Ratification of the Agreement between the Government of the United Kingdom and Northern Ireland and the Government of Jersey to improve international tax compliance

STATES OF JERSEY

RATIFICATION OF THE AGREEMENT BETWEEN THE GOVERNMENT OF THE UNITED KINGDOM AND NORTHERN IRELAND AND THE GOVERNMENT OF JERSEY TO IMPROVE INTERNATIONAL TAX COMPLIANCE

Lodged au Greffe on 6th May 2014 by the Chief Minister

STATES GREFFE

2014   Price code: D  P.66

PROPOSITION

THE STATES are asked to decide whether they are of opinion

1. to ratify  the  Agreement  between  the  Government  of  the  United Kingdom of Great Britain and Northern Ireland and the Government of Jersey to improve international tax compliance, as set out in the Appendix to the report of the Chief Minister dated 2nd May 2014; and
2. to ratify  the  Agreement  between  the  United  Kingdom  and  Jersey amending  the  2009  Agreement  between  the  United  Kingdom  and Jersey for the exchange of information relating to tax matters, as set out in the Appendix to the report of the Chief Minister dated 2nd May 2014.

CHIEF MINISTER

REPORT

1. An  Agreement  between  the  Government  of  the  United  Kingdom  and  the Government of Jersey to improve international tax compliance, attached at the Appendix to this report, was signed in London by the Chief Minister on 22nd October 2013. This Agreement is commonly  referred to as an Inter- Governmental Agreement or I.G.A.
2. Also signed by the Chief Minister on 22nd October 2013 was an amendment to the  2009  Agreement  between  the  United  Kingdom  and  Jersey  for  the exchange of information relating to tax matters, as set out in the Appendix to this report.
3. The signing was in accordance with the provisions of Article 18(2) of the States of Jersey Law 2005 and paragraph 1.8.5 of the Strategic Plan 2006 – 2011 adopted by the States on 28th June 2006. The Council of Ministers has authorised the Chief Minister, in concurrence with the Minister for External Relations, to sign on behalf of the Government of Jersey, and has further authorized  the  Chief  Minister  to delegate  the  signing  to the  Minister  for Treasury and Resources or Assistant Chief Minister, as appropriate.

Background

4. The I.G.A. is based on the requirements of the U.S. Foreign Account Tax Compliance  Act  (FATCA)  enacted  in 2010,  whereby  foreign  financial institutions are required to report financial account information in respect of specified persons. The purpose of these requirements isto reduce tax evasion, which the Jersey authorities are committed to support through their active engagement  in a  number  of  current  international  initiatives.  The  United Kingdom Government requested from Jersey, the other Crown Dependencies and the  Overseas Territories,  the  same  degree  of support in reducing  tax evasion by U.K. residents as is to be extended in respect of U.S. citizens under FATCA through the I.G.A. entered into with the U.S.A.
5. To ensure consistency of approach, lessen the burden on financial institutions and  deal  with  data  protection  issues,  the  U.S.  offered  the  alternative  of financial institutions reporting the required information through their home country tax authority, through an inter-governmental Agreement, rather than reporting directly to the U.S. Internal Revenue Service (the I.R.S.). The U.K., having  themselves  entered  into  such  an  I.G.A.  with  the  U.S.A.  and recognizing the advantages in this approach, and with an eye to the future when  similar  Agreements  will  be  entered  into  with  other  countries,  also offered an inter-governmental Agreement to the Crown Dependencies and the Overseas Territories.
6. The I.G.A. approach is supported by the finance industry. An advantage of the I.G.A. for the financial institutions is that any significant failing on the part of a reporting financial institution will be taken up by the U.K. tax authority with the Jersey tax authority in the first instance. The I.G.A. also assists in dealing with any legal impediments arising from data protection legislation.

7. The I.G.A. with the U.K. also anticipates the implementation of a Common Reporting Standard (C.R.S.) for the automatic exchange of tax information which will have global application. This Standard, prepared by the O.E. C.D . at the request of the G20, was endorsed by the G20 Finance Ministers at their meeting in Sydney in February 2014. This move to what will be a global level playing field has been welcomed by the Jersey authorities, and in March 2014 Jersey joined with over 40 other countries in a statement committing to the early  adoption  of  the  C.R.S.  The  Standard  is  based  on  the  U.S.  FATCA requirements and matches closely the I.G.A. with the U.S. and that with the U.K. The United Kingdom has indicated that when the C.R.S. is brought into effect – currently expected to be by the end of 2015 – it will wish to make the necessary amendments to the I.G.A. so that itis even more closely in accord with the C.R.S.
8. The I.G.A. builds on an ongoing relationship between Jersey and the United Kingdom with respect to mutual assistance in tax matters, and a desire to improve international tax compliance by further building on that relationship. Both governments agree that the practical application of the I.G.A. should be monitored so that action can be taken to minimize the burden on financial institutions, where this can be achieved without risk toits effectiveness.

Bringing the I.G.A. into effect

9. For  the  I.G.A.  to be  brought  into  effect,  there  is  a  need  to amend  the 2009 Agreement between Jersey and the United Kingdom for the exchange of information relating to tax matters (the TIEA), so that the provisions of that Agreement  on  procedures  and  confidentiality  can  apply  equally  to the automatic and spontaneous exchange of tax information. The Amendment is attached at the Appendix to this report.
10. For the main body of the I.G.A. and its 4 Annexes to be brought into effect, Regulations will need to be made in pursuance of Article 2 of the Taxation (Implementation) (Jersey) Law 2004. The States will be asked to adopt the Draft  Taxation  (Implementation)  (International  Tax  Compliance)  (United Kingdom) (Jersey) Regulations 201- following the ratification of the I.G.A., if this is approved.
11. Annex 1  sets  out  for  all  reporting  financial  institutions  the  due  diligence obligations for identifying and reporting on reportable accounts.
12. Annexes II and III make provision for certain entities to be treated as either exempt beneficial owners and/or as other non-reporting financial institutions, as  the  case  may  be,  and  certain  exempt  products  are  excluded  from  the definition of financial accounts. Annex II to the I.G.A. lists the non-reporting U.K. financial institutions and exempt products; and Annex III lists the non- reporting Jersey financial institutions and exempt products.
13. Annex IV provides for an alternative reporting regime for those resident in the United Kingdom who are non-domiciled for tax purposes. Such persons are not subject to tax in the United Kingdom in respect of foreign source income, unless that income is remitted to the United Kingdom. It was feared that if there was not some recognition of the special status of those known as

"res non-doms",  they  would  move  their  financial  accounts  to  other jurisdictions that are not subject to the same requirements. In recognition of this  concern,  the  United  Kingdom  was  prepared  to  offer  an  alternative reporting regime. Instead of the income and account balance information that is required under the main body of the I.G.A., the alternative reporting regime calls for information on gross payments and movements of assets into and out of the "res non-doms" reportable account.

14. Throughout the negotiation of the I.G.A. and the alternative reporting regime, Jersey authorities have pressed the United Kingdom to include in tax returns to be completed by "res non-doms" a request for the same information as that being required in Annex IV. This would create more of a level playing field in that the "res non-doms" would be under an obligation to provide information that would not discriminate between the jurisdictions in which foreign source income was being held, and would lessen the risk of accounts being moved to jurisdictions with whom the United Kingdom does not have an I.G.A.
15. The United  Kingdom  is of  the  view  that  automatic  exchange  is  about providing  additional  information  which  allows  revenue  authorities  to risk assess for tax evasion. They are of the view that there is a risk of tax evasion with the "res non-doms", and that for this to be discouraged, information is required under the I.G.A. in respect of those in this category. The preferred position of the United Kingdom was to draw no distinction between their residents in the reporting required under the I.G.A., but they were prepared to adopt Annex IV as what they saw as an acceptable compromise between their interests  and  those  of  the  Crown  Dependencies.  The United  Kingdom Government does not agree that assisting in the fight against tax evasion should be conditional on what they include in their tax returns.
16. The Common Reporting Standard (C.R.S.), which is expected to have global application, does not provide for any arrangement for alternative reporting for the "res non-doms", because the latter concept is peculiar to the U.K. The U.K. has stated that, as the C.R.S. isto be adopted globally, the alternative reporting  regime  for  the  "res non-doms"  should  be  seen  as  a  transitional arrangement that was put in place to cope with the competitor threats, pending the move to the global Standard and its global application. All countries that commit  to automatic  exchange  of  information  through  the  signing  of  the O.E. C.D . Convention on Mutual Administrative Assistance inTax Matters (Luxembourg,  Singapore  and  Switzerland  are  among  the  signatories)  will exchange  information  in accordance  with  the  C.R.S.  By  2017,  when jurisdictions will begin to be assessed for compliance with this international Standard, itis to be expected that the "res non-doms" will be faced with the same reporting requirements whether an account is held in Jersey or in one of the Island's major competitor jurisdictions.
17. Prior to the global application of the C.R.S., some new and existing "res non- doms" business could be lost to other jurisdictions, although this is difficult to quantify. At the same time, Jersey is fully committed to assisting the United Kingdom in fighting tax evasion; and not to provide the United Kingdom with the  information  they  require  would  be  seen  as  inconsistent  with  that commitment.  In  signing  an  I.G.A.  including  Annex IV,  all  3 Crown Dependencies agreed that a sufficiently mutually acceptable balance had been struck between their interests and those of the United Kingdom.

Procedures

18. Under the terms of the I.G.A., Jersey Financial Institutions will provide the Comptroller of Taxes with the required information. The Comptroller will forward that information to the Competent Authority in the United Kingdom (H.M.R.C.). The Comptroller will not audit the information provided, but will check  that  the  returns  are  complete.  It  will  be  the  responsibility  of  the reporting financial institutions to provide the correct information in the correct format. The Comptroller will enforce the obligations placed on the reporting financial institutions in cases of significant non-compliance identified and reported on by H.M.R.C.
19. The I.G.A.  provides for 2014 to be the first reporting  year in respect of specified U.K. persons with a reportable account as from 30th June 2014. For 2014,  the  information  required  must  be  reported  to the  Comptroller  by 30th June 2016.  For  2015  and  the  years  thereafter,  information  must  be reported to the Comptroller by 30th June of the year following the reporting year.
20. The I.G.A.  will  be  supported  by  Guidance  Notes  on  which  the  finance industry  has  been  consulted.  Not  least  because  there  are  many  financial institutions with offices in each of the Crown Dependencies, it is considered important that as far as possible, and subject to differences in domestic law, the Guidance Notes issued by each Crown Dependency should be the same for the same business area, and should be issued at the same time to financial institutions in all 3 Islands. The Crown Dependencies have worked closely together in the drafting of the Guidance Notes.

Financial and manpower implications

21. The passing of the required information to the U.K. tax authority will call for the  Taxes  Office  to put  in place  the  necessary  systems  to receive  the information  from  the  reporting  financial  institutions  and  provide  for  that information's onward transmission. The Taxes Office will also be in receipt of queries from the U.K. tax authority about the returns received, which the Office will need to take up with the financial institution concerned. In certain respects this will be an extension of the arrangements currently in place for the passing of information to the EU Member States under the Agreements on the Taxation of Savings Income.
22. It is difficult at this stage to quantify the financial or manpower implications. However,  given  the  commitments  entered  into  with  the  G20  and  the international community generally, and the specific commitments to join in the fight against tax evasion to which the I.G.A. relates, itis considered that the financial and manpower costs to be incurred are unavoidable.

2nd May 2014

APPENDIX