Tax Questions in the States: A Gloomy Prognosis

Do you remember that Senator Philip Ozouf promised he would try and find a solution to the problem whereby locally owned companies, such as Voisins, effectively still pay income tax here, and yet the next door company De Gruchy does not? Ransom's Garden centre does pay local tax, but St Peter's Garden Centre - owned by non-Jersey shareholders does not. And the list could go on.

Deputy Geoff Southern has recently been criticised for asking too many questions at the start of States sittings, and one pundit in the JEP suggested he would be better off contacting the Ministers directly outside of the States. Perhaps, but when a question is asked in the States, then it nails a Minister down to a particular commitment. In this case, he asked:

Will the Minister assure members that he will keep his promise to bring forward in his fiscal policy for 2013, and beyond in the Medium Term Financial Plan, measures that will deal with the absence of a contribution to Jersey's tax revenues from zero-rated companies?

What lessons, if any, has he learned from the experience of Gibraltar in attempting to raise revenue from such companies without breaching European Union regulations?

We have the usual answer which really is just a restatement of Senator Ozouf's position:

The Minister remains committed to bringing forward measures to deal with the issue of nonfinance, non-locally owned businesses. However, the Deputy's question is fundamentally flawed when it states that there is an "absence of a contribution to Jersey's tax revenues from zero-rated companies". As has been stated many times, those companies which are subject to tax at 0% contribute significantly to tax revenues either through taxes and Social Security paid by individuals they employ, GST or contributing to the taxable profits of the finance industry.

Well - let's take an example. Robert's Garage is a town garage around Springfield with quite probably a fairly substantial income - it's in a good location, and cars are always going in and out. Recently it was taken over by a UK company. The result: a company which was contributing to local income tax on its profits is now contributing zero.

The reason is that local shareholders are taxed on those profits - they are "attributed to the shareholders" as local income, but overseas shareholders do not - they only get taxed in the country in which they receive any dividends.

Yes, Roberts Garage pays GST, and they employ staff - but they did that before. The loss of the profits coming into the Jersey tax net should not be underestimated - the fact that they pay GST suggests their turnover was pretty substantial.

The substantial contribution from their profits is now gone. If you look at the slice of the pie that they contributed, that's reduced substantially. So "much diminished contribution" would be a better way of describing the situation, but to read Senator Ozouf's reply, the suggestion is that is "significant", and nothing to worry about. But a good many companies have moved from local to UK ownership since zero / ten was introduced, and the black hole is growing.

Senator Ozouf's reply is lazy, and doesn't address the real concerns. Perhaps he should speak to the retailers and traders that I've spoken to - they all think the anomalous situation is grossly unfair to them. But finally something is coming to the table to address the issue:

A significant amount of work has been done on this and the fact that is has taken so long to deal with illustrates that this is not a simple issue and there is no perfect solution. Members will be fully briefed on this issue before the Budget debate. A report will be issued in the summer and proposals will be brought forward in the Budget Statement.

Or is it? The rest of the Senator's statement does not actually give us much grounds for hope:

The Deputy rightly mentions the recent Gibraltar case. This highlights two issues. Firstly that the international world is constantly changing and Jersey needs to act accordingly. Secondly, assuming the Code of Conduct Group takes a similar position as that taken by the European Court of Justice, it will not be possible to tax the majority of companies in Jersey and maintain a compliant regime.

Jersey chose to implement zero/ten as that was in its best interests to protect its economy. It more recently chose to maintain zero/ten for the same reason. No action will be taken to jeopardise that position. Similarly no action will be taken which jeopardises employment when the economy is so fragile.

What is the Gibraltar case? Gibraltar had proposed to implement a new tax system setting a zero rate of corporation tax for all companies, much like Jersey. But in order to claw back taxation from local companies, the proposal not only removed effectively corporation tax, it also involved replaced replacing it with new taxes targeted at company personnel and property occupation - which would have been capped at 15% of profits.

The European Court of Justice ruled in November 2011 that while property taxes and payroll taxes would normally not be subject to corporate tax regime scrutiny, that in these circumstances - because it was specifically set up to claw back tax revenue from local companies, and not the offshore ones (who had been paying an exempt company tax instead), it was discriminatory.

In the judgement, it states that "due to the absence of other bases of assessment, combining those two bases of assessment excludes from the outset any taxation of offshore companies, since they have no employees and also do not occupy business premises".

"By combining those tax bases, even though they are founded on criteria that are in themselves of a general nature, the Court of Justice finds that in practice the regime would discriminate between companies which are in comparable situations. Combining those bases does not only result in taxation according to the number of employees and the size of the business premises occupied, but also, due to the absence of other bases of assessment, excluded from the outset any taxation of offshore companies, since they have no employees and do not occupy business property."

"Furthermore, the fact that offshore companies are not taxed is not a random consequence of the regime at issue, but the inevitable consequence of the fact that the bases of assessment are specifically designed so that those companies, which by their nature have no employees or occupy premises, have no tax base under the bases of assessment adopted in the proposed tax reform. This gives reasons for the Court of Justice to conclude that offshore companies enjoy selective advantages."

Hence, "those criteria discriminate between companies which are in a comparable situation with regard to the objective of the proposed tax reform, namely to introduce a general system of taxation for all companies established in Gibraltar."

The general guiding principle in the ruling seems to be that a tax system designed in such a way that offshore companies avoid taxation constitutes a State aid scheme that is incompatible with the internal market. This is where those words by Senator Ozouf are important - "it will not be possible to tax the majority of companies in Jersey and maintain a compliant regime".

It may well be the case that no scheme is possible without falling foul of judgments on taxation, and the case of Gibraltar rules out some of the options already being mooted for Jersey. That's probably not the message Senator Ozouf wants to deliver, and it's not what Jersey people want to hear, but the Gibraltar ruling may have boxed us into a zero / ten regime that is very difficult to escape.

Part of the problem was that the Isle of Man acted unilaterally, boosted by their own VAT system for providing extra tax revenue, which was already established. Once they decided on a zero / ten regime, it was hard for Jersey and Guernsey to compete with, for example, an low but not zero corporation tax rate. In effect, it was a race to the bottom, and we are still paying the price for that kind of fiscal strategy.