Introduction

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, ~~the~~tThe 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 wc~~ould~~ould 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 a~~its 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.

Panel Membership

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

Independent Expert Advice

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.

Terms of reference

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.

Documentation

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?

Hearings

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

Background: Previous Scrutiny reports

Unfair competition between local and foreign owned businesses

~~‘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 here~~failing 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 ~~proposal~~proposal itself, ~~and felt~~hearing 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.

Would Jersey-owned businesses be disadvantaged?

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 ~~will~~should 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 conclude~~was 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 therefore~~Either~~ ~~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 Je