, rather than some to Jersey and some to the UK, but the total
amount remains unchanged.
10.
The Panel received sufficient evidence to concludewas advised that this view is
naïve, and that non-Jersey owned businesses would be able to avoid tax, or postpone it for many years[5]. Simple tax planning would thereforeEither would give them a significant advantage over Jersey-owned businesses, and amount to unfair competition.
11.
Even those accountants who said that these
businesses would pay tax in the UK implied that any payment would be postponed
and uncertain - they would only say that “at some point they probably
will” pay UK tax, and that “it is just a fact of commercial life that if you
introduce a rule people are suddenly inspired to think around it”[6].
12.
Indeed the Treasury’s own approach to
0/10 suggests that many shareholders will seek to avoid tax once their
companies become tax-free under 0/10, otherwise the deemed distribution provisions and
the extended information powers given to the Comptroller would not be
necessary.
13.
In the case of a Jersey branch of a
UK company, it is true that the full profits
would be taxable in the UK (currently at 30%) as soon as they are
earned. However in the case of a UK group with a Jersey subsidiary,
under 0/10 that subsidiary will pay no tax in Jersey, and the group would only pay
UK tax when its profits are paid to the UK parent company as a dividend.[7] Since a dividend would attract tax, there
would be a strong incentive for UK groups to avoid receiving dividends from their Jersey
subsidiaries. Instead profits could be
reinvested
tax-free,
either in Jersey or elsewhere in the group, or extracted by way of a loan to the parent
group.[8]
14.
For businesses owned outside the UK, the treatment
will vary. However it seems likely that
a Guernsey company, for example, will be able to avoid, or at least
postpone for a long time, any tax on its Jersey operations.
15.
It therefore seems that off-Island owned trading operations
in Jersey will pay no Jersey tax, and will be able to avoid or delay paying tax
elsewhere. Their costs will therefore decrease, giving them an
advantage over locally-owned businesses.
16.
This advantage also means that Jersey businesses
will be more valuable to off-Island investors than they are to Jersey
residents, who may therefore find themselves outbid. Although there are of course many reasons
for making an investment, giving a tax advantage to off-Island investors can
only accelerate the current trend for Jersey businesses to be bought by
non-Jersey investors.
17.
The Sub Panel
has remained convinced that the real problems of inequity between locally owned
and non-locally owned non-finance businesses operating in the Island, which the
RUDL charge was intended to solve, had to be addressed. In its first report the
Sub Panel proposed two alternatives to the RUDL charge, a GST restriction and a
proposal from Jurat P.G. Blampied to re-introduce Income Tax Schedule A whereby
owner/occupiers of real property in Jersey were assessed to income tax (the
‘Blampied’ proposal).
18.
It should be noted that
prior to 1963 it was normal practice
in both the United Kingdom and Jersey to tax the benefit in kind that owner
occupiers enjoyed through occupying their own properties, and this was achieved
through Schedule A assessments.
19.
Subsequent to the Sub
Panel’s first report it became clear that the second proposal would be the more
suitable of the two options. The ‘BlampiedThis proposal is
discussed in more detail below (paragraph 23 onwards).
1.
The A key issue with regard to the proposal was is whether the tax
under Schedule A would be creditable against income tax so that the overall tax
burden on company shareholders was is not increased. If the tax is
creditable then any Jersey tax paid should give an equal reduction in UK tax,
so that the overall tax paid by the company and its shareholders remains the
same. It isiwas clear that in Jersey
the Schedule A tax would be a tax-deductible expensecreditable
for resident shareholders. The key question isiwas whether it could
be structured so that the UK would regard it as an income tax, and UK-owned
businesses would therefore be able to recover it against their UK tax.[9] Without this the tax would be an absolute
cost of doing business in Jersey, and therefore (like RUDL) would risk reducing
investment in the Island.
20.
21.
However even if it is
not creditable in the UK, the Schedule A tax would not be inflationary if
UK-owned businesses can successfully avoid paying UK tax on their tax-free
Jersey profits under 0/10 (see paragraphs 53-56 below).
22. The Sub Panel commissioned BDO Stoy Hayward LLP (“BDP”) in London to provide definitive advice on this question.
23.
The advice from BDO concluded that it was
not felt that a tax on deemed rents for non-residential[MH1]
Jersey property would not be an admissible tax in the United
Kingdom, for either
for United
Kingdom companies with a Jersey permanent
establishmentbranch or in relation to dividends paid by
Jersey companies to a UK parent company.
The basis for this advice was:
· FirstlyPrimarily that the UK only
gives credit for taxes which “correspond” to UK income tax or corporation tax;
since the Jersey tax would be on deemed (notional) rents whereas UK tax
is charged on actual income, it would not “correspond” to UK tax.
·
Secondly, in relation to a Jersey business which is a
branch rather than a subsidiary of a UK company, the UK only gives
credit for tax charged on “the same item of income” as the UK
tax; since the Jersey tax would be on deemed rents whereas the UK tax would be
on trading profits,;
the two taxes would therefore not be on the same income (which is one of the conditions which must be met
before the UK will give credit for an overseas tax).
24.
An alternative route was suggested by the Sub Panel, that a
UK-owned operation which currently owns and occupies its own premises in Jersey
could instead transfer the property to another group company, so that the
property holding company would charge rent (at full value) to the trading
company[10].. This would transfer part of the profits from
the trading company to the rental company.
Instead of the trading company paying Jersey tax on a deemed rent
(which it appears would might not be
recoverable against UK tax) the property company would pay Jersey tax on its actual
rental income.
25.
The advice from BDO stated clearly that in this case the
Jersey tax would be creditable against UK tax:.
“The
associated property ownership company
will have creditable tax for UK purposes”
26.
.However, BDO stressed that the wider implications
of such a move were beyond the scope of their advice.[11]
27. The Treasury and Resources Minister agreed that the Blampied proposal might be a viable alternative and agreed to undertake further investigations to confirm that the parallel company structure would work and to assess whether setting up such a structure might be too expensive.
28. The Minister told the Sub Panel in December 2006:
Senator
T.A. Le Sueur:
“… My only potential solution at the moment as to dealing with the
non-resident shareholder issue is something along the Blampied proposal… I do
not know yet as to whether they work fully or not but I cannot think of
anything that works better than that so it is, from my point of view, at the
moment that or nothing. I am not
looking at any other alternatives.”[12]
29.
In a
subsequent public hearing on 16th August 2007, the Minister confirmed that this
position had not changedit was still the case that the Blampied proposal
represented the only potential solution on the table and he was minded
to explore the consequences still further with the Sub Panel. He said:
I am leaning much more towards the Blampied idea on the
grounds of equity. But one has to be careful; if one generates greater equity
in one area does one create inequity of imbalance elsewhere?.
30.
In
order to address potential commercial disadvantages, tThe
Treasury and Resources Minister commissioned a note from Oxera on the economic
and distributional impact of the Blampied proposal[13].
ThisThise note
concludesed:
For the business sector, the analysis show that such a tax is likely to
have a negative impact on the international competitiveness of Jersey export
sectors, and to distort the competitive balance between domestic and
international firms in Jersey.
31.
The Sub Panel believes that the Oxera report is flawed because
it
is assumes that credit will not be available to non resident owned
trading companies against United Kingdom income tax, and so the
tax would represent an additional cost to doing business in Jersey compared to
their current position and that under 0/10. This is in contrast to the advice
received by the Sub Panel in the BDO report referred to above which found that
100% credit should work provided the parallel company structure was used. Indeed even if the Schedule A tax were not
creditable against UK tax, the Panel's advice still cast doubt on Oxera's claim
that it would be inflationary. If UK-owned businesses can avoid UK tax on their
Jersey profits under 0/10 then they will reduce their cost of doing business in
Jersey, so the Schedule A tax would merely cancel out part of that advantage (See paragraphs 53 - 56
below).
32.
The Sub Panel discussed this point with Jurat Blampied[14].
He said that Oxera had mistakenly looked at Schedule A as a stand-alone tax. He
explained that Schedule A tax was payable on the net annual value:
That net annual value on which income tax was payable, that net annual
value was deducted from the assessed profits.
So if you had profits of £500,000 and you owned the building in which
you traded, the net value, £100,000, would come off. You would pay tax under schedule D which lays out the rules on
which trading profits are assessed, at £400,000 and you would pay schedule A,
£100,000: £500,000. So you would in
fact be paying 20 per cent tax on your total income. If the schedule A exceeded the profit there would be a loss and
the loss would be set off against the schedule A, which would mean you would
only still pay tax on your actual profits.
So the effect disappears. This
would be the same for the company owned by non-residents as it would be for the
company owned by residents because a tax assessment would have to be calculated
in order, so far as the Jersey resident is concerned, that can be imposed on
the Jersey resident shareholder. So the
same would happen for the schedule A for the company owned by the
non-resident. If, by any chance, the
schedule A exceeded the trading profit, there would be a theoretical loss and
there would be no schedule A payable.
33. Jurat Blampied told the Sub Panel:
When 0/10 is introduced these companies will be in a significantly
better position than Jersey owned trading limited liability companies and I
have no doubt that it is this benefit which makes the acquisition of Jersey
trading companies attractive to non residents.’
34. It is worth noting that the Economic Adviser to the British Chamber of Commerce, Mr. David Kern, gave the same warning in a recent public presentation[15]:
Non-local companies have effectively been given major tax advantages
and are able to operate in Jersey without contributing to the local tax base.
The consequences of this massive shift in Jersey’s tax structure have not been
given adequate weight in subsequent policy decisions, eg the retail sector.
More generally, it is critically important to assess future policy decisions
with regard to their impact on Jersey’s wealth and tax base. The drastic
changes in Jersey’s tax structure alter fundamentally the cost-benefit analysis
relating to the importing of non-resident firms into Jersey. But proposed
policy changes seem to ignore this critical point while damaging a key domestic
sector.
35.
Under this proposal, Tthehe annual value of
all Jersey non-residential property would be subject to income tax at 20%,
either:
· By taxing the landlord[16] on rents received
(actual rents for properties let on legitimate arms-length terms, full market value rent for property owned by a related party); or
· By taxing the occupier on the notional (market value) rent, for owner-occupied property.
· Raises
revenue, to help plug the ‘Black Hole’, by taxing use of a scarcescarce resource;
· Collects tax from off-Island owned businesses, which will otherwise escape Jersey tax under 0/10, whilst being creditable against UK corporate tax and therefore not increasing the cost of doing business in Jersey (see below).
36.
From discussions with the a rates assessor
Edward Trevor [should we refer to him by name or not?],
it appears that the Rates data could be adapted to deal with this tax. Although Quarters are based on historic
rather than current market values, the intention is that they will be revised
on a rolling basis so that the Quarters reflect the relative current
market rental value. It would therefore
be simple to publish an annual multiplier that converts Quarters into market
rent.
37.
Being based on Jersey land, this should be a non-distortionary
distorting
(i.e. permitted) exception to the general 0% rate. Indeed it is merely an extension to the
existing, accepted proposal to tax actual Jersey rents at 20%. Being based on the arm’s length price, the
calculation of the tax base is in line with international standards.
38.
Whether UK-owned businesses can offset this tax against
their UK tax liability is a key issue; if they can, then the cost will be
effectively nil for such companies.
This is one of the main advantages of this proposal against the RUDL
levy.
39. This point will have to be analysed further, and it appears that it may depend on whether the Jersey operation is a branch or subsidiary of the UK company. However as an initial appraisal it appears that even if the tax is not automatically creditable, a simple change in the group structure will ensure that it can be.
40. A company that owns its own premises (TradeCo) could transfer its property into another group company (PropCo) and pay an actual, market value rent. PropCo would receive real rent, and pay Jersey tax on that real rent. It would then (if UK resident) pay UK tax on that rent, and it is clear that Jersey tax on actual rent is creditable against UK tax on the same actual rent.
41. We suggested this structure to BDO when they advised the Panel last December, and their comment was that “the associated property company will have creditable tax for UK purposes”
42.
See appendix
for technical analysis.
43.
To comply with the EU Code, this tax would have to be
levied on all businesses. The effect on
owner-occupier businesses other than UK-owned ones would be:
44.
This proposal would have no effect on the amount of tax
payable. Tax would be charged on the deemed rent at 20%, but that
same deemed rent would also be treated as a tax-deductible expense against
trading profits, giving an equal 20% reduction.
Example:
A business has
profits of £50,000, before taking account of the deemed rent on its premises.
The deemed rent is
£20,000.
Deducting the deemed
rent from the trading profit gives a trading profit of £30,000.
Tax is therefore due
on £30,000 of trading profits and plus £20,000
of deemed rent, a total of £50,000 – exactly the same amount as would have been
taxable anyway.
45. If the business is making a loss, that loss can be offset against the deemed rent under normal principles. If the deemed rent is larger than the trading profit, when it is deducted from the trading profit it will create a loss which can be offset in the same way.
Example:
A business has profits
of £50,000, before taking account of the deemed rent on its premises.
The deemed rent is
£70,000.
Deducting the deemed
rent from the trading profit gives a loss of £20,000.
This loss can be set
against the deemed rent, giving a taxable deemed rent of £50,000 – exactly the
same amount as would have been taxable anyway.
46.
The tax-deductible expense would be valueless for a 0%
company. The company will therefore be paying Jersey income tax
on its deemed rent, whereas under 0/10 it would normally not be paying any tax.
47. However any Jersey income tax paid by the company will be creditable against Jersey tax paid by the shareholders on their actual or deemed dividends, so the overall amount of tax paid would remain the same.
48. As a beneficial side effect, this will ensure that Jersey-owned trading companies pay at least some tax in Jersey even if the Jersey ownership is hidden (e.g. through an offshore trust).
49. The only problem would be for loss-making companies, where there would be a tax on deemed rents but no overall profits to generate an actual or deemed distribution for the shareholders. It would be very unusual to allow such companies to offset their trading loss against their deemed rental income, because the trading profits would not be taxable. In this case the tax would have to be carried forward, and set off against the shareholder’s tax on future dividends, giving a cashflow disadvantage. Alternatively the Limited Liability Partnership option could be resurrected, for this limited group of companies only.
50.
Tax would be charged on their deemed rent at 20% (for
those companies that own their own premises). . However the corresponding
deemed tax-deductible expense will only reduce profits charged at 10%,
increasing the overall tax burden slightly[17].
51. For a UK-owned bank that can use double tax relief this will not be an additional expense, but it could be for some non-UK owned (and potentially for some UK-owned) banks.
52.
If it is necessary to give the industry some compensation for
this, then the GST flat rate charges could
be reduced so that banks will pay slightly more income tax and slightly less
GST, keeping the overall burden the same as under the Design Proposal. This would actually benefit some banks,
because the income tax is potentially available for double tax credit whereas
the GST charges will not be.
53.
The deemed rent would be taxed at 20% but would also
attract 20% relief as a tax-deductible expense against trading profits, so the
overall amount of tax paid would remain the same (just as for Jersey resident
partnerships).
54.
Creditability is clearly an advantage, since it
makes the tax effectively free for companies that can use the credit. However
it is not necessarily correct to say that the tax would be inflationary if it
is not creditable.
55. In the case of a Jersey branch of a UK company, the tax would be an additional cost, because the full profits would be taxable in the UK as soon as they are earned.
56. However in the case of a UK group with a Jersey subsidiary, under 0/10 that subsidiary would pay no tax in Jersey, and the group would only pay UK tax when its profits are paid to the UK parent company as a dividend. UK anti-avoidance (CFC) rules would not apply in most cases, because the company has a genuine commercial reason for being in Jersey. Since a dividend would attract tax, there would be a strong incentive for UK groups to avoid receiving dividends from Jersey subsidiaries. Instead profits could be reinvested, either in Jersey or elsewhere in the group, or extracted by way of loan.
57. It therefore seems highly probable that UK-owned trading operations in Jersey will pay no Jersey tax, and will postpone paying UK tax for several years, perhaps indefinitely. Their costs will therefore decrease, and an alternative tax would therefore not be inflationary provided its impact was less than the other tax benefits of 0/10.
58.
What would be taxed?
Currently landlords are taxed on their profit, i.e. rents less expenses
(including mortgage interest). That
could be used as the basis for this tax, but the primary purpose is to replace
the tax on business profits, so it might be better to simply tax gross rents.
59. This might cause some problems for UK groups; if 20% Jersey tax on their gross rents is more than the UK tax on their net profits on the rent they might not be able to receive any UK tax credit for the excess. However even that could probably be solved by moving debt around the group, so that the interest is borne by a different company.
60.
This paper is seeking a wayreport is examining
ways of collecting tax from off-Island owned, Jersey-based businesses in order to ensure that
they contribute to the
Island's economy. However Jurat
Blampied is also keen to extend the principle of taxing owner-occupiers to
domestic property as well as commercial. This proposal is beyond the scope of the current
review.
1.This
would be similar to the proposal for commercial property, but would probably
have some different features, including:
·a
deduction for mortgage interest,
·a
threshold, where the first few thousand pounds of annual rental value would be
tax-free (to avoid disadvantaging low- and middle-income
families), and
·a
scheme for “asset-rich, cash-poor” elderly (who would probably be allowed to
postpone their tax, with the States taking a charge on the house until their
death, at which point the heirs could either pay the accumulated tax or sell
the property).
61. The total annual rental value of commercial property in Jersey is £190 million.[18] Tax at 20% on that would yield £38 million, but the yield would be substantially reduced by:
· Rented property (rather than owner-occupied), which is taxed already;
· Property owned by Jersey-owned businesses and utilities, which would obtain a full tax credit;
· Property owned by finance businesses, which would obtain a half tax credit (10% against 20%);
· Property owned by Parishes and Jersey-based charities, which would presumably be exempt;
· States properties, for which no net tax would be received.
62.
These are unknown factors, and therefore the yield is difficult for the Sub
Panel to estimatecannot be estimated. It is important that the Treasury estimates the
expected yield of the tax, now that the Minister is “minded” to pursue it.Provided the collection
is cost effective the Sub Panel believes that this proposal will address the
issue of inequity although the reduction of inequality will be small
unless the tax
the foreign-owned business pay under this proposal is a substantial proportion
of the tax they escape under 0/10/.
63.
It is important therefore that the Treasury
estimates the expected yield of the tax, now that the Minister is “minded” to
pursue it.
1.For
domestic property, the total annual rental value of Jersey housing is £418
million.[19] However in this case we know that the total
amount of actual rent paid is £125 million[20], so
the deemed rental value of owner-occupied housing will should be
£293 million. Tax on that at 20% would
yield £58 million, but the actual yield would be much less depending on the
level of threshold chosen and mortgage interest deductions.
64.
The Taxing owner-occupied business premises in the way
suggested above lends further weight to the argument for abandoning the proposal
tocurrent
exemption for
foreign pension funds from tax on Jersey property would have to be
abandoned[21],
otherwise UK-owned groups would simply transfer their Jersey property into
their UK pension funds (this is already done in the UK, with a major UK group
having been reported as carrying out this switch this year). That would mean that the trading operation
no longer owned its premises, so would not be taxed on any deemed rent, but the
group body that did own the building would not be taxed on the rent
it received.
65.
The Minister told the Sub Panel that such a move would have to
be carefully considered as there could be an impact on property prices, on rental yields and
on competition.
The Minister said that this could possibly devalue the
capital value of some of the Waterfront land[22].
66. The UK gives unilateral double tax relief, which in this case is more generous than that available under the UK-Jersey treaty. Section 790 (4), Income & Corporation Taxes Act 1988 (UK), states:
Credit for tax paid under the law of the territory
outside the United Kingdom and computed by reference to income arising or any
chargeable gain accruing in that territory shall be allowed against any United
Kingdom income tax or corporation tax computed by reference to that income or
gain
67. Clearly what is being paid is “tax”. The two questions are:
· Is
it computed by reference to “income arising” in Jersey?
Jersey
is exempt from this requirement (ICTA s790(5)(a)). In any event, there are several areas where HMRC
suggest that deemed and actual income are to be treated as the same (see for
example Statement of Practice SP 6/88).
· Is there any UK tax “computed by reference to that income”?
This is a potential problem, since the Jersey tax is on (deemed) rental income but the UK company would be seeking to offset this against UK tax on the trading profits of the branch.
68. There are two alternative potential solutions to this problem:
1) Alter
the group structure
2) Tax Jersey businesses on their business
profits, but compute those profits by reference to the deemed rental value of
the premises they occupy
69. The simple answer to a UK company faced with Jersey tax on deemed rental income that is not creditable against the trading profits of (say) a Jersey shop, is to convert the deemed rent into an actual rent.
70.
In other words, transfer the ownership of the premises to
another group company,[24]
which will charge rent to the trading company.
This will reduce the profits of the trading company, and the
property-owning company will be paying Jersey tax on actual rents which should be,
creditable against UK tax on those same actual rents.[25]
71.
There are probably other mechanisms that could be devised, but
the above is a simple and practical solution to which should enable ensure
that double tax relief is availableto be claimed.. Consultation with relevant companies and
their advisers should result in a Jersey tax system that gives maximum
flexibility to UK-based companies seeking double tax relief.
72.
The proposed new tax could be re-drafted as a tax
on business profits, but with the profits equal to the deemed rent. This could be seen as an
over-elaborate system, although. I itit may
work to allow UK creditability[26]
(see Yates v GCA International, where a
Venezualan tax charged on a highly artificial tax based was accepted for credit
against UK tax on conventionally-calculated profits).
73.
However it
seems likely to fall foul of the EU Code, particularly B4 whether the rules for profit determination
in respect of activities within a multinational group of companies departs from
internationally accepted principles
74. Under 0/10, this may well become the dominant structure, as UK groups take advantage of the 0% tax rate.
75. In the case of a subsidiary (provided the UK parent company owns at least 10% of the Jersey subsidiary), the conditions for UK unilateral double tax relief are less onerous than for a branch. Section 790 (6), Income & Corporation Taxes Act 1988 (UK), states:
Any tax in respect of its profits paid
under the law of the territory by the company paying the dividend shall be
taken into account in considering whether any, and if so what, credit is to be
allowed in respect of the dividend.
76.
The same issue therefore arises as to whether tax on deemed
rents is tax “in respect of profits”. There are several
areas where the UK tax authorities suggest that deemed and actual income are to
be treated as the same, but there remains a strong risk that the proposed tax
on deemed rents would not be permitted.,”,
although as was stated above HMRC do in other cases accept that deemed profits
are profits. In
the event of any problems,However the same “parallel property company”
structure could be used as for the branch..
[1] Draft Income Tax (Amendment No.28)(Jersey) Law 200-
[2] Transcript of public hearing on 16th August 2007
[3] Draft Income Tax (Amendment No.29)(Jersey) Law 200-
[4] Corporate Services Scrutiny Panel
Report, Review of the Zero/Ten Design Proposal (SR4/2006), Section 5.5
[5] Jurat P.G. Blampied: Notes on Oxera paper
[6] Transcript from public hearing dated 4th August 2006
[7] UK anti-avoidance
(CFC) rules would not generally apply where the company has a genuine commercial operation in Jersey.
[8] Clearly there are
limits to this process; if the profits retained in the Jersey company
become too large then it risks being treated as an investment company rather than a trading operation, and so
risks being caught by the UK’s anti-avoidance rules. However it seems that it will be possible to
avoid paying a dividend for many years, giving a substantial tax advantage.
[9] This is on the basis that under
Zero/Ten UK-owned companies will still be paying the same amount of tax but to
the UK Treasury rather than to Jersey.
In the Sub Panel’s Interim report some doubt was cast on this assumption
by some witnesses (Corporate Services
Scrutiny Panel Report, Review of the Zero/Ten Design Proposal (SR4/2006),
Section 5.5)
[10] It is in fact
already quite common amongst large UK retail chains for a separate group
company to hold all the
property.
[11] To view the BDO advice in full
please refer to the Scrutiny website
[12] Transcript from public hearing, 15th
December 2006, p.26
[13] To view the Oxera paper please refer to the Scrutiny website
[14] Notes by Jurat P.G. Blampied on the
Oxera note dated 6th July 2007; transcript of hearing dated 8th August 2007
[15] The Jersey Economy: Prospects, Opportunities and Threats, 17th July 2007
[16] Possibly collected from the tenant,
through a withholding tax on rent.
[17] Only very slightly, since banks would
be expected to have a very high profitability per square foot, so the deemed
rent would be a small proportion of the overall profits.
[18] Parish Rates data
[19] Parish Rates data
[20] Household Expenditure Survey;
because the two figures are calculated in different ways, the net figure for
owner-occupied property is unlikely to be accurate. However it gives a good indication of the potential yield.
[21] Through repeal of Article 115(a) of the Income Tax (Jersey) Law 1961. See Corporate Services Scrutiny Panel Report, Review of the Zero/Ten Design Proposal (SR3/2007), Section 7.6) for discussion of the issues.
[22] Transcript
of public hearing on 16th August 2007
[23] This Report is prepared
for the States of Jersey to explore the possible impact of a proposed tax
reform. It is not intended as
commercial advice, and businesses should seek their own advice before
proceeding. Neither the Panel
nor its advisers accept any responsibility for any loss or costs caused by
following the theories expounded herein.
[24] It may be necessary to introduce a
stamp duty relief to facilitate this
[25] Per BDO’s advice
to the Scrutiny Panel, see above.
[26] see Yates v GCA International, where a Venezualan tax charged on a highly
artificial tax based was accepted for credit against UK tax on
conventionally-calculated profits
[MH1]Richard - please check this paragraph. Jim felt that it wasn’t very clear. I’ve deleted one phrase as you can see