letter to JEP. 23/07/10

Letter to the Editor of the Jersey Evening Post

23^rd July 2010

Why do the States favour non-resident companies on tax

while still pretending Jersey is not a tax haven?

Pat Lucas

I would like to congratulate John Clennett, former Treasurer to the States of Jersey, for his excellent Letter to the Editor dated 16.7.2010, in which he explores the root causes of Jersey's fiscal black hole. By pointing out the correlation between the projected deficit exceeding £64 million for 2010 and similar amounts for the following two years with the implementation of Zero-Ten it is perfectly obvious that our economy is in this deplorable mess as a direct result of Zero-Ten.

As far back as May 2005 Richard Murphy of Tax Research UK and adviser to the Tax Justice Network warned in a report prepared for the States of Jersey that this huge deficit would occur if our government pursued the Zero-Ten option. At the time he said the new laws underpinning Zero-Ten "...do not appear to meet the requirements of that Code (the EU Code of Conduct) and might also breach some other EU requirements." The States of Jersey ignored the warning and now, 5 years on, the Treasury Minister tries to blame the global recession for our predicament.

The global recession is not the reason why a Goods and Services Tax was introduced. Neither is it the reason why our Government wants to hike up the rate of GST to 5%. These measures are necessary because the European Union has expressed its concern that the details of the Zero-Ten policy continue to contravene their attempts to remove harmful tax practices. As Mr Murphy advised in 2005 "...this law (the zero-ten policy) reproduces the ring fence that exists under existing Jersey tax law which has largely ensured that only companies owned by Jersey residents have been taxed whilst companies owned by those who were not resident have, in the main, not been taxed. As such this provision contravenes section B2 of the Code."

Mr Murphy also made it clear that "The new 10% tax on the profits of financial services companies is in contravention of sections B1, B2, B3 and B5 of the Code"

It is proposed under this law that only finance companies regulated by Jersey Financial Services will be charged at 10% unless those companies are undertaken through Special Purpose Vehicles. To date those are mainly companies understood to be operating in the financial services but which:-

"(a). are not owned by Jersey residents;

(b). supply services within Jersey but for the benefit of persons not
resident in Jersey;

(c). undertake a very limited range of transactions for which they are
specifically incorporated, each of which may have little or no
economic substance within Jersey despite taking place there;

(d). are deemed not to be resident in Jersey despite meeting all the
normal tests for being so including being incorporated there, holding
all their directors' meetings there and undertaking all their
commercial transactions there."

Why do the States persist in giving favourable tax treatment to non-resident companies while still trying to pretend that Jersey is not a tax haven? Who benefits from this Zero-Ten legislation? Why have warnings about its acceptability to the EU been consistently ignored? Why have those who have tried to advise Jersey to opt for fairer and more sustainable tax options been referred to as "not friends of Jersey"?

In 2005 we were advised that:-

Individually and in combination these factors ensure that the new law
will fail tests B1, B2 and B3 of the Code. The discretion granted to
the JFSC to deem any activity undertaken by an SPV ensures that
the new law will also fail test B5 of the Code.

It's time to wake up Jersey! Let's take heed of what is happening and stop kidding ourselves. Our deficit is a consequence of the choice taken to adopt the Zero-Ten policy. So much easier, isn't it, to blame the global recession than to face up to the fact that our present tax system is not only grossly unfair but, for that very reason, is most unlikely to meet the requirements of the EU Code of Conduct.

Another sticky topic which our government seems reluctant to face up to.