Tax Strategy: Collecting Company Information - White Paper October 2012

STATES OF JERSEY

TAX STRATEGY: COLLECTING COMPANY INFORMATION – WHITE PAPER OCTOBER 2012

Presented to the States on 25th October 2012 by the Minister for Treasury and Resources

STATES GREFFE

2012   Price code: B  R.130

Treasury and Resources Department

White Paper

Collecting company information  24th October 2012

PURPOSE OF CONSULTATION

The purpose of this consultation is to propose how the Government of Jersey could collect the information necessary to develop its tax strategy.

When the current company tax regime was introduced in 2009, most Jersey companies became subject to income tax at the new general rate of 0%. As a result, the obligation on these companies to submit information to the Taxes Office was reduced. Since 2009, companies have been required to submit details of their income and expenses only where they have income that is subject to tax at either 10% or 20%.

The Government needs better data so that it can understand both the nature of the activities  being  undertaken  in  the  Island  and  the  profitability  of  the  companies undertaking those activities.

Recent  scrutiny  of  the  company  tax  regime  by  the  EU  Code  of  Conduct  Group reinforced the need for the Island authorities to have reliable data on the activities of companies in Jersey.

It is proposed that the additional information needed to inform decisions about tax policy will be collected by the States of Jersey Statistics Unit. The Statistics Unit has complete operational independence in producing and publishing official statistics; it has an independent oversight group, and is the central statistical office for the States of Jersey.

The Statistics Unit issues a number of surveys and questionnaires to companies each year. It is proposed to insert new questions into these surveys to collect information that is more relevant for tax purposes. It is considered that this approach strikes a reasonable  balance  between  the  competing  need  of  the  States  to  collect  useful information  with  the  need  of  both  the  States  and  businesses  to  keep  additional administration to a minimum.

Completion of these questionnaires is, however, voluntary. If insufficient information is collected in this way, it will be necessary to consider ways of making it mandatory to provide data, whether by requiring all companies to submit a return disclosing details of their profits to the Comptroller of Taxes, or in some other way.

It is not intended to obtain information on an individual company basis, but sufficient information  to  determine  an  approximate  level  of  profits  for  companies  that  pay income tax at the 0% rate, so as to better understand the economy. The data currently collected centrally is insufficient for this purpose.

All information compiled by the Statistics Unit is treated with the strictest confidence and is only used by the Unit to produce aggregate numbers. Furthermore, individual company, household or personal information is not passed by the Statistics Unit to any other States department or third party.

The other main options which have been considered for gathering such data have been set out in Section 5.

Respondents are invited to comment on this proposal by answering the questions set out at the end of the Paper.

Public submissions – Please note that responses submitted to all States public consultations may be made public (sent to other interested parties on request, sent to the Scrutiny Office, quoted in a final published report, reported in the media, published on a States of Jersey website, listed on a consultation summary, etc.). If a respondent has a particular wish for confidentiality, such as where the response may concern an individual's private life, or matters of commercial confidentiality, please indicate this clearly when submitting a response.

HOW TO RESPOND

The deadline for responses is 5p.m. on 25th January 2013.

All respondents should indicate the capacity in which they are responding (i.e. as an individual, company, representative body).

If you are responding as a company or representative body, please indicate the nature of your business and/or your clients' business.

Representative bodies should identify who they are responding for and how they gathered responses.

Please send your responses and any additional comments to:

Tax Policy Unit  Heather Bestwick at Jersey Finance Limited is

co-ordinating  a  finance  industry  response  that Telephone:  01534 440532  will incorporate any matters raised by local firms Fax:  01534 440409  or entities. Her contact details are:

e-mail:  tax.policy@gov.je  

Heather Bestwick

Wendy Martin  Jersey Finance Limited

Director of Tax Policy  48–50 Esplanade

Cyril Le Marquand House   St. Helier

PO Box 353  Jersey

St. Helier  JE2 3QB

Jersey

JE4 8UL  Telephone:  01534 836004

Fax:  01534 836001

e-mail:  Heather.Bestwick@jerseyfinance.je

It  is  the  policy  of  Jersey  Finance  to  make individual responses it receives available to the Treasury  and  Resources  Department  upon request, unless a respondent specifically requests otherwise.

1. INTRODUCTION

1. Jersey taxes companies on a residence basis, so that residents of Jersey are liable to pay tax in Jersey on all their income, wherever in the world it arises. Non-residents are, broadly, liable to Jersey tax only on income arising in or derived from the Island.
2. A company is broadly considered resident in Jersey for tax purposes if it is incorporated in the Island, or if it is centrally managed and controlled from Jersey.
3. A company resident in Jersey is subject to Jersey tax, albeit that the rate of tax applied in most cases is 0%. References to "Jersey companies" in this White Paper  refer  to Jersey  resident  companies,  regardless  of  their  place  of incorporation. References to "offshore companies" refer to companies that are resident in Jersey but incorporated elsewhere. Until the current company tax regime was introduced in 2009, these companies were not treated as resident and therefore not subject to tax except on Jersey income.
4. In  order  to  support  the  States  of  Jersey's  tax  policies,  it is necessary  to improve the collection of information regarding the activities of all companies resident in Jersey.
5. Prior to the introduction of the current company tax regime, some companies, notably those which were treated as exempt from tax, were not required to file accounts with the tax authorities.
6. With the introduction of the current company tax regime in 2009, the majority of Jersey companies became liable to income tax at the rate of 0% for the first time.  From  2009  onwards,  information  on  profits  earned  was  no  longer requested from the majority of Jersey companies and the data available to the Taxes Office is frozen at that point.
7. Data from 2008 is particularly unsuited to analysis because the 2008 tax year of assessment was based on a combination of the profits of accounting periods ending in 2007 and 2008, in preparation for the introduction of the current company tax regime in 2009. 2007 and 2008 are not considered suitable for meaningful comparisons with profitability today, as for many companies 2007 was the last year of the economic boom before the effects of the economic crisis began to truly be felt in 2008. The available information is likely to represent profits inflated above 2012 levels and for some years to come.
8. Due to the regime in place prior to the introduction of 0/10 and the changes arising from the introduction of the current company tax regime, the amount of data available on activity from Jersey resident companies is inadequate to properly inform future tax policy development.

2. INFORMATION REQUIRED

1. When the current company tax regime was introduced, it was considered that the  system  should  be  given  time  to bed  down,  so  that  companies  could become used toit. Jersey's tax system had not changed for a considerable period of time, and it was considered important that the system be allowed time to become familiar to businesses.
2. It was also considered that the administration of the company tax regime should have as light a touch as possible, to minimise the impact on companies and on the Taxes Office. Therefore, only information which was relevant or potentially relevant to income tax liabilities should be routinely collected.
3. However,  it has  become  clear  that  this  policy  may  result  in  important information going uncollected.
4. Informing Jersey's future tax policies

1. Firstly, Jersey needs to better understand what profits are being earned in the Island. A great deal of information is currently collected from a number of sources, but itis not ideal for the purposes of establishing the tax-adjusted profits, and hence, the impact of company tax policy changes.
2. Any future reform of Jersey's company tax system will be limited by the lack of data available, as it is currently difficult to say with any degree of accuracy how much tax revenue would be collected.
3. The position in relation to offshore companies is even more limited, as no information  is currently  routinely  collected  regarding  their  activities  or profitability. Companies incorporated in Jersey are required by the Companies Law  to prepare  accounts  on  a  regular  basis.  However,  there  is not  an obligation to file these accounts in all cases.
4. The zero/ten tax model has been established to comply with the European Union Code of Conduct on Business Taxation. Under the current company tax regime, the general rate of company income tax charged to the majority of companies in Jersey, on the majority of profits earned, is 0%.
5. Should it be decided in future to increase the scope of the 10% or 20% income tax bands for companies, policymakers will need to understand how much scope exists for doing so. Collecting more accurate information on the profits earned by companies in the Island will help with this.

3. FURTHER CONSIDERATIONS

1. The need for the States to collect more detailed information on companies and their  profits  must  be  weighed  against  the  increased  compliance  and administration work for companies. There is no desire to unduly increase the cost for trust companies which administer a large number of corporate clients, and which would be expected to provide information on their behalf. It is recognised  that  a  change  which  creates  excessive  additional  cost  would

damage Jersey's trust industry and could affect Jersey's ability to attract this type of business.

2. Clients may also be sensitive about information being provided which has not been requested in the past. That said, as Jersey's network of Tax Information Exchange Agreements (TIEAs) expands, the Comptroller of Taxes has the power to obtain information on any company in Jersey.

4. IMPROVING THE INFORMATION COLLECTED BY THE STATISTICS UNIT

1. The States of Jersey's Statistics Unit is the de facto National Statistics Office for  Jersey,  producing  official  statistics  on  the  Island's  economy  and population, including social and environmental statistics.
2. A key measure produced by the Statistics Unit is the performance of the Island's economy through estimation of Gross Value Added (GVA) and Gross National  Income  (GNI).  These  measurements  relate  to economic  activity conducted  on  Island  by  resident  institutions  (GVA),  as  well  as  income transfers to/from the rest of the world (GNI).
3. Information on offshore companies is not included in either GVA or GNI since offshore companies, for the most part, are either non-resident or have limited economic activity in Jersey.
4. Data collected by the Statistics Unit through surveys is provided voluntarily by businesses, households and individuals. The only exception is the census of the population which is covered by the Census (Jersey) Law 1951.
5. All information compiled by the Statistics Unit is treated with the strictest confidence  and  is  only  used  by  the  Unit  to produce  aggregate  numbers. Furthermore, individual company, household or personal information is not passed by the Statistics Unit to any other States department or third party.
6. To reinforce such assurances of confidentiality, Jersey's Chief Statistician (the head  of  the  Statistics  Unit)  is a  Chartered  Statistician,  and  as  such  must comply with the Code of Conduct of the Royal Statistical Society.
7. It  is proposed  that  information  on  foreign  incorporated  companies  and formerly  exempt  companies  be  collected  through  the  Survey  of  Financial Institutions which the Statistics Unit runs on an annual basis. This survey selects companies on a random basis stratified by size (manpower). Response rates and coverage have been high throughout the last 2 decades.
8. It  is proposed  to reinstate  in this  survey  a  question  for  trust  and  fund administrators, asking respondents to identify the number and type of entities administered  (e.g.  trust,  Jersey  incorporated  company,  non-Jersey incorporated company, limited partnership, etc.), together with a request for respondents to estimate the net profits earned by these entities in the period covered by the survey.

9. In  addition  to  the  above  survey,  the  Statistics  Unit  conducts  an  Annual Business Inquiry of non-finance sector businesses. This Inquiry focuses on collecting  data  required for  producing  the  national  accounting  aggregates, GVA and GNI.
10. It  is proposed  to include  in the  Annual  Business  Inquiry  of  non-finance companies a question relating to net profits earned in a given period.
11. Completion  of  both  the  Survey  of  Financial  Institutions  and  the  Annual Business Inquiry is voluntary. It is hoped that businesses will appreciate the need for this data and be prepared to respond.

Questions for respondents:

1. What would the impact be on your business, and on companies using Jersey as a whole, of expanding the information collected by the Statistics Unit as indicated above?
2. What additional burden do company administrators consider that disclosure of a net profit figure for all companies administered would create? Is such a burden likely to discourage completion of the survey?
3. If the data requested was based on sector, bands of profits and numbers of companies within each band, would that create a significant administrative burden on trust and company businesses? If so, what level of detail could be provided?
4. If the rate of voluntary compliance was insufficient, what measures could be taken to improve compliance rates? Are either of the other options considered below acceptable or preferable?
5. OTHER OPTIONS CONSIDERED AND REJECTED

5.1.  Enhanced income tax returns for all companies

1. Article 16  of  the  Income  Tax  (Jersey)  Law  1961  requires  any  person (individual, company, partnership, etc.) if required to do so by the Comptroller of Taxes to provide information of the taxable profits arising, regardless of the rate of tax applied to those profits or gains.
   2. Currently, all companies resident in Jersey are required to submit an annual tax return showing details of profits subject to tax at 10% and 20%, together with details of Jersey resident shareholders where they hold an interest of 2% or  greater  in the  company.  For  practicality,  and  in order  to minimise administration  for  companies  whose  liability  is nil,  the Taxes  Office  will accept a global return from the administrators or agents of companies which are not incorporated in Jersey, confirming they have no profits subject to tax at a rate higher than 0% and that no Jersey resident holds an interest in the

company. These global returns do not require signature by an officer of the company in question and therefore do not create an obligation on the company or its directors to disclose complete or accurate information in the same way as would a signature on a full return. Given that there is no tax at stake, this does not put tax revenues at risk.

3. Consideration  has  been  given  to amending  the  tax  return  to  require  all companies to include details of their profits subject to tax at 0% and the source  of  these  profits.  This  would  be  a  relatively  simple  administrative change for the States which would not require new legislation to be enacted before being put into practice.
4. The Isle of Man has similar annual company return requirements; it was therefore considered that the extra administration for companies would be acceptable.
5. However, creating new electronic records on the Taxes Office system for an additional 12,000 to 18,000 companies would be a resource-intensive process. Merely issuing the additional paper tax return forms would be costly. In order to minimise the additional resource requirements for the Taxes Office, the current global return facility could be retained for companies incorporated overseas, but with an additional requirement to report the amount and nature of  profits  made  by  each  entity.  Alternatively,  administrators  could  be permitted  to provide  an  aggregated  profit  figure  for  all  the  foreign incorporated companies administered, instead of disclosing each company's profit.
6. In order to ensure that information could be analysed without committing excessive additional resources, it would be necessary to require electronic returns. Developing a system to allow this and permit analysis of the data generated would involve significant initial investment.
7. It is also recognised that this would create a substantial administrative and cost burden to company administrators, in particular the extra level of risk management required in completing such returns.
8. On balance, it is considered that the additional administration requirement on the  Taxes  Office  and  burden  on  businesses  of  an  additional  12,000  to 18,000 companies' tax returns made this a less preferred option. However, this option  remains,  should  it prove  impossible  to collect  the  necessary information voluntarily through the Statistics Unit.

5.2  Requirement to submit accounts to the Registrar of Companies

1. All companies incorporated in Jersey are required to prepare accounts no later than 10 months after the end of their financial period (7 months in the case of public companies).
2. There is, however, no obligation for private companies to submit accounts to the Registrar of Companies or any other governmental body or agency. While companies carrying on a regulated activity may need to submit accounts and

other financial data to the Jersey Financial Services Commission (JFSC), this is not required for unregulated companies.

3. The JFSC may share the information it collects with States departments in certain  circumstances,  through  its joint  role  of  regulator  and  registrar  of companies.  That  being  said,  it  collects  information  for  specific  purposes connected  with  its  regulatory  or  registry  activities,  and  it  may  not  be considered the most appropriate body for collecting information ultimately intended to be used for tax purposes.
4. Additional staff resources would be needed to deal with the additional returns required, although the JFSC would be expected to automate as much of the process as possible. The cost of this additional resource would be likely to be met by additional income from the additional filing fees payable by affected companies. This fee is currently £25 per company and there are penalties for the late filing of accounts. Additional resource would also be required to extract and collate the information from the accounts received.
5. While this option would allow the collection of information from companies taxed at 0% which are incorporated in the Island, it would not address the question of offshore companies which are neither registered nor regulated in Jersey. If there is no legal link to the Island, they are not bound by JFSC rules and could not therefore be required to submit information to the JFSC except voluntarily. As compliance with information requests from the JFSC would carry  with  it  an  additional  administrative  cost,  it  seems  likely  that  many companies incorporated overseas would be reluctant to voluntarily report their profits to the JFSC.
6. In  the  absence  of  any  exemptions  from  the  rules,  companies  which  are dormant or have no income, such as property holding companies like those used to hold share transfer properties or (j) category homes in Jersey, would be required to prepare and submit accounts.
7. There is a concern that requiring all companies to submit accounts would encourage companies to migrate. This could mean them leaving the Island altogether, or merely migrating to another jurisdiction with no account filing requirement  (such  as  Guernsey  or  the  British  Virgin  Islands).  The management, control and administration functions could remain in Jersey, allowing the company to continue as before, except the company would no longer be subject to Jersey law.
8. As a result, Jersey would lose the annual company return fee payable by the company,  the  ability  to obtain  much  information  from  the  company,  and possibly the administration work associated with it.
9. Given that requiring all companies to file accounts with the JFSC would not address the issue of offshore companies incorporated elsewhere but resident in Jersey, and the risk of losing business, this option is not considered feasible at present.

6. QUESTIONS FOR RESPONDENTS

1. What would be the impact on your business, and on companies using Jersey as a whole, of improving the information collected by the Statistics Unit as detailed in this paper?
2. What additional burden do company administrators consider that disclosure of a net profit figure for all companies administered would create? Is such a burden likely to discourage completion of the survey?
3. If the data requested was based on type of entity, activity, bands of profits and numbers  of  companies  within  each  band,  would  that  create  a  significant administrative burden on trust and company businesses? If so, what level of detail could be provided?
4. If the rate of voluntary compliance was insufficient, what measures could be taken to improve compliance rates? Are either of the other options considered acceptable or preferable?