Zero / ten – definitely dead but Jersey denies it

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The statement from the UK Treasury on the zero / ten tax systems for Jersey, Guernsey and the Isle of man is now available, albeit I can still only find it from secondary sources. It says:

"On 23rd September, the Code of Conduct for Business Taxation Group discussed Jersey's Zero-Ten Corporate Tax Regime and the Isle of Man's New Tax Legislation.

"After an exchange of views with those concerned (Jersey and IoM reps attended the Code to make an opening statement and answer questions), the Code Group invited the EU Commission to prepare draft evaluations for the next Code meeting on 19 November.

"The EU Commissions evaluation focused on the operation of the zero/ten regimes as a whole, not merely the deemed distribution and attribution provisions in isolation.

"The EU Commission considered that taken as a whole, the systems were designed to offer a 0% tax rate to foreign investors (although some sectors are not taxed at the 0% rate), whilst avoiding residents benefitting from the 0% tax rate.

"Following a discussion of the Commission's evaluation, the Group agreed that Jersey's Zero-Ten Corporate Tax Regime and the Isle of Man's New Tax Legislation give rise to harmful effects. This was duly noted by ECOFIN.

"Under the terms of the Code of Conduct for Business Taxation, the UK is committed, within its constitutional arrangements, to ensuring that the principles of the Code are applied in its dependent and overseas territories. Both Jersey and the Isle of Man made voluntary commitments to abide by the Code in 2002. The Government expects Jersey and the Isle of Man to abide by those commitments and implement the abolition of the harmful measures.

"We are ready to offer support to Jersey and the Isle of Man in implementing the changes necessary. Although Guernsey operates a Zero-Ten Corporate Tax regime similar to those operated by Jersey and the Isle of Man, its regime is not being assessed as Guernsey was deemed by the Group to have made a strong enough public commitment to move away from its current regime. The UK is supportive of Guernsey's efforts to move towards a normal, internationally acceptable business tax regime."

There is only one way to interpret this statement and that is that the UK is going to make an absolute and categorical demand that Jersey and the Isle of Man change their policy.

Commentators from Jersey have been keen to dismiss my claim that Zero 10 is dead. Treasury Minister Philip Ozouf did so today.  Jersey and the Isle of Man say that the situation has not been resolved as the EU Code of Conduct Group is to undertake a review on what are the limits of business taxation. It is their contention that the deemed distribution elements of zero ten, that mean that local people have to pay tax on profits of the companies they own when non-resident owners do not are not within the scope of business taxation as this is personal tax law.

I am aware that there are a couple of EU countries that support this view – the Netherlands being one as tax abusers like sharing company. But I am equally aware (indeed I can state with considerable confidence) that the European Commission does not share this view. I know they have stated the view that it is not possible that the Isle of Man’s tax system that was ruled abusive when this deemed distribution rule was included in company profit rules suddenly becomes acceptable for the sole reason that a rule with identical impact has now been created instead in personal tax law.

And of course the EU is right. The Code of Conduct is a principles based approach to regulation and the Isle of Man, Jersey and their supporters are taking a legalistic interpretation to the Code. They’re wrong to do so, and they will lose their case as a result.

If they really hold out they might have another year to wait to bring about change. But there will be change, inevitably and they’d be so much more mature, and so much more effectively evidence their claimed “good neighbour” policy if they admitted that their tax systems are abusive and were always meant to be so. The UK is clearly going to impose that on them like it or not – and by the look of it risk a constitutional crisis on the issue as well, if necessary.

Despite that perhaps the leopards won’t change their spots. But when, inevitably, their economies fail because they can’t raise enough tax to keep their economies going they’ll have fewer friends to call on if they pursue this policy now. It’s sheer folly on their part.

Or desperation.

Or lack of imagination.

Or all three.