Expenditure Proposals for 2012 and 2013 and Draft Budget Statement 2011 (P.157/2010): seventh amendment (P.157/2010 Amd.(7)) – comments.

STATES OF JERSEY

EXPENDITURE PROPOSALS FOR 2012 AND 2013 AND DRAFT BUDGET STATEMENT 2011 (P.157/2010) – SEVENTH AMENDMENT

(P.157/2010 Amd.(7)) – COMMENTS

Presented to the States on 6th December 2010 by the Council of Ministers

STATES GREFFE

2010   Price code: A  P.157 Amd.(7)Com.

COMMENTS

The Council of Ministers opposes this amendment in its current form.

The Minister for Treasury and Resources is considering lodging an amendment to this proposal.

The Deputy of Grouville proposes that the Minister for Treasury and Resources be required  to  introduce  measures  to  tax  non-financial  services,  non-Jersey-owned companies with effect from 1st January 2012.

Summary

Although the Council of Ministers agrees with some of the objectives behind this amendment, they cannot support it in its current form for the following reasons –

1. The Minister for Treasury and Resources has already committed in the Budget statement  to  make  announcements  in  2011  regarding  the  ways  in which certain non-finance companies that do business in Jersey can contribute to the Island's tax revenues. This is currently being reviewed as part of the Business Tax Review.
2. However,  it  would  be  unwise to take steps now  that could  prejudice  the outcome of the EU Code of Conduct Group's review of our corporate tax system.
3. Because the timing of the EU's review of 0/10 is not within the control of Island  authorities,  the  Minister  is not  in a  position  to make  an  absolute commitment  at  this  time  as  to when  alternative  revenue-raising  measures could be introduced or the nature of those measures. The Council of Ministers does not believe that the States would wish him to do so. These measures will be implemented as soon as itis prudent to do so.

Comment

The  Council  of  Ministers  has  long  acknowledged  that  one  of  the  unintended consequences of the zero/ten tax regime is that non-financial services companies do not pay income tax on the profits they earn in Jersey.

The  Minister  has  already  committed,  in  his  Business  Tax  Review  consultation document, to consider whether it is possible to recoup the corporate tax revenue lost from  certain  non-finance  companies  with  Jersey-based  business  activities  on  the introduction of zero/ten, without unintended economic consequences. In the 2011 Budget statement he confirmed that announcements will be made in 2011.

Much time and effort has been put into trying to find a way to resolve this without jeopardising the zero/ten regime itself. As the Deputy herself acknowledges, achieving this  is  complex  and  time-consuming.  Measures  have  already  been  introduced  in Budget 2011 which bring extraction and oil companies within the charge to tax at 20%.

The Deputy also recognises that this could be achieved by means other than a tax by introducing, say, a charge of some nature. A number of alternatives are currently being considered, including an alternative charge as well as a direct tax on profits.

The scope of such a charge also needs careful consideration. What does "non-financial services companies" mean? To bring in a charge or tax on profits for all foreign- owned companies registered in Jersey would be highly detrimental to the Island's economy. One of the alternatives considered in the Business Tax Review consultation was a flat rate of tax, and the overwhelming response was that this would result in a net decrease in tax revenues.

One other factor which is relevant to this issue is that Jersey's company tax system is based on the premise that 0% is our general rate of tax. This is currently being assessed by the European Union Code of Conduct (Business Taxation) Group (Code Group). It is vital that any changes proposed do not jeopardise the acceptability of the zero/ten regime to the Code Group. Extending the 10% band to other companies without fully understanding the impact on this analysis is critical. The measures noted above that bring extraction and oil companies within the charge to tax at 20% were carefully considered and this does not impact on the analysis. It is also important to await the outcome of the assessment so that we can fully understand any issues that the Code Group might have and therefore ensure that any changes that we make are acceptable.

The Minister's intention is that if it is practicable, proposals for increased revenue raising will be introduced from 2012. The outcome of the EU review of zero/ten will influence what these measures are, but the timing of this review is outside our control. Therefore, the Minister is not in a position at this stage to guarantee that he will be in a position to bring legislation before the States in 2011 to be implemented in 2012, although that is his firm intention.

Finally, the Deputy 's assertion that the current fiscal deficit has been caused by the introduction of zero/ten must again be refuted. The current fiscal deficit has been caused by a fall in company tax revenues from those companies that pay tax at 10%, principally the banks, combined with an increase in States spending over a period of years.

2009 was the first full year in which 0/10 applied, and also coincided with the worst of the global economic downturn. The banking sector, which contributes most of Jersey's company tax income, was particularly badly affected, with its profits falling by more than a half. Not surprisingly, given how heavily Jersey relies on tax revenues from the financial  services  industry,  income  tax  received  from  companies  has  decreased significantly.

The  deficit  which  arose  from  the  necessary  introduction  of  0/10  was  recovered through  GST,  20%  Means  20%,  ITIS  and  the  other  alternative  revenue-raising measures introduced. 0/10 is not the cause of the current structural deficit.

Prior to the introduction of 0/10, the financial services industry, and in particular a small number of banks, paid the majority of the income tax collected from companies in Jersey. This is still the case under 0/10, but the amount of tax collected is now significantly lower for 2 reasons. Firstly, financial services companies generally paid tax at 20%. This was reduced to 10% under 0/10 to protect Jersey's competitive position. Ireland had at that time reduced its corporate tax rate to 12.5%, prompting

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the rate for financial services companies in the Crown Dependencies to be set at 10% when 0/10 was introduced. This was anticipated, and the compensating measures noted above were introduced. The second reason for the reduction as noted above is the  economic  downturn.  The  tax  lost  from  other  non-finance,  non-Jersey-owned companies as a result of 0/10 is comparatively minor, and has not contributed to the current economic position of the States due to the compensating measures previously taken.

Financial and manpower implications

The Deputy acknowledges that her proposal will take a certain amount of officer time in order to bring forward workable proposals. This is certainly true; the officers in question are those that are currently working on responding to the EU review of our business taxation regime. The Council of Ministers assumes that all States Members would agree that this is the most appropriate use of their time at present. When the outcome of the EU review is known, then the Minister for Treasury and Resources will look at ways to seek additional revenues from certain foreign-owned companies.

The Deputy believes that the benefits of taxing foreign-owned companies would be great. She has not sought, however, to quantify this benefit. Of the approximately £80 – £100 million in tax revenues lost as a result of the introduction of 0/10, the overwhelming majority was due to revenue lost from financial services companies that had been paying tax at 20% and now pay at 10%.