To Jersey: more answers please

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I noted the reply Colin Powell, the senior adviser to the government of Jersey, sent me regarding my requests for further information about transparency and accountability in that island last Friday.

Events ran away with me that day and I failed to reply to Colin then, but did so yesterday. This was my reply.

I am looking forward to more comprehensive answers on issue of substance this time.

Dear Colin

Many thanks for your email. I did indeed have a good holiday.

I admit to some disappointment on reading your mail. It seems you might either have not properly read my mail, or chose not to reply to much of what I asked. When the issue we are discussing is transparency that does seem to be unfortunate.

It is firstly unfortunate that when the whole reason for information exchange is to increase transparency in the world’s tax systems so that problems arising from tax evasion and tax avoidance can be addressed that you say that the IRS does not wish for data on the number of information exchanges it makes with Jersey to be made public and that other countries have expressed similar views. Since you are engaged in the OECD monitoring process on these issues can I ask you:

a) How you believe such secrecy will help make the Tax Information Exchange Agreement process transparent and accountable?

b) How you think that such secrecy will help public acceptance of the value of TIEAs?

c) How such secrecy will assist creation of the necessary deterrent effect of which TIEAs are a part?

d) Why you think such secrecy is appropriate and beneficial?

These questions are personal to you. They do not require the consent of others to permit you to answer and as such I hope you can address these issues.

It is also unfortunate that you avoided my suggestion that there are massive information hurdles that obstruct the process of using Tax Information Exchange Agreements. I assure you I am not alone in thinking this: very senior tax officials in many countries have shared this opinion with me. It is one reason why the UK did not rely on a standard TIEA with Liechtenstein: I think I can say with some confidence that HM Revenue & Customs did not believe a standard TIEA would work because of the those information hurdles I note below. These, of course, do not exist when the request has been made – which is what I think you seek to imply – but before it can be made. Those obstacles are that, as you know, the standard TIEA makes clear that to make a TIEA request a tax authority must provide or state the following:

(a) the identity of the person under examination or investigation;

(b) what information is sought;

(c) the tax purpose for which it is sought;

(d) the grounds for believing that the information requested is held within the jurisdiction of which request is made;

(e) to the extent known, the name and address of any person believed to be in possession of the requested information.

The reason for the low number of information requests becomes obvious immediately. By definition there is considerable secrecy within secrecy jurisdictions about trusts of all sorts. Determining from readily available sources the ownership and control of companies is almost impossible in most such locations, including Jersey. Many have official banking secrecy, and the combination of trust secrecy and nominee ownership and control in places such as Jersey creates de facto banking secrecy, as Switzerland correctly points out. In that case the chance of linking assets, such as a bank account, owned by a company which is in turn controlled by a trust of which a person, under investigation in a state with a TIEA with Jersey, may or may not be settlor and / or beneficiary is remote in the extreme. The existence of TIEAs is immaterial in that case: without a ‚Äòsmoking gun’ to trigger an enquiry under the Tax Information Exchange Agreement the reality is they have no practical value.

And yet you refused to answer the question about how Jersey may help create that smoking gun, which would tackle tax evasion. Why didn’t you answer that question? What does that say about Jersey’s attitude towards the prevention of tax evasion? I’d remind you of what I said in my first mail to you. I summarised the fundamental flaw at the heart of the Jersey secrecy jurisdiction as follows:

There is a more important issue though, which goes to the core of Jersey’s plans and suggests why there will remain considerable doubt about the good faith of Jersey in offering any [tax] scheme to the EU. This is that Jersey has not ever really acted as a good neighbour to any other jurisdiction, anywhere, with regard to tax. That is because of the combination of a number of factors.

The first is that Jersey persists in the view that a company incorporated in Jersey is not resident in the island even if its directors are located there, its registered office is there and all its book-keeping and other administrative functions are located there. This practice is contrary to any normal state law on tax residence, a point which Jersey persistently ignores. But there is more to it than that. Jersey maintains this is possible because despite all these indicators of residence it claims that if the substance of the transactions of the company, which prima facie appears resident in Jersey, are actually elsewhere then it is really tax resident in that other place where that substance occurs. There are however two obvious conditions that must be satisfied for this to be true.

The first is that Jersey satisfies itself that the company is indeed declaring itself resident in that other place and is paying tax there. However, Jersey never asks that question. Jersey does not say as it should:

“This company claims not to be “here” so it must be “somewhere” else, so let’s find out where that “somewhere” is and make sure they know about it before agreeing they’re not “here”.”

Instead it says:

“This company claims not to be “here” so let’s take their word for it and just assume they are “elsewhere” even though we have no clue where that “elsewhere” might be.”

This is the first fundamental flaw at the heart of Jersey’s corporate tax system.

The second is that Jersey makes sure that it is as hard as possible for the other place that is “elsewhere” but unknown to the Jersey authorities to secure the information they need to tax a Jersey company that undertakes the substance of its transactions in their territory, meaning it should be taxed there.

Jersey ensures that this near insurmountable obstacle, which will persist unchanged in the era of Tax Information Exchange Agreements because of the massive information hurdles they place in the path of an enquiring tax authority, still exists, and it does so deliberately. That is what makes Jersey a secrecy jurisdiction.

This was a serious allegation – but it is one I think to be true. But as I noted when writing earlier, if you can show it is wrong then of course I would have to change what I have written in Plan B. So might I reiterate that perhaps you might advise me as to the following:

1. What measure Jersey adopts to ensure that a company or trust registered in its domain but claiming to be resident in another jurisdiction is actually registered as resident in that other domain and is actually paying tax there?

2. What mechanisms Jersey has to advise another jurisdiction that a company or trust registered in Jersey is actually taxable in their jurisdiction?

3. If such mechanisms exist, how they work.

4. If such mechanisms do not exist can you please advise how you think that other jurisdiction where the Jersey registered company or trust is resident might establish that fact given the considerable prior information requirements that exist in Tax Information Exchange Agreements and the impossibility of securing the information necessary to make a TIEA enquiry from public domain information in Jersey?

In asking these questions again I note all you have to say on the Jersey Register of Companies. I regret what you say seems to me to be inconsequential if no useful information of any sort is available from that Register. This seems to be the case for all I have spoken to who have ever sought to secure data from it – only to find no question they sought to answer could be addressed using information on its public record. How does Jersey plan to tackle this problem? In particular, how does Jersey intend to meet requests for the most basic of information – such as accounts on public record, without which the Registers you run are, to be quite candid, useless, however competent they people you engage to run them might be?

Finally, I note the information you have supplied on the European Union Savings Tax Directive. I am disappointed that you do not hold some key data that seems essential to understanding this issue and the likely consequences for Jersey if reform were to take place. How are you able to make informed decisions without knowing the number of accounts where withholding occurs?

I look forward to your fuller reply

Best regards

Richard