{"id":39722,"date":"2017-12-05T16:08:54","date_gmt":"2017-12-05T16:08:54","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=39722"},"modified":"2017-12-05T16:08:54","modified_gmt":"2017-12-05T16:08:54","slug":"the-eu-tax-haven-list-is-very-bad-news-for-jersey-guernsey-and-the-isle-of-man","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2017\/12\/05\/the-eu-tax-haven-list-is-very-bad-news-for-jersey-guernsey-and-the-isle-of-man\/","title":{"rendered":"The EU tax haven list is very bad news for Jersey, Guernsey and the Isle of Man"},"content":{"rendered":"

I have, for more than a decade, had an interesting relationship with the British Crown Dependencies\u00a0 of Jersey, Guernsey and the Isle of Man.\u00a0 From 2005 onwards\u00a0 I ran a campaign<\/a> pointing out that none of them could comply with the requirements of the European Union's EU Code of Conduct on Business Taxation.\u00a0 I was right: they couldn't and by 2010 all of them had been told to reform their tax systems to meet the EU's requirements<\/a>.\u00a0 Whether or not that would have happened without me, I do not know.\u00a0 I do know it made be deeply unpopular in those places.<\/p>\n

What I also know is that they became compliant by 2011 by doing two things that the EU never expected.\u00a0 The first,\u00a0 with the pace being set by the Isle of Man, was to create what was, in effect, a 0% corporation tax regime for all companies located in the islands ( some tiny exceptions apart).\u00a0 The Isle of Man could afford to do this at the time because it was still receiving massive subsidies from the UK on its revenue sharing agreement with regard to VAT<\/a>: something that I took on from 2007, and which was largely removed by 2012 as a consequence, although it is now (unfortunately) seemingly reappeared.<\/p>\n

The second thing\u00a0 the islands did was to, in the face of EU pressure, remove all arrangements that forced locally owned companies to pay tax when internationally owned ones did not have to do so.\u00a0 This was immensely costly:\u00a0 the result has been Jersey's ongoing budget difficulties ever since<\/a>,\u00a0 on which issue\u00a0 I've also had quite a lot to say over the last decade\u00a0 or so.<\/p>\n

As\u00a0 I have already noted today<\/a>, there is much to regret about the EU's new tax haven blacklist<\/a>.\u00a0 That is, however, one exception, which is paragraph 2.2,\u00a0 which says:\u00a0\"\"<\/a><\/p>\n

The explanatory note to this listing says:<\/p>\n

\"\"<\/a><\/p>\n

Given that by 2012 Jersey, Guernsey and the Isle of Man had all received clearance from the EU Code of Conduct Group\u00a0 that their tax systems were compliant with its requirements it is a little hard to see how paragraph 2.1 can now be used against these locations.\u00a0 \u00a0However, paragraph 2.2 is another issue. What it opens up is a new 'soft'\u00a0 test, by which I mean that the EU Code of Conduct Group has\u00a0 given itself the right to decide whether, on a broader construction which\u00a0 no doubt considers both outcomes as well as legislation,\u00a0 these places are putting into place regimes that do encourage artificial relocation of profits.<\/p>\n

I confirm that they do just that. As I noted recently,\u00a0 corporate profits make up 67% of the GDP of the Isle of Man<\/a>.\u00a0 \u00a0For comparison, they make up 21% of the profit of the United Kingdom,\u00a0 which might reasonably be used as a benchmark.\u00a0 Jersey and Guernsey are similarly abusive, and no doubt Cayman and Bermuda\u00a0 are likewise.\u00a0 Therefore, as a matter of fact, the\u00a0 EU Code of Conduct Group test is failed by each of them:\u00a0 they do provide facilities that do encourage the artificial relocation of profits\u00a0 without\u00a0 the economic substance\u00a0 of the related transactions that give rise to that profit being located in the islands.<\/p>\n

The\u00a0 Code of Conduct Group has, then, set up a test which these islands do, as a matter of fact, fail.\u00a0 And the reason why they fail is inherent in the tax system that they put in place by 2012 to get round the original requirements that the Code of Conduct Group\u00a0 expected them to comply with in 1997.\u00a0 Way back then that Group\u00a0 made clear that differential tax rates to\u00a0 encourage the artificial relocation of profits were not acceptable.\u00a0 What they presumed would happen\u00a0 was that there would be a levelling up of rates: they did not expect the levelling down that actually took place.\u00a0 But what they are now clearly indicating is that the continuing abuse justifies further action.<\/p>\n

So what does this mean for the Crown Dependencies,\u00a0 in particular?\u00a0 I would suggest\u00a0 that a total reform of the corporation tax systems has to be on the cards.\u00a0 Firstly, they will be expected to have a corporation tax.\u00a0 Second,\u00a0 this tax will be expected to be set at a rate that does not encourage the relocation of profits.\u00a0 Third, as a benchmark for what that rate might be I strongly suspect that the Code of Conduct Group will look at comparable income tax rates on the island,\u00a0 which are 20% in each case.\u00a0 Anything significantly different from this will, I suspect, require some tortuous explanation.<\/p>\n

What happens if\u00a0 the Crown Dependencies do not respond? Then the EU is making clear that it expects member states to put what it calls 'defensive measures'\u00a0 in place. These are:<\/p>\n

\"\"<\/a><\/p>\n

In other words,\u00a0 any EU country will be encouraged to disallow payments made to these places for tax purposes within their own tax regime or, even more powerfully, will be encouraged to have tax withheld from payments of interest, dividends, royalties and other such payments to the Crown Dependencies, utterly neutering their so-called status as 'tax neutral international\u00a0 financial centres'\u00a0 by ensuring that all monies they receive have been taxed before getting there.<\/p>\n

Now I am not counting my chickens as yet. First of all,\u00a0 the UK is leaving the EU\u00a0 and so these conditions will not apply to payments made from whatever is left of the United Kingdom. Second,\u00a0 not every EU member state may apply these sanctions.\u00a0 But, what is clear is that the pressure is very real,\u00a0 and that the sanctions are tough.<\/p>\n

I am not optimistic enough to say that this is the end of these British tax havens;\u00a0 they are adept at wriggling out of these situations.\u00a0 What I do, however, like is the form of wording chosen; the fact that the test is defined in such a way that they inevitably fail it; and that the potential sanctions are significant.\u00a0 Whatever other impacts\u00a0 the EU tax haven blacklist might have, for\u00a0 Jersey, Guernsey,\u00a0 the Isle of Man, the Cayman Islands and, no doubt in due course,\u00a0 the British Virgin Islands,\u00a0 the sanctions are draconian,\u00a0 and I warmly welcome them for precisely that reason.<\/p>\n","protected":false},"excerpt":{"rendered":"

I have, for more than a decade, had an interesting relationship with the British Crown Dependencies\u00a0 of Jersey, Guernsey and the Isle of Man.\u00a0 From
 Read the full article…<\/em><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[89,22,35,4,6,7,32],"tags":[],"class_list":["post-39722","post","type-post","status-publish","format-standard","hentry","category-bvi","category-cayman","category-economics","category-guernsey","category-isle-of-man","category-jersey","category-tax-havens"],"_links":{"self":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/39722","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/comments?post=39722"}],"version-history":[{"count":0,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/39722\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/media?parent=39722"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/categories?post=39722"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/tags?post=39722"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}