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News Changes to zero-ten approved

As the States of Jersey welcomes an EU ruling on business taxation, John Riva at KPMG outlines what’s involved and what it means for the island

now consider extending the positive rate to other business sectors, such as retailers. This should not offend the Code’s principles as long as the general rate of tax – when taking into account such variables as the number of companies within the tax net, profitability, and number of employees – continues to be zero per cent.

CHANGES TO JERSEY’s tax system have been approved at a recent meeting of the EU’s Code of Conduct Group. The decision, announced on 13 September 2011, brought the island one step closer to formally ending the uncertainty surrounding the status of the tax regime and provided welcome news for the island’s business community. Last year, the Code Group found

Jersey’s zero-ten regime, when taken as a whole with the deemed distribution and full attribution provisions, to be ‘harmful’ as it offered a zero per cent tax rate to foreign investors, while preventing Jersey residents from benefiting from the zero per cent rate. Jersey’s response was to remove the harmful elements of the zero-ten regime by abolishing the deemed dividend and full attribution provisions with effect from 1 January 2012, thus placing the regime in the same position when it was approved by ECOFIN in 2003. The Code Group accepted the States of Jersey’s proposals regarding rollback, and it

is expected this position will be ratified by ECOFIN in its December 2011 meeting. Commenting on the announcement,

Chief Minister Senator Terry Le Sueur said: “This is excellent news for Jersey, and vindicates the consistent stance maintained by the Treasury Minister and myself over a long period… In these challenging times it is good to be able to present members with positive news that should significantly strengthen confidence in Jersey’s future.” This approval should have long-reaching

implications for the future of Jersey business taxation, as it will effectively, once more, endorse the principles underlying zero-ten’s compliance with the Code. Jersey can therefore continue to offer

a simple system of tax neutrality via its general tax rate of zero per cent, which is a significant factor in attracting business to the island. It can also raise tax from various business sectors (currently from certain financial service companies and utilities) by applying a positive rate of tax on those profits. Furthermore, policy makers can

Not all plain sailing The abolition of the deemed distribution and full attribution provisions does, however, come at a cost. Profits generated by most Jersey businesses will be subject to the zero per cent rate of tax until they are distributed to their Jersey resident shareholder, at which point those individuals will pay Jersey income tax at 20 per cent. Under the outgoing sections of the Law, tax would have been paid on a portion of the profits by the Jersey resident shareholders irrespective of whether or not they are distributed. It has been suggested that this will

result in a deferral of tax revenue of around £10 million, though this forecast contains significant uncertainties, since it is difficult to account for future behaviour of individuals. We may find in the coming years this estimate is pleasingly accurate, or conversely, way off the mark. As for Guernsey, it has adopted a ‘wait

and see’ approach, making no decision on the future of its zero-ten regime until the Code Group process has been concluded. Although Guernsey has stated it’s now unlikely there will be substantial changes to its corporate tax regime, given the positive ruling on Jersey’s regime, only time will tell whether Guernsey follows Jersey’s example in rolling back its version of deemed distribution and attribution provisions and seeking to extend its 10 per cent rate to the same extent as Jersey. l

JOHN RIVA is Head of Tax, KPMG Channel Islands

10 October/November 2011 stay on top of the latest business news from the Channel Islands at

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