Jersey is in a profound mess. Its finance industry is failing, with funds under management rapidly leaving the island and the profits of its finance sector falling by fifty per cent in 2009. Worse still, it faces a government spending deficit of at least £100 million a year representing 18% of its total annual government income unless radical reforms take place soon. To compound matters its corporate tax system faces being ruled unacceptable by the European Union, threatening another £120 million of its state income.
In the face of this crisis the government of Jersey has begun a fiscal strategy review. It has suggested increases in personal taxes amounting to £50 million a year and cutting government spending by the same amount will solve its problems, whilst adopting a new corporate tax system and planning for growth will keep the economy in balance.
There is however a fundamental problem at the heart of this plan: it does not address the fact that Jersey’s one and only major business — offshore finance — is failing in its current form. As such making choices on raising taxes are largely irrelevant because there may be little to tax if urgent action is not taken by Jersey to transform its future.
I have therefore written a new Tax Research UK Briefing that propose Plan B for Jersey - the alternative industrial strategy it has never had. This is a radical plan, but one which builds on Jersey’s two competitive advantages, the first of which is its ability to legislate and the second of which is its ability to arrange and administer financial structures. It exploits those strengths by turning the entire logic of the past history of Jersey as a finance centre on its head. Instead of basing that offshore activity on secrecy — as historically Jersey has always done — it suggests that Jersey should base its future activity on radical transparency.
This transparency would be total: everything about finance in Jersey would be on public record and automatic information exchange would be offered to all who wanted it unless human rights were threatened as a result. Far from being a secrecy jurisdiction as Jersey is now it would trade on the exact opposite — as being the most transparent place to do business in the world.
The economic reasoning for this is easy to explain: transparency reduces risk. Many people appear to need the tax neutrality (or no tax) structures Jersey offers because of the complexity of the interaction of tax laws of other, more populous, countries, but the secrecy Jersey offers at present attaches risk to those structures, and this increases their cost for users. If this risk, and so cost, were removed by total transparency people using Jersey would as a result be willing to pay Jersey itself more in fees because transparency was offered and more in fees to companies based in Jersey who would manage these structures if, uniquely, those structures were completely transparent.
As a result of offering total transparency Jersey would move away from being tainted as tax haven. This would be of enormous advantage to it.
And Jersey would as result secure new business because there are large numbers of companies who want to use offshore but do not want questions asked about why they do so: they can justify the use openly and legitimately, they say, and would appreciate the transparency Jersey would then have on offer to let them answer all questions that might be put to them.
And this in turn would ensure new profits were available in Jersey to be subject to corporate income taxes charged on a territorial basis that would meet the requirements of the European Union. There would in addition be a plentiful supply of new employees wanting to work offshore in Jersey untainted by the stigma of secrecy who would be willing to pay higher social security and income tax charges for the benefit of having an easy conscience.
This then is Plan B for Jersey — a truly new opportunity for it to create a market that would be all its own from which it could profit and which could provide it with long term sustainability.
Jersey may not opt for Plan B but if it does not then we will know two things. The first is it will surely fail as an independent jurisdiction: no place can run deficits forever, least of all if it expects the UK to bail it out — as the UK must, constitutionally. The second is that we will know secrecy is too important to Jersey to give up and that in turn will tell us that the secrecy is actually the bedrock of what it does (whatever it may now claim) and it will automatically follow that we will know that illicit transactions are the real foundation of its finance industry, again, whatever it may say to the contrary.
So this is a time for real choice: Jersey can turn its back on its past, hold its head high, and even ask for international financial assistance to transform its finance industry and so secure for itself an ongoing income stream that should last well into the future where transparency becomes the foundation of all it does and legitimacy is the guarantor of its well being.
Or it can carry on with secrecy and face a desperate future.
Those are Plan B and Plan A respectfully. The Jersey government has only presented the people of the island with Plan A as part of its fiscal strategy review. But Plan B is now on the table.
Jersey has to decide, is it A or is it B?
It may be the most important decision it’s made for a long time.
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A few years ago, in an exchange on IsThisJersey, I told you that protesting was not enough, but that you needed to suggest positive alternatives.
Now, you have, and it is good. Thank you. Already we are starting to promote your proposal.
@David Rotherham
Until now Jersey was not ready for Plan B
Now it is
Never again can it be said we have not delivered an alternative
Because we have
It is radical
But it has Jersey’s strengths at its core, exploitation of a new market as its focus and it is consistent with the state of Jersey finance as it says it is
The only possible reason for not doing it is Jersey’s finance centre really does not do what it says it does,,,,
but that’s another issue
Richard your proposal is fantasy because all finance centres demand a level playing field and as soon as places like Switzerland discard client confidentiality then others can then consider following suit. Why don’t you just admit that you want Jersey closed down as an offshore finance centre because all your previous postings on here show that to be so. David Rotherham I am surprised you have endorsed such a fantasy idea as well but then again I guess you do respresent the JDA who are noted for knowing very little about the world of offshore finance after all.
@Jeppy
Shall I take that then as a statement that secrecy is fundamental to what you do?
In which case it follows – necessarily – that much of what is done is illicit?
I assure you what I suggest is not fantasy – I have built on what Jersey says of itself
It can only be fantasy if what Jersey says of itself is wrong
Again, as you saying that is the case?
This is a potentially interesting concept. Quite a few questions though.
1. What market research has been done on the scale of global demand for what you are proposing ? If multiple offshore jurisdictions all followed suit, then the likely level of demand for such structures may be far too low for any of them to make it viable. If coupled with a dismantling of the existing tax regime, then that could be economically disastrous for all those jurisdictions who go down that route with good intent, and so on a risk analysis basis its unlikely to gain much favour.
2. The paper makes no reference to the types of “users” who would wish to use such transparency. What research have you done on this ? Vital to bear in mind that fully tax-compliant users of the existing tax structure are also taking advantage of legally-available privacy, which is fully legal. If Jersey alone went down that route, then all tax-compliant business which could still get legitimate privacy elsewhere would surely migrate from Jersey. Jersey could be left with very little business, having lost a huge volume of perfectly legitimate business alongside any bad business which would naturally be driven out.
Even assuming that this was seem to be potentially viable, it would be totally impossible to go overnight from what exists today to a totally transparent structure. Jersey could literally switch off its entire revenue stream and find that overnight that it has nothing to replace it. One possible solution would be to establish a separate “financial transparency centre”, which would operate on a separate basis from the rest of Jersey’s finance industry, rather like Dubai’s DIFC which operates separately from “onshore Dubai”. In other words, it would be a bit like having a separate form of company/trust/limited partnership regime, perhaps called a “Transparent International Company/Trust/LP”, and entities would register on that regime and see their details being fully accessible to the public. The level of take-up would be obvious for all to see. However, to commit to such a regime without a parallel transitional trial period could be economic suicide for Jersey and will be a risk far too big for the island to take.
It doesn’t mean that its a bad idea. Personally I think it has potential mileage. But it needs a lot more thought re. the practicalities. Its probably far easier for a brand new jurisdiction to go down this route as there would be no risk of potential loss of massive existing revenue.
A parallel ringfenced regime seems to be the only way in which this might conceivably work.
@Rupert
Of course I have done no market research on this – heaven’s I dedicated some time to writing a more comprehensive plan for Jersey than anyone since John Christensen left the place has ever come up with and you want me to pay for market research too? Come on Rupert! 🙂
And actually I do not need to do any – simply because Jersey says this is all the business they do and all the business they want
They say they are transparent. I’m saying prove it
They say they want the illicit to go for good. I’m saying guarantee it
In which case they must be confident they have enough business of the right sort
And if not then someone is not telling the whole truth, I think you’d agree
In which case we’re into another scenario altogether, aren’t we?
One where every claim Jersey makes is wrong…and necessarily so
But it on’t be me who said so
I’ve said I’m willing to believe them for a moment. If that’s a mistake on my part I’ll accept it
But the consequence for them is much bigger still
Either way – I’m convinced this is a viable plan they HAVE to look at if anyone is going to take their claims seriosuly ever again
Oh, and if Jersey fails to rise to the issue then Guernsey must – so they too have to consider this
Richard
I agree that Jersey and Guernsey would be unlikely to take different routes, but I don’t quite agree with the transparency point.
It all comes back to the privacy v secrecy v confidentiality v transparency issue. Very simply, clients who are fully tax-compliant(and that’s the vast majority of them) don’t need anything different from what they’ve got already. Would they switch to a new regime in Jersey and give up their lawful privacy, or transfer their business to another jurisdiction which allows them to operate as they do now, such as Bermuda, totally legitimately. What’s in it for them to change ? I can’t see anything at all.
Those that aren’t tax-compliant would leave Jersey anyway (if they haven’t already) as soon as automatic exchange of information comes in (as it must). Those that are fully tax-compliant will be very happy to stay under automatic exchange of information. If they are happy that the taxman knows everything, then why are they going to effectively tell other irrelevant parties about their potential affairs ? Why would they want to do that when there is no downside to continuing to operate totally legally ? That bit just doesn’t stack up as a business model for Jersey or indeed anywhere else.
Until the tax-compliant use of offshore vehicles becomes unlawful, and I cannot for one moment see that ever happening, this doesn’t seem viable as there just wouldn’t be any need for it and I don’t see how one would create the demand. What’s the marketing angle ?
@Rupert
You just don’;t get it do you?
If Jersey really means what it says then secrecy has no part in its business model
And because secrecy is rightly distrusted by tax authorities and so increases the risk of using locations such as Jersey and Guernsey it follows that the price you charge is lower than it might be with transparency
In other words transparency must pay you if the market is as you say it is – clean and transparent.
Both of you have failing economies as a result of failed industrial policies – the latter having failed because the price of secrecy is now so high
And yet you say it does not pay to change model
You do realise it follows as night does day that secrecy is what you actually sell and we then have no reason to believe anything else you say – at all?
Richard
Its not me who “doesn’t get it”. Privacy is not illegal anywhere in the world, and that’s a fact. Breaking tax laws is of course illegal. But if you are currently tax-compliant and wish to retain your privacy, why on earth would you wish to tell everyone else about your financial affairs? The taxman has to know and already does know. Why does anyone elese need to know? Until and unless privacy is made illegal (and I don’t see that ever happening), then voluntary transparency as you are advocating simply doesn’t have a value and there will be no demand for it. If there is no demand for something then then you can’t sell it as there will be no buyers. Supply and demand form the very basics of economics, as you well know. Demand for what you propose does not exist because there is already a very well-established supply of fully legitimate and fully compliant alternatives under the status quo.
You’ve announced “Plan B” and are demanding that Jersey considers it “or else it proves what they are up to”, but you just haven’t thought it through. It does not cater for the vast majority of Jersey’s existing tax-compliant industry, which is already well catered for.
Your Plan B would only have legs if (a) privacy is made illegal, and/or (b) Jersey’s finance industry was primarily non-tax compliant, which it simply isn’t. An element surely is non-tax compliant, but to risk throwing away hundreds of million pounds worth of GDP generated from totally legitimate and fully tax-compliant business would be utter business.
Legitimate use of privacy is commonplace throughout the world and that is not going to change in our lifetimes. You clearly don’t believe that privacy should be lawful, but it is, and until it isn’t there will never be any demand for Plan B.
I have used some specific examples below of typical offshore structures administered in Jersey.
1. An Indian-domiciled UK resident has a Jersey excluded property trust with an underlying BVI company, also administered in Jersey, which owns £20m of investments. The individual has lived in the UK for more than 7 years and so is paying the £30000 remittance basis charge, so that he is fully on HMRC’s radar. His fiduciaries in Jersey have ensured that all relevant UK tax returns have been filed, including Non-Resident Landlord Returns for property rental income. The structure is 100% tax compliant. The client diesnt want his children to know about the extent of wealth in the trust. Plan B would force him to remove that business from Jersey to ensure that his children cannot access the trust information.
2. A UK private company has established a Jersey EBT to reward and incentivise its key employees. Contributions to the EBT appear in the UK company’s audited accounts and for corporation tax purposes the deductibility of the contribution is deferred. The EBT is fully on HMRC’s radar and all necessary tax returns regarding benefits or benefits in kind to employees are
being filed. Its a dicretionary trust and so different employees are earmarked to receive differing levels of benefit. The employer company does not want employees to know how much other employees have received or will receive. Plan B would destroy that objective and so would also drive the EBT to relocate to another jurisdiction.
3. A Hong Kong Chinese investor has bought a UK commercial property through a Jersey company. Hong Kong taxes on a territorial basis and so no tax is being avoided or evaded in Hong Kong. UK rental income is taxable but is paid gross under the NRL regime. The Jersey fiduciary has to file the necessary NRL returns and all UK tax due is paid. The Hong Kong Chinese investor is in his second marriage and does not want his second wife or stepchildren knowing details about his wealth. Plan B would also drive his structure away from Jersey.
Jersey’s fiduciary industry, just like Guernsey’s, is dominated by such structures. Each of these structures generates significant fee income to the island which finances employment. Each structure is totally tax compliant and perfectly legal by anyone’s standards. Why on earth should this type of business be driven away ? Who is objecting to it ? All due taxes are being paid. Who gains from any added transparency ?
[…] I was on Radio Jersey yesterday talking about Plan B. […]
[…] I was on Radio Jersey yesterday talking about Plan B. […]
But surely there is a difference between maintaining private structures for private family affairs, and providing them for PLCs that are supposed to be giving stock markets and others honest, reliable investment information? And that is where the scandals like Northern Rock and Enron have tarnished us.
@David Rotherham
Anyone anywhere anytime can be private in my book
Do your transactions in your own name and you can enjoy complete privacy
But use limited liability entities that can impose cost on society and you have an obligation to society to say in return how you sued the privilege society granted to you
Use a trust to change property rights and you have the same obligation
No one asks you to use these structures – it is a choice. Make the choice because there is a personal gain and pay the price of doing so seems the natural corollary
So I do not breach your maxim, at all
But you are arguing for rights without responsibility
I cannot accept that
But Richard those are your desired rules, not the laws which exist anywhere in the world where individuals have for centuries been able to establish trusts or companies for commercial or estate planning purposes. For your Plan B to be dependent on that freedom to use such entities being abolished worldwide suggests that it has absolutely zero chance of succeeding. Nobody is going to abolish the right to use legal structures for legal purposes in a totally tax-compliant manner and I don’t see or hear anybody else clamouring for such abolition.
@Rupert
Nonsense – they’re every tax authorities desired rules
And it is innovation that creates markets
Jersey is failing – and Guernsey is too
Innovate or die – that’s the choice you have
Your choice, not mine
But die you surely will if you do not innovate – and you’re saying you want to stick your head in the sand
feel free – and in a few years I will say – as I’ve been able to already – “I told you so”
Richard
“They’re every tax authorities desired rules”. Of course they are. But tax authorities very rarely get what they want, as we’ve seen in the UK for decades.
Innovation is one thing. Changing to a system for which there is likely to be minimal demand (nothing you have said has indicated that there is any demand whatsoever for such transparency – you have not even commented on my post above which highlights the issues),while the rest of the world carries on much as now, would be economic suicide for Jersey and Guernsey, throwing away huge levels of totally tax-compliant and totally legitimate business. The risk would be infinitely greater than the status quo Why would anybody want to do that ? It hasn’t got a prayer on commerciality grounds.
@Rupert
Your choice of course
But never ever say you’re transparent
You’re not
You choose not to be so
And there can ONLY be illegitimate reasons for that choice
Richard
Please see my post #10 above. There is nothing illegitimate whatsoever about any of those examples, and they are bog standard examples of most of the Channel islands’ fiduciary industries. Many Jersey and Guernsey fiduciary businesses are built almost entirely on exactly such business. If there is anything illegitimate about any of those examples, then please explain exactly what they are.
There is no need whatsoever for any more transparency re. such structures. All taxes legally due are being paid in the relevant jurisdictions, exactly as the relevant tax laws require. Why should such business be thrown out just because you don’t happen to believe that the lawful usage of such structures shouldn’t actually be lawful?
I for one have not said that we are transparent. I’ve said that we are tax-compliant. But you are totally and factually wrong in your assertion that “there can ONLY be illegitimate reasons for [not being transparent]”.
@Rupert
Prove it
You can
But only by going for Plan B
Which is why the world won’t believe you
And rightly so
Richard
I have given you prime examples in black and white. There is nothing more to prove. You claim to be a tax expert. Please analyse what I have said and tell me what aspect of it is illegal. You can’t.
You repeatedly demand that posters on this blog provide reasoned argument. I have done so. You have tried to counter it with no reasoned argument whatsoever, simply demanding that I try to prove a negative. Disappointing – I would have expected far better of you than that.
Your Plan B has not been thought out properly, is completely unfeasible and does come up even close to your usual standards of argument and debate. Yet you demand that the islands adopt such a poorly thought-out idea. Back to your drawing board I’m afraid.
@Rupert
Yes I do demand you prove a negative
Prove Jersey and Guernsey do not harbour illicit financial flows
Prove you do not facilitate crime
I have shown you can
You won’t
I accuse you of advocating arrangements that facilitate crime
If you don’t like it I am quite indifferent to your discomfort
I am stating a fact
It is for you to change the facts
I see this debate has degenerated once again to your same old “prove a negative” style. How about you answer my earlier queatiin. What is wrong with any of the core examples of CI fiduciary business described in my post #10 above ? What’s criminal about it ? Why attack it ?don’t tell me that its not representative of the CI fiduciary industry because that will completely destroy your credibility.
Richard
Are you going to respond to my post ? I’m very keen to see how you will answer it.
For Rupert:
The concept of “radical transparency” is being explored, albeit not in the finance market. You should read “Ecological Intelligence” by Daniel Goleman (available from Amazon), and you will also want to look at http://www.danielgoleman.info/2010/01/03/green-intelligence-toward-true-ecological-transparency/
What is true of ecological transparency is equally true of financial transparency.
The old man of the woods (great name !)
I may well do that, although to be honest I’m far more interested in the answer which Richard is clearly struggling to come up with in response to the points in my post #10 above.
Rupert,
You are not moving forward you are in a “cognitive lock in” state of mind. The truth is governments around the world (G20 need tax dollars and to stop money laundering. The transactions that were accepted as legal before are rapidly being codified by law as illegal. Norway, India, US, EU, Australia, china are all changing their laws to close legal “loopholes”.
So your point about legality is not an forward looking one but based upon past experience and old style legal advice.
The other point is that more resources are being poured into enforcing these laws than ever before because of the billions of dollars of tax that can be gathered.
Whether this is right or wrong in your opinion is irrelevant if the regulators and tax collectors codify the law and enforce it more stringently than before.
@Rupert
I have replied
Please don’t waste my time until yo stop supporting structures that facilitate crime
Richard
You have NOT replied to my post #10. You have not answered my questions. You ask for proper debate on this blog yet you don’t seem interested when I ask several straight questions about what is wrong with the core structures of the CI fiduciary industries, and why the islands should get rid of such business in order to embrace your ill thought-out Plan B.
Let’s go back a step. You demand that the islands adopt your Plan B, without you considering the implications for totally legitimate and fully tax-compliant existing business. I’ve asked you to explain why the core examples that I gave you are unacceptable and you have not answered me. Instead you resort to attacking me for endorsing non-transparency.
However I have not endorsed non-transparency. I have merely asked you why you think such business is unacceptable and you seem unwilling or unable to answer the question.
Your Plan B falls at the very first hurdle if you cannot answer such key questions. Where’s the “crime” to which you refer in your last post ? How can anybody possibly take it seriously ? Most ideas that you come up with are based on a degree of research and analysis but on this occasion you don’t appear to thought it through.
@Rupert
I have answered
Each and every one of those mechanisms is an opaque and deliberate mechanism for distorting property rights unaccountably and without recourse by anyone to know who has undertaken the act
If the transactions are legitimate they can and should be transparent because accountability is the price society demands for limited liability – and Jersey / Guernsey are not society – these transactions as you note do not happen there
I have therefore completely answered your point – opacity is what is wrong – and whilst it remains these transactions remain under legitimate suspicion
Remove the opacity and they need not suffer that doubt
That is Plan B – stated and proven in a nutshell
Unless you respond to the issue your further comments will be deleted
[…] launched Plan B for Jersey a couple of weeks ago. Now I have my first official response, from Colin Powell, the Adviser […]