Tuesday, 29 September 2009

Guernsey Watch

There is a buzz word in Guernsey - "silo mentality". It comes with the inability of departments to co-operate with one another, and save the taxpayer money. I've not seen any figures showing how well Jersey's new Ministerial departments improve over that, although Chris Swinton has certainly said there are benefits for group spending. I am not yet sure we have seen any major improvement in interdepartmental working together - all the so-called "joined up" government.

One has only to look at the North of Town Masterplan which demolishes De Quetteville Court, with a complete lack of consultation with the Housing Department, who have just signed a deal to improve it. This is exactly what is causing problems in Guernsey, and before we get smug, we'd better look at our own problems.

I do agree with Terry le Sueur that Chris Swinton does an excellent job in highlighting all kinds of weaknesses and lack of controls in Jersey's system, and we don't really need outside reviews. He certainly seems quite independent in coming out with at times quite damming criticisms of Jersey's own departmental structure.

Meanwhile, this is the view from across the water, where Guernsey have a second spending review (after a Welsh one), and no one in the States there wants to know:

THE States' silo mentality is costing the island £51m. Tribal Consulting's Fundamental Spending Review, released this morning,  reveals for the first time how much the inability of government departments to cooperate is costing the taxpayer. Tribal's Ian McPherson (pictured) was highly critical of the States culture and insisted £70m. could be saved over the next five years if members supported his recommendations.Of that, 73% - or £51m. - would come from eliminating the culture of departments working in inefficient isolation.... Mr McPherson said: 'We discovered a number of operational issues on our  mission, such as a lack of corporate governance and any sense of identity,'  he said. 'People relate to the department for which they operate but not to the States - we have to break down the silos. There is no need for them to be there.' The report comes weeks after the Wales Audit Office gave a similarly damning verdict on Guernsey's government. Mr McPherson said Tribal Consulting had found very little evidence-based  decision making. For anyone outside the departments it was hard to see how decisions had been made because of the lack of transparency, he said. That does not mean IWV is not worth considering - at some stage. But with the majority of this Assembly reluctant to embrace a wholesale change in how the States functions, despite the overwhelming problems identified by Tribal Helm/WAO, the island must be wary it does not accept this placebo in place of a genuine cure. (1)

Guernsey was also mentioned in the Panorama programme, and came out with a very similar line to Jersey about "rogue" and "maverick" elements who are a minority. This kind of argument is a rhetorical trick, and just doesn't wash statistically. What are the chances of a reporter coming, picking a bank, and getting - purely at random, the 0.1% rogue element? It is a nonsense. Unless, of course, the Panorama investigator was tipped off about one individual in Guernsey and one in Jersey, and tried specifically to get hold of them, which certainly does not seem to be the case. And if that was the case, unlikely as I think it is, why haven't the Island authorities - the Financial Services Commission - been able to flush out the maverick if one lone reporter can?  What we need both here and in Guernsey, perhaps, is not just education in compliance, but education in not presenting to anyone the kind of scams that Panorama revealed.

BANKING scandals in the national media are damaging the island, according to Guernsey Finance. A BBC Panorama programme last night introduced Guernsey and Jersey as Britain's tax havens. It revealed that British tax officials were investigating Lloyds Banking  Group in the Channel Islands over allegations that rich clients were being encouraged to avoid UK taxes by channeling money through Hong Kong. The programme showed an employee at the Jersey Lloyds branch telling an undercover journalist it was of no interest to the bank whether the client  told the taxman about income. While the programme focused more on Jersey, the investigator also stated that a banker from Northern Rock in Guernsey told him EU tax laws could be avoided by opening an account in the name of a non-trading company. The member of staff said the client should inform HM Revenue and Customs, but the bank itself keeps the details from the taxman. The reporter said that it was strange that a bank owned by the British  taxpayer was encouraging him to avoid tax. The programme also highlighted that Northern Rock (Guernsey) had been doing  well since nationalisation, with deposits doubling over the last year. Guernsey Finance chief executive Peter Niven said the bad press would tarnish the island. 'It is extremely frustrating when this happens,' he said. 'About 99.9% of people on the islands do good business and very professionally and this is an unwelcome distraction and not the norm.'(2)

A really odd letter from Elizabeth Osborne in the Guernsey Press, which she says should be renamed " 'The Guernsey Depressed and Star' or maybe 'The Guernsey Oppressed and Star'." She mentions "Castel douzenier Dave Chester saying that because Guernsey is running out of space for people to be buried when they die, that an alternative is that people's bodies can be frozen, put into liquid nitrogen and then shattered into dust. So, not only are we being told how to live, we're being told how we must finish up." (3)

This has to be one of the most bizarre suggestions I have ever heard of, almost up the former Senator Averty who wanted to move the registry office in Jersey to the crematorium, in the 1970s, to save on resources!

An interesting question was asked in the leader comment about where loyalties belong when there is a conflict. With the much tighter link to Parishes in Jersey, with a few notable exceptions - former Deputy Jerry Dorey being one over the incinerator location - most Deputies take care to "look after" their constituency, even when it means placing parish matters before Island ones, because however unpopular they might be if they stood as Senator, it is the Parish vote which gets them in. Guy de Faye notably lost the public confidence on transport in the Senatorials, then got back in as a Deputy, a much safer option, as you have fewer people to please. This is what the editor of the Guernsey Press has to say about pleasing the voter:

HERE'S a question: who do People's Deputies serve - their constituency or the whole island? The right answer should be obvious. While it's quite proper that deputies take a particular interest in issues affecting their electoral district, their first responsibility must always be to Guernsey. That means that on those rare occasions when parochial and island interests may clash, they really must take the wider view. That's easy to say, but at times some deputies seem to find it hard to put into practice. Whether that's because of a laudable passion for their home patch or a craven fear of losing precious votes, I leave you to judge. Whatever the reason, there is a whiff of hypocrisy about those politicians who call (rightly) for a more strategic approach to policymaking but then suspend their own strategic judgment because an issue generates strong feelings in their own backyard.(4)

What have you read on global corporation tax? Not a lot in Jersey, but in Guernsey it has made the headlines. Here is the story from Peter Roffey (Guernsey's answer to Peter Body!):

The news that the G20 has been discussing the idea of a global, minimum rate of corporation tax is a potential "exocet" for Guernsey's tax system. In international politics, might may not always be right, but it usually prevails nevertheless. So if the group of countries with the world's largest economies really does reach agreement on minimum tax rates for businesses, then any smaller country which ignores that code will find themselves in a cold and lonely place. Constitutionally the big boys may have no right to interfere with other countries' internal tax systems but that's fairly academic. Once they start to say, 'if you don't comply then we'll make it very hard for our nationals to do business with you', then it would be a very brave/foolish minnow which replied 'do your worst'. However before we get to that situation they will have to agree among themselves. That may not be so easy. While they might be in accord over squeezing very low tax regimes, where the standard rate of corporation tax is zero, some of them will be very nervous about where it could all end. What if, in the future, countries with really high tax rates start to resent the loss of business to other countries with relatively competitive regimes?  Will the USA really agree to harmonise with France? Let's assume they decide that's a risk worth taking and they should start by  setting a global minimum rate of corporation tax at, say, 10%.  How will that affect Guernsey?  Well clearly unless we take a huge and reckless gamble and tell them to 'go forth and multiply', then we will have to dismantle the zero-10 tax regime.   Does that really matter?
Well it wouldn't if we were able to revert to our old tax regime, in fact in many ways that would be a huge relief, but I'm afraid we can't. To put into context the impact on Guernsey of any international minimum rate of corporation tax we have to remember the two reasons why we brought in zero-10. Firstly because it was regarded as vital to our finance industry to be able  to offer a 'zero product'. In other words, there were some businesses which we didn't want to tax for the sake of the broader economy. We used to achieve that by offering a limited range of companies 'tax exempt status'.  The OECD and the EU called foul. They said 'set whatever tax rates you like, but don't tax anybody less than your standard rate, that is just predatory behaviour designed to steal business'.

We really had two options.  Firstly we could have made the previously tax exempt companies pay our standard rate of corporation tax - then 20 The perceived wisdom was that would lead to economic ruin.  Secondly we could [and did] reduce our standard rate of corporation tax to zero. This was deemed the best long-term option, despite making a huge hole in the public finances. Of course if nowhere in the world could offer a 'zero product' the situation would be slightly different. The idea that Guernsey would lose lots of business as a result of taxing the  previously tax exempt companies would give rise to the question - lose it to where? The same applies to the second reason for adopting zero-10. Our competitor jurisdictions such as Jersey and the Isle of Man had already decided to go down that route so we had to maintain our competitive position. That was true then, but that rationale disappears if they too are forced to comply with a new minimum tax rate.
The only problem is that it might mean that all three territories, and others like us, start to lose their competitive edge over traditionally higher taxing countries. At 10% we may still have considerable allure, if it was set at 20% much of that would disappear, at 30% it would be gone. What it would do is test the often made claim that our competitive tax regime is only one reason for business coming here....A major exodus because of a high minimum tax rate, amounting to global harmonisation, would hole us below the waterline. Viewed from Guernsey, the G20 just became a very exciting white knuckle ride.(5)

Having worked like mad to get everyone on board for zero-ten, it will certainly be ironic if it has to go in five years! As Peter Roffey notes, getting agreement from all the countries, certainly those in the OECD, will be difficult if any has a lesser rate of Corporation tax. In the USA, for example, the company may not be taxed, and instead the shareholders are taxed on the profits of the business, not on distributions. This method is adopted in the USA only for companies owned by a small number of shareholders (less than 100), so-called S corporations. But there would be a considerable impact on small businesses in the USA if this was removed. But if the USA came on board, and suppose a minimum of 10% was set, then with Ireland at 12.5%, the Channel Islands would certainly face major problems on competition.

(1) http://www.thisisguernsey.com/2009/09/24/70m-cost-of-states-waste-revealed/
(2) http://www.thisisguernsey.com/2009/09/22/true-or-not-tax-dodging-allegations-harm-the-islands/
(3) http://www.thisisguernsey.co.uk/discus/messages/11779/12367.html?1253713738
(4) http://www.thisisguernsey.com/2009/09/22/parish-priorities/
(5) http://www.thisisguernsey.com/2009/09/24/is-guernseys-tax-system-about-to-come-under-fire/

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