Retail tax: rescindment of States’ decision

STATES OF JERSEY

RETAIL TAX: RESCINDMENT OF STATES' DECISION

Lodged au Greffe on 12th March 2018 by Senator P.F.C. Ozouf

STATES GREFFE

2018  P.62

PROPOSITION

THE STATES are asked to decide whether they are of opinion

1. to refer to their Act of 30th November 2017, in which they adopted the Draft Budget Statement 2018, and their Act of 28th November 2017, in which they rejected an amendment to the Draft Budget Statement 2018 which sought to provide that the new Income Tax levied on large retailers be levied at the rate of 10% rather than 20%, to rescind that part of the Budget Statement 2018 which enabled that new Income Tax to be levied at 20%, and to agree in principle that the new Income Tax levied on large retailers be levied at the rate of 10%; and
2. to request the Minister for Treasury and Resources to bring forward the legislation necessary to implement this decision.

SENATOR P.F.C. OZOUF

Note:  In accordance with Standing Order 23 (Additional requirement for proposition

to  rescind  earlier  decision),  this  proposition  has  been  signed  by  at  least 3 States Members in addition to the proposer.

1. Connétable of St. Helier
2. Deputy M.J. Norton of St. Brelade
3. Deputy G.J. Truscott of St. Brelade
4. Deputy S.M. Wickenden of St. Helier
5. Deputy A.D. Lewis of St. Helier .

REPORT

The States rejected P.90/2017 Amd.(4). Part V of the amendment stated –

"the new Income Tax levied on large retailers is levied at the rate of 10% rather than 20%, reducing estimated income by £2,800,000;".

Background

The original report proposed a variety of measures which, if adopted, would have more than funded all the revenue necessary to reduce the proposed 20% Retail Tax to 10%.

The debate was an important one, and concerned the sector which employs more people than any other outside the Finance sector, and which produced £149 million in GST receipts for the States between 2008 and 2015.

The scale of this sector in terms of its contribution to employment and tax collected, quite apart from the essential role it plays in providing goods to all Islanders, cannot be understated.

Any decisions regarding this sector's competitiveness and the level of investment required to sustain it and its effect on the cost of living should be taken with the greatest of care.

All the evidence pointed to a certain increase in the cost of living, which would be felt particularly acutely in the grocery sector.

The issue of the creation of an unlevelled playing-field amongst retailers became an uncomfortable position for many Members.

All the Jersey business groups and associations made strong representations that the imposition of a 20% tax had not been thought through, and they universally said it was an unwise decision.

The Jersey Retail Association had been recently formed and expressed deep concerns about the 20% and its effect on investment and prices – although 10% would have had an effect, they believed that if a tax was to be introduced – a 10% rate and one which would only affect the largest retailers, would have been an acceptable compromise.

The Chamber of Commerce, the Island's largest independent business organisation, expressed their concerns about the 20% rate, but agreed that a 10% rate properly introduced would be a compromise, and would place retail on a similar footing to the finance sector.

The work the Chamber have done since the debate has shone a light on the fact that no proper consultation took place. Certainly not over the 12-month period which Members were led to believe.

Warnings were given that if the cost could not be borne by the businesses themselves, the cost would be passed on in terms of higher prices. The cost of living has already increased due to the exchange rate volatility after Brexit, and a further self-imposed price increase would, moreover, damage confidence in Jersey's much-valued, vibrant retail sector.

The accompanying report explained the effect on prices and set out the concerns that the tax would likely increase prices. The report stated –

"If fully passed on in prices, a 20% tax on profits would add only 1–2% to the costs of goods sold by the retailers affected'.

The research that undertaken that the prices of goods sold by the companies affected if the 20% rate would be adopted would be in the region of 3%.

That is equivalent to an additional 3% GST for those customers who would continue to shop at those establishments."

The report referenced the importance of a vibrant retail offering and evidenced that Jersey enjoyed one of the most vibrant and busy high streets in the British Isles.

Specifically, it argued that both Islanders and visitors benefited from A wide and diverse mix of local and non-local retailers.'.

The report said Long may that continue'.

The report referenced the Connetable of St. Helier and highlighted the work and the appointment of a Town Centre Co-ordinator', whose work had been extremely helpful to retailers.

"Empty shops have been encouraged to display art, and even pop-up shops have been allowed to occupy empty or transitioning retail premises.

Many people from Guernsey come to Jersey to shop because of the wide range of retail establishments we have.

This is despite a sector that has however been hugely affected by the emergence of online retail.

The truth is, that has resulted in falling rentals or at least stagnant rentals (which are sadly not reflected in lower rates bills due to lack of revaluation of Rates levied by the Parishes and some of which is paid to the Island-wide rate) which are now a reality.

Levying this indiscriminate tax is likely to act as a disincentive for retailing." My fears were not misplaced.

Whilst the original amendment recognised the importance of balancing annual revenue expenditure and proposed a number of additional revenue-raising measures which would, if agreed, have funded the reduction of 20% to 10% – it was accepted that such measures could raise revenue in the future – but they should be the subject of proper consultation, economic advice and business impact – this was accepted. It is hoped that that work is already underway, and that a careful extension to the 10% rate will be proposed to include on-licensed premises and gambling.

Those parts of the original report which addressed the alternative retail tax proposal are set out in Appendix 1.

The Minister for Treasury and Resources' justification

The report is set out in Appendix 2 (original justification of the 20% proposal).

Although it was described as an economic report – and whilst I have a very high regard for the States' Economic Adviser – it has become clear that what was required was a full business impact report.

A tax at this level should have been proposed and explained with actual tangible evidence of what would happen to the retail sector in Jersey if the tax at 20% was implemented.

The report stated:

The Retail Tax was not properly consulted on.

It was stated that there had been appropriate consultation, that the sector had been consulted.

A Freedom of Information Request revealed the facts about consultation. This is shown in Appendix 4.

The tax was not properly consulted on.

This is not good government, and the States were not informed that in reality the Retail sector had been told of the tax, not asked what the consequences of it would be.

This is little wonder the sector and its Retail Association have been so disappointed. The Jersey retail sector concerns remain

The retail industry has been very clear about their severe concern in an article published in the Jersey Evening Post ("JEP") of 2nd March 2018, as shown in Appendix 5.

The concerns of retailers cannot continue to be ignored.

Retailers who accepted a 10% tax as fair and in line with Finance remain extremely concerned about the consequences of the additional tax, which has not increased by 5% or 10%, but by a significant and unconsulted amount.

The retail sector in the United Kingdom and elsewhere

Since the start of the year and in recent weeks, there have been numerous media reports of more failures of High Street chains. This trend is set to continue.

There is a real concern that the pressure that the Retail sector is under, across the British Isles, and indeed globally, will continue.

When considering Jersey's Retail offering, decisions about its future cannot be taken without consideration being given to events elsewhere, and particularly their U.K. counterparts. The U.K. high streets have been decimated.

Town High Streets – with populations similar to Jersey – across the British Isles now experience severe problems.

It could be argued that the decision, which was unrelated – to introduce 0:10% and reduce the corporate tax on retail – was actually in hindsight at the time a real fiscal stimulus. If it hadn't been introduced, significant changes would have otherwise started to affect retailing in Jersey and would have seen St. Helier 's high street fail.

There are a number of major retailers literally teetering on the brink. We need to provide every incentive to ensure that those retailers are not disincentivised to pull out of Jersey. If shops do fail through no fault of the Island – the fiscal Environment needs to be attractive to attract more investment and to boost investment of the existing retailers.

Do we want to see more retailers fail in Jersey because of the uncertainty of this tax?

Jersey will be not be unaffected by these trends, and the imposition of the 20% tax is likely to put Jersey traders in a worse position than they otherwise would be, moreover, in a very difficult trading environment.

The effect on grocery prices

The recent decision by a large local retailer, Sandpiper, to re-organise their distribution arrangements was welcomed as an opportunity to limit price increases and indeed to see falling prices.

With the rising cost of food, as a result of exchange rate movements following Brexit, this is welcome, but the reality was that more could have been done.

The JEP article is shown in Appendix 6. Islanders' concerns about the cost of living

In recent months there have been a number of surveys about Islanders' views on matters of public importance.

The recent ComRes Poll is set out in Appendix 7.

Islanders are really concerned about prices and the cost of living, and the States needs to listen.

The 20% is increasing the cost of living, especially for groceries, and this can be reversed.

Fairness

As the debate last November continued, it became increasingly apparent that there was not going to be a level playing-field between those large retailers that would be caught by the 20% tax and those that wouldn't.

Many Islanders shop at the Island's Co-op. No-one wants to see the Co-op taxed on its profits if at all necessary.

This is an important institution, but it cannot be allowed to compete unfairly with commercial enterprises that need to retain confidence that the Island will treat all businesses on a level playing-field.

Having  reviewed  the  provisions  of  the  Competition  (Jersey)  Law  2005 (the "Competition Law"), I believe that there is a justifiable case for a challenge to be made that the retail tax is being unfairly applied, because the provisions of the Competition Law apply to the States just as they do to any other entity.

Improved Public Finances

Great store has been set by the recent estimates of income tax. The cost of reversing this provision is clearly now affordable in the current year.

Urgency

It may well be argued that this matter can be left to the new States Assembly. However, this is a proposition which reverses the tax on profits arising this year. With the new Assembly being formed in June, it is inevitable that it will be the autumn before there is any opportunity for a reversal to the tax being brought for a debate.

This Assembly made this decision, and it is for this Assembly to reverse the decision based upon this new information.

Summary

The imposition of the 20% retail tax was always going to have a detrimental effect on the Island's vibrant retail sector.

It is now beyond doubt that the Retail sector was not properly consulted upon, and the industry deserves a proper consultation, as they did have with the alternative of 10%.

It is the Members of the current States Assembly who imposed this unilateral tax on large retailers. This proposition offers the opportunity for the Members of the current Assembly to reverse it in the interests of both retailers and, more importantly, consumers and the cost of living.

Knowing what we now know:

- Islanders have a heightened concern about the cost of living

- The imposition of this tax is going to increase the cost of living

- Retail trading conditions have worsened since the decision on the 20% tax.

There is every reason for this Assembly to reverse this decision and allow the new Assembly to reconsider the taxing of corporates in a fair and equitable way that does not cause such a rise in the cost of living.

A further addendum will be published shortly.

APPENDIX 1

DRAFT BUDGET STATEMENT 2018 (P.90/2017): FOURTH AMENDMENT [part (v) only]

____________

PAGE 2, PARAGRAPH (a) –

At the end of paragraph (a) insert the following words –

"except that –

[Other proposals rejected and not relevant to this proposition have been removed.]

(v)  the new Income Tax levied on large retailers is levied at the rate of 10% rather than 20%, reducing estimated income by £2,800,000;".

SENATOR P.F.C. OZOUF

Extracts from the accompanying REPORT

Summary

The main purpose of this amendment is to reduce the proposed Retail Tax from 20% to 10% which is shown in part (v).

The loss of revenue that the Treasury has calculated as £2.8 million.

I have worked hard to identity a number of additional revenue-streams in order to fund this reduction.

In doing so, a number of the additional revenue-raising proposals have been identified, which may in themselves find favour as standalone proposals.

The alternative measures are designed to be fairer, and taken together with my other Budget amendments – are designed to ensure that the cost of living of Islanders is lowered, which will have an important beneficial effect on all Islanders whether they are students, in work or retired.

[]

The total revenue of the additional of replacement measures on an annual basis would be sufficient to meet the reduction in revenue.

Background

In last year's Budget 2017, Senator S.C. Ferguson proposed –

"(e) to agree in principle that from 2018 a 20% tax on profit should be applied to

all  large  retail  businesses  operating  in  Jersey,  whether  owned  by  Jersey resident companies or by non-resident companies, where taxable profits are above GBP 500,000 per annum providing this does not pose a risk to the zero-

ten regime and to direct the Minister for Treasury and Resources to bring forward the necessary legislative changes for debate by the Assembly during 2017;".

The following report was attached –

"This amendment is intended to expedite taxation legislation equivalent to that existing in Guernsey and the  Isle  of Man. It should solve the  conundrum of inequitable taxation between all retail organisations owned by local residents and those owned by corporations outside the Island. This has been a matter of concern for Islanders from some time and this particular piece of legislation should go some way  to  assuaging  that  concern.  The  Guernsey  proposition  is  attached  as  an Appendix. It can be seen that this is a simple piece of legislation. The BEPS (Base Erosion and Profit) Project initiated  by  the  OECD and to which  the  Crown Dependencies are signatories may well affect the taxation income from these sources in the future. In the meantime this particular amendment will make a level playing field in the retail sector.

Financial and manpower implications

There are no manpower implications. The financial implications will simply be an increase in States income which is difficult to define at this time."

The Minister for Treasury and Resources has proposed the Retail tax because of this proposal.

The purpose of this amendment is to provide an alternative. Retail Taxes in Guernsey and Isle of Man

The justification of the adoption of a new retail tax is that it has been introduced in the other Crown Dependencies.

The Isle of Man has introduced a Retail Tax at 10%.

Guernsey has adopted a Retail Tax of 20%.

However, both islands have important and different aspects to their economies.

The Isle of Man is subject to the same rates of United Kingdom Value Added Tax and Duties (which we call impôts) so have the higher rate of 20% VAT and higher duties that the UK, in effect a common purpose arrangement.

Guernsey, despite a number of suggestions for its introduction, does not apply Good and Services Tax.

Discussion – who pays tax companies or individuals?

Economists always remind us that companies don't in themselves pay tax, but people do.

The reality is that ultimately someone will pay the tax collected by the company or other non-natural entity.

There are only 3 possible classes of real people who will ultimately pay –

1. Shareholders or owners
2. Employees of the company
3. Consumers.

The effect on prices

I am gravely concerned that the result of this additional tax will be higher prices. The Treasury conceded this. On page 143 of their Budget documents they state –

if fully passed on in prices, a 20% tax on profits would add only 1-2% to the costs of good sold by the retailers affected'.

The research that I have undertaken that the prices of goods sold by the companies affected if the 20% rate would be adopted would be in the region of 3%.

That is equivalent to an additional 3% GST for those customers who would continue to shop at those establishments.

The importance of a vibrant retail offering

Jersey enjoys one of the most vibrant and busy high streets. A wide and diverse of local and non-local retailers. Long may that continue.

The Connétable of St. Helier should be congratulated for his work and the appointment of a Town Centre Co-ordinator', a proposal which was originally an initiative of Economic Development in or around 2006.

Empty shops, to the extent of their remaining empty, have been encouraged to display art, and even pop-up shops have been allowed to occupy empty or transitioning retail premises.

Many people from Guernsey come to Jersey to shop because of the wide range of retail establishments we have.

This is despite a sector that has however been hugely affected by the emergence of online retail.

The reality is, that resulted in falling rentals or at least stagnant rentals (which are sadly not reflected in lower rates bills due to lack of revaluation of Rates levied by the Parishes and some of which is paid to the Island-wide rate) are a reality.

Levying this indiscriminate tax is likely to act as a disincentive for retailing.

The importance of continued investment in Retail

Continued investment in retail is absolutely vital.

To impose a tax at 20% will restrict the ability of major retailers to invest.

In fact the 20% may result not only in higher prices but investment in retail falling.

The Finance Sector and its 10% Special Rate of Tax

The arguments as to why the Island is unable to levy a 10% General Rate of tax are well known to Members.

The Island's 0% General Rate of tax is of vital importance to the financial and business services sector.

Nothing should be done to compromise the General Rate of tax.

However, exemptions can be made, and one is made to levy a special 10% on Regulated Financial Services Providers, they make up a small number of businesses in themselves.

Fairness of treatment

The Retail Sector do not feel it is fair or reasonable to charge their sector, albeit that there are tests of turnover and profit included in the proposal.

A 10% rate of tax would put the limited number of Financial Services providers on the same footing as the finance sector.

[]

Extension to the whole liquor trade

If large off-licence traders are to be taxed on their profits, then I see no reason not to include the profits of on-licence businesses and off-licence businesses should not be treated on the same basis.

There are concerns about the margins on liquor sales in the on-licence sector and I have lodged an additional proposition to investigate this sector.

Figure 10 of the main Budget proposal showing the ever and ongoing widening of the on-licence alcoholic beverage should be of concern to all Members.

Here are the margins from the Budget 2011 Report –

Here are the margins as shown in Figure 10 of the 2018 Budget –

These tables show that the margin differential in off-licensed alcoholic drinks has improved, and the net prices in Jersey are almost identical to the United Kingdom.

The situation for the net price in tobacco has also improved and net prices are almost at the same level as the UK.

The situation for remains a problem – and the evidence from similar-sized islands provides evidence of these concerns.

The most startling differential is that from the on-licensed trade. The example of a pint of beer shows that net of duty and tax, a pint of beer is 97p higher in Jersey than in the United Kingdom.

Does it really cost an additional 97p to serve a pint of beer in Jersey?

The fact that the Treasury has identified that extension of a 10% rate of tax to Taverners licence-holders would yield £450,000 indicates powerfully that despite the annual refrains from the liquor companies that complain vociferously against annual duty increases, this number sheds new light on the fact that even with the profit test of over £500,000, and that this will affect only companies with turnovers of over £2 million, their profitability must be in the order of £4.5 million.

That is probably a conservative number, as it has been said that one large pub chain has profits across the Channel Islands of over £20 million.

Extension of the retail tax at the lower rate of 10% would only affect those large groups and not small businesses.

It provides an important contribution to permit the lowering of the retail tax at to 10% and will ensure all large liquor vendors – whether they be on-licences or off-licences – are treated equally.

The review which is the subject of another amendment is also an important part of getting  to  understand  the  reasons  for  what  seem  very  high  margins,  and  seeks recommendations to improve the consumer prices, to maintain a vibrant night-time economy, and is also complementary to the important work of the Assistant Minister for Economic Development, Tourism, Sport and Culture, the Connétable of St. Brelade , and Senator P.F. Routier, O.B.E. as Assistant Chief Minister, who have overseen the important new Licensing Law amendments.

Extension of the 10% Financial Services Special 10% Rate to Licensed Betting bookmakers

Many people I have consulted have been surprised to learn that in fact, whilst there are some fees charged by the Jersey Gambling Authority, their profits are not taxed at the same rate as Regulated Financial Services.

Gambling does have an effect on some people's lives to a deleterious effect.

As a standalone Proposition, it could be argued that this is one sector that should be the subject of a special rate of tax because of the impact on society that gambling has.

Particularly people who can least afford it.

Whilst there are arguments as to the extent to which the retail tax would increase prices it is hard to see how betting shops would pass on the tax to users of betting services.

I have no doubt the sector will make its representations prior to the budget debate, but I remain resolute in believing that this is a sensible and proper extension of the special 10% right and without the turnover and profit test that will be applicable, if approved, for retail.

I have not sought at this stage to extend the 10% rate to online gaming. I do have concerns about the emergence of the sector in Jersey, as in my view it sits somewhat uncomfortably with the activities of our Financial Services sector.

But  apart  from  the  fact  that  jurisdictions  have  already  established  well-regulated e-gaming activities, Islands develop specialisations and should focus on what they are good at.

This is a matter which will no doubt be the subject of further debate, but the fact that the High Street betting shop should be taxed is a reasonable one, and I hope it finds favour with Members.

Extract from last year's Budget debate

In proposing her amendment, Senator Ferguson made the following remarks –  "I will make no apologies for a quick look at the background of this because I think that most Members in this Assembly now were not here at the time when the original Zero/Ten came in.

All the Crown Dependencies started with the implementation of the Zero/Ten policy.

All the Crown Dependencies recognised the inequity of the position with regards to overseas companies trading in the Islands, but they felt powerless to do anything about it at that time.

There were 3 fairly comprehensive scrutiny reports, which discussed the matter. It was recognised that a Jersey branch of a U.K. (United Kingdom) company, the full profits would be taxable in the U.K. as soon as they are earned.

But in the case of a U.K. group with a Jersey subsidiary, the subsidiary will pay no tax in Jersey and the group would only pay tax when its profits are paid to the U.K. parent as a dividend. A dividend would attract tax, so there is a strong incentive to avoid receiving dividends from Jersey subsidiaries. The profits could be reinvested tax-free either in Jersey or elsewhere in the group or extracted by way of a loan to the parent group.

For instance, there is a large department store in the Island, which is, when I last looked, owned through a Luxembourg subsidiary. For businesses owned outside the U.K. the treatment would vary, but it does seem likely that a Guernsey company would be able to avoid or postpone for a long time any tax on its Jersey operations.

Off-Island owned trading companies will pay no Jersey tax and therefore they will be able to avoid or delay paying tax elsewhere. This gives them an unfair advantage over locally-owned businesses and it also means that Jersey businesses will be more valuable to off- Island investors than they are to Jersey residents and it gives a tax advantage, as I have said, to off- Island investors, which would only accelerate the current trend for Jersey businesses to be sold to non-Jersey investors, all pretty prescient I would say. In S.R.14/2007, the Corporate Services Scrutiny Sub-Panel followed up one of the major concerns identified in its reports, this fact that non- Jersey owned businesses would escape tax liability in Jersey.

The panel and their adviser adapted a proposal originally submitted by Jurat Blampied – the Blampied Proposal – for a tax on owner-occupied business property as a workable solution. The Minister for Treasury and Resources acknowledged that the proposal had some merit and agreed to investigate the economic impact and the potential yield. The result was the Draft Income Tax (Amendment No. 32) (Jersey) Law 200-, which was lodged on 21st October 2008. As a result of the various elections to panels and ministerships following the election, an agreement was reached between the Minister and the Scrutiny Panel that, after the legislation had been reviewed by the new panel, it would be debated.

The debate was scheduled for March 2009. The new Minister and the Scrutiny Panel adhered to that agreement and the then current Corporate Services Panel presented their report to the States.

The panel was greatly disappointed that no substantive work had been done by the Treasury concerning the implications of the comments made by the panel in 2008. It appeared that the onus had been put on Scrutiny to justify the progression or lack

thereof of this piece of legislation. Certainly the panel has received no evidence of further  consultation  and,  apart  from  some  indicative  work  done  by  the  Tax Department, there is no detailed evidence to support the Minister's reluctance to introduce the deemed rental amendment.

The conclusion was that there were 2 main issues inherent in the proposal, the first was that all businesses profiting from their activities in Jersey should contribute to the Island. This is eminently fair. The second issue was that of equity between non- finance local and foreign-owned trading companies.

This question of equity for local businesses remains extremely important and must be addressed, it still goes on. The panel was of the opinion that the deemed rental concept had much to commend it, but it did depend on the availability of the information.  The  biggest problem,  as  was  pointed  out  by  the  Comptroller  of Taxation, was that the information was difficult to access and was incomplete.

As most comptrollers are only too happy to collect as much tax as possible, I must consider that his regret over this was absolutely genuine. The Treasury estimated that Zero/Ten proposals would cost the Island £10 million to £12 million in lost tax revenue  from  foreign-owned  non-finance  companies.  The  department  also estimated, this was at the time of the report, that the deemed rent tax would recover about half that sum, some £4 million to £6 million. So, for nearly 10 years we have had  a  tax  policy,  which  is  incredibly  inequitable  for  local  businesses  and encourages local owners to sell out to foreign firms.

I cannot blame them, but it would be nice if we retained some local ownership of local businesses and all we have done is wring our hands and say: "Woe is me", or whatever is the political equivalent. In the meantime, the Isle of Man produced a Tesco  tax'  in  2013  and  Guernsey  produced  an  amendment  to  their  budget legislation in October 2015 and all we hear is words, not deeds.

I ask the Assembly to support me in this amendment so that we can start producing deeds, not just words."

Senator Ferguson's proposal was amended by the Minister for Treasury and Resources, who successfully replaced the words "taxable profits are above GBP 500,000 per annum" to "annual taxable profits exceed a certain threshold (which is to be determined during 2017)".

He explained –

"I have already said publicly on many occasions so far that we are considering broadening the scope of companies that pay tax in Jersey. I am actively looking for a way to tax the profits of larger retail businesses.

At the moment, such businesses in Jersey are of course zero tax rated, whether they are locally or non-locally owned. In making any changes, we have to protect the internationally compliant status of the Island's Zero/Ten corporate tax regime.

That means not discriminating between locally and non-locally owned businesses. So any taxation, just to emphasise the point, or any changes to the corporate

taxation regime, requires that both locally and non-locally businesses are treated exactly the same.

It does mean that most companies and most profits must be taxed. The Zero/Ten regime states and makes it absolutely clear that the majority of companies and the majority of profits must be taxed at the zero rate to maintain that compliance.

Now the wording of the Senator's amendment is very specific, it is a copy in fact of the retail tax introduced in Guernsey in 2016, and although the tax models used by Guernsey, and for that matter the Isle of Man, are useful starting points, they might not be appropriate for Jersey, as our finance sectors differ in a number of different ways.

If we are to make a properly-informed decision about how to broaden our tax base, we need to first be in a position to gather evidence on company profits.

We need to know how many companies and what percentage of profits are taxed at zero compared to those taxed at 10 per cent and 20 per cent.

Now, we have already started gathering this evidence, in fact the process started long before the Senator lodged her proposition. So this is something that has been in train and is ongoing and it resulted from the fact that we made changes to the 2015 Corporate Income Tax Return form to allow us to collect the information necessary from companies and by exchanging also information with the Jersey Financial Services Commission.

You cannot get the information necessary on company profits without going through an appropriate process in the income tax return form and information exchanged with the J.F.S.C. (Jersey Financial Services Commission) are the routes and they take a small amount of time obviously before that can be completed.

My Budget proposals, of course Members will be aware, will allow the Taxes Office to collect the profit data from all companies, which are taxable in the Island, as a result of that. Based on that information, I will work with Treasury officials to determine whether it is safe to propose a change to the taxation of larger retail businesses in Budget 2018.

It is a point that the Senator herself makes in her proposition that to bring forward the proposal, providing it does not compromise our corporate tax system, and so we are agreed on that point. So my amendment to Senator Ferguson's amendment gives the Treasury quite simply more flexibility to use the data gathered from the company tax returns when we have received it to develop a solution that is evidence- based and is appropriate for Jersey and the makeup of Jersey corporate profits.

We are simply saying that, by removing the sum taken or applied in Guernsey of half a million pounds of profits, we do not know at the moment, because we do not know the profit levels, whether half a million pounds is right. It might be higher than that. It might be that we have to reduce it to a figure lower than that.

We do not know at this stage because the corporate profit information is not available here in the Island, so we want the flexibility, when the data is collected, to be able to set it at an appropriate level.

But what I can say to Members is we are committed to looking at ways of expanding the scope of businesses that we can bring within the corporate tax net to address some of the issues that the Senator has rightfully raised. Latest data that we have in Treasury suggests that the tax leakage, if I can put it that way, that is between non- locally owned companies trading in the Island where the profits go off-Island, those profits  of  course  are  still  going  to  be  taxed  in  the  jurisdiction  where  the shareholders reside, but it is revenue that is lost to the Island and we think that tax leakage amounts to around about £7.5 million to £8 million a year.

The measure of expanding the scope of Zero/Ten will help us to close that gap. It is again a matter of fairness as well as a matter of generating some additional revenue and making sure that we do not have leakage in our corporate tax system.

So my amendment to the Senator's amendment is simply saying: Yes, we agree with the principle; yes, we want to do it; yes, we are doing it, we have started the process of collecting the data with the intention of bringing back a firm proposal in Budget 2018.'

But we do, and I would urge Members to support the fact that we want to have the data first, which will come as a result of the new information from the 2015 corporate tax returns, which will be then analysed by the Treasury Department and allow us to bring forward an informed proposal of the exact levels that we need to apply and on the basis that we are able to proceed because we do not damage the Zero/Ten corporate tax system."

Financial and manpower implications

The financial and manpower implications of this proposal are clear in terms of the additional revenue raised.

It should be stated that the report indicates that a figure of £200,000 has been indicated in order to ensure compliance for the tobacco element of the proposal.

There will be some additional work for the Income Tax Department with the extension to the gambling and liquor trades.

Budget Statement 2018

(P.90/2017: as amended following the States' debate of 28th–30th November 2017)

Appendix 11 – Economic and distributional analysis of the proposed extension of corporate tax

APPENDIX 3

Extract from the Comments of the Council of Ministers opposing the reduction of 20% to 10% (P.90/2017 Amd.(4).Com.)

"Tax rate applied to large corporate retailers

In  the  2017  Budget,  Senator  S.C. Ferguson  lodged  an  amendment  seeking  the introduction of a large corporate retailers tax that mirrored the equivalent tax introduced in Guernsey in 2016. Following the adoption of an amendment to prevent the Minister for Treasury and Resources being required to simply copy the Guernsey legislation directly into Jersey's Income Tax Law, the amendment was overwhelming supported by the Assembly; with a number of Members welcoming the fact that steps were now being taken to require non-locally owned companies trading in the Island to make a direct contribution to income tax revenues.

The only conditionality associated with the amendment was that it should not be introduced if to do so would pose a risk to the zero-ten regime. During 2017, the Treasury reviewed whether making the change would pose a risk to the zero-ten regime. The Treasury's findings were that it was considered safe to extend a positive rate of tax to large corporate retailers in the manner proposed, as the proposal will not have a material impact on either –

1. the amount of profits taxable at 0% vs profits taxable at a positive tax rate; or
2. the number of companies taxable at 0% vs the number of companies taxable at a positive tax rate.

Correspondingly, the Minister for Treasury and Resources was obliged to bring forward appropriate legislation to the States Assembly for consideration in the 2018 Budget.

Senator Ozouf 's amendment does not seek to strike out the large corporate retailers tax completely, rather it seeks to reduce the applicable tax rate on profits in excess of £750,000 from 20% to 10% – effectively halving the estimated revenue that the States will receive from the tax. There appear to be 3 reasons supporting Senator Ozouf 's position: (a) impact on prices; (b) economic impact; and (c) the existence of the 10% tax rate applied to financial services companies.

Impact on prices

Although not required by the States' decision, in developing the legislative proposals, the Council of Ministers requested that the Economics Unit produce both an economic and distributional impact analysis to inform their considerations. This analysis has been published in full as Appendix 11 to the Draft Budget Statement 2018. In completing their analysis, the Economics Unit also considered the experience of the Isle of Man, Northern Ireland, Scotland and Guernsey from the introduction of taxes that apply to large retailers.

For the benefit of States Members, the section of the analysis relating to the likely impact on prices from the introduction of the large corporate retailers tax has been reproduced in the Appendix A to these comments. The conclusions reached on the likely impact on prices in the Island are summarised in the analysis as follows –

"The impact on prices could be limited for a number of reasons:

• The retailers subject to the tax will often be competing against smaller retailers and against off-island retailers, neither of whom will face the tax.
• Some  of  the  retailers  affected  are  likely  to be  branches  of  large  UK corporate retailers with national pricing structures.
• Locally-owned large retailers will have less incentive to increase prices as local shareholders will be able to offset the corporate tax against any personal tax they would otherwise have paid on the distribution/dividend of those profits.
• Profits are generally a small part of the price of retail goods."

After reviewing the experience in the other jurisdictions noted above, the analysis states –

"There is limited evidence of any significant price impact in other jurisdictions. Discussions with Northern Ireland indicate that there was no evidence that retailers deviated from prices set at a UK-wide level, however this risk may have been partially mitigated by the temporary nature of the scheme there (which was a three year increase in rates for large individual premises, rather than Corporation Tax). Similarly, no increase in prices was attributed to the introduction of a retail tax in Guernsey or the Isle of Man."

Having taken this analysis into account, the Council of Ministers was content that the likely increase in prices from the introduction of the large corporate retailers tax at 20% was limited.

In Senator Ozouf 's report accompanying his amendment he notes that: "The research that I have undertaken that the prices of goods sold by the companies affected if the 20% rate would be adopted would be in the region of 3%. That is equivalent to an additional  3%  GST  for  those  customers  who  would  continue  to  shop  at  those establishments.".

That statement is inconsistent with the findings outlined in the Economics Unit's analysis, which states –

"In 2016 the Guernsey government introduced a 20 per cent tax on retailers with profits above £500k. This scheme raises around £1.5m per annum and impacts on around twelve businesses across a range of retail subsectors, with most of the businesses concentrated in the food/drink, garage and clothing sectors.

There is no information to suggest the cost is being reflected in retail prices or staff numbers/wages at this stage. While inflation has accelerated from mid- 2016, this is generally understood to be the result of the depreciation in sterling following the UK referendum vote to leave the European Union."

In considering the impact of Guernsey's large corporate retailers tax on prices in Guernsey, States Members will need to consider whether to rely on the analysis prepared by the Economics Unit or Senator Ozouf 's research.

Furthermore, although the Economics Unit's analysis cautions against placing excessive reliance on comparing inflation rates between jurisdictions, it is worthwhile highlighting some key inflation statistics reported in Jersey and Guernsey since the introduction of the large corporate retail tax in Guernsey in 2016. The reports prepared by the respective Statistics Units show the following inflation rates overall and in key retail sectors for the year ended 31st December 2016 –

With lower inflation rates in Guernsey across RPIX, the food sector and the clothing and  footwear  sector,  this  data  indicates  no  support  for  the  contention  that  the introduction of large corporate retailers will result in price increases of around 3%.

Economic impact

Senator   Ozouf 's  accompanying  report  states  (original  emphasis):  "Continued investment in retail is absolutely vital. To impose a tax at 20% will restrict the ability of major retailers to invest. In fact, the 20% may result not only in higher prices but investment in retail falling.".

The Economics Unit's analysis of the impact on firms/economic output  has been reproduced in  Appendix B to these comments for the benefit of States Members. However the analysis is summarised as follows –

"If firms are unable to pass the tax on in prices or by reducing other costs, they may need to absorb the tax increase through reduced profits. At the margin, this may affect investment decisions – but given the size of the tax as a percentage of the overall cost base it is unlikely in itself to lead to firms downsizing, closing down or relocating."

In the body of the analysis it is noted that this may lead to some opportunities for smaller businesses because: "if there is some reduction in market share by large retailers who decide to scale back activity/employment, this will often be picked up by smaller retailers who are unaffected by the tax."

Availability of the 10% tax rate

On the move to zero/ten it was identified that requiring financial services companies, which predominantly provide services to customers located outside the Island, and which operate highly mobile business models, to pay tax at 20% would make Jersey uncompetitive in this sector and might result in key businesses/employers relocating outside  the  Island.  Having  undertaken  appropriate  competitive  analysis,  it  was

1 See:

https://www.gov.je/SiteCollectionDocuments/Government%20and%20administration/R%20 RPI%20Dec%202016%2020170120%20SU.pdf

2 See: https://www.gov.gg/CHttpHandler.ashx?id=105604&p=0

determined that applying a 10% corporate income tax rate specifically to financial services companies struck the balance between delivering the sector an internationally competitive tax rate and the need to raise revenue from the sector.

The  conclusions  reached  in  the  context  of  financial  services  companies  do  not automatically apply in the context of large corporate retailers who are based in the Island and predominantly sell to local consumers. These businesses are not highly mobile – it is not straightforward for them to move their businesses wholly outside of Jersey and continue to sell goods to consumers in Jersey. Large corporate retailers arguably have more in common with utility companies/companies supplying hydrocarbon oils which are currently subject to the 20% tax rate.

Furthermore the Council of Ministers notes that in respect of any locally owned companies subject to the large corporate retailers tax, the proposals represent simply an acceleration of the personal income tax that would be paid by the local shareholder(s) when they receive a distribution of the profits (i.e. the proposals do not result in any additional tax being paid, just an acceleration of the time at which that tax would be paid). This is because the local shareholder(s) will be entitled to a credit for the tax paid by the company when calculating their personal tax liability. The proposals effectively return large corporate retailers to the tax position that applied before the introduction of zero/ten."

APPENDIX 4

Consultation

A Freedom of Information request was submitted on what consultation had taken place with the Retail Sector

The release showed that there was no effective consultation.

Request

During the 2018 Jersey Budget Debate on 30 November 2017, when the Treasury Minister was summing up Senator Maclean made reference to a consultation which he and his department had carried out with regards the new 20% Retail Tax.

I would like to know the following information:

• the names of the 30 companies contacted
• the names of the people contact at each of the 30 companies
• the date which the 30 invitations were sent
• a copy of the written invitation
• how were the invitations sent (e.g. email or post)
• the names of the 10 retail companies which engaged and attend the consultation meeting
• a copy of the meeting agenda
• what attempts were made to ensure complete engagement with the subsequent 20 companies
• what  form  did  the  consultation  take?  Such  as  round-table  discussions, questionnaires, impact assessments and so on
• I would like to see a copies of all documents, regarding the 20% retail tax, that were presented to those retailers who attended the consultation meetings
• the Minister said the consultation had taken place one year before the budget. What other forms of consultation were carried out during that twelve month period?

I would also like to see a copy of all supporting fiscal analysis and research, which was used to produce the retail tax appendix in the 2018 Jersey Budget.

Response

The States Assembly resolved "in principle" to subject large corporate retailers to a positive rate of corporate income tax in December 2016 as part of the Budget 2017 debate, subject only to being satisfied that the introduction of such a measure would not "pose a risk to the zero-ten regime". The voting can be viewed at the following link: Draft Budget Statement 2017

Senator Sarah Ferguson originally proposed the taxation of large corporate retailers and based her proposal on the approach adopted in Guernsey from 2016; an approach which sees corporate retailers taxed at 20% on all their retailing profits once those profits exceed £500,000*. See link below: * Extract from Draft Budget Statement 2017 (Fourth Amendment)

The  Council  of  Ministers  proposed  an  amendment,  adopted  by  the States Assembly, which allowed for some flexibility in the final form of the measure (i.e. the  measure  introduced  in  Jersey  need  not  be  a  carbon  copy  of  Guernsey's approach)**. See link below:

** Extract from Draft Budget Statement 2017 (Fourth Amendment)

The wording of the proposition adopted by the States Assembly is outlined below:

"to agree in principle that from 2018 a higher rate of tax on profit should be applied to retail businesses operating in Jersey, whether owned by Jersey resident companies or by non-resident companies, where annual taxable profits exceed a certain threshold (which is to be determined during 2017) providing this does not pose a risk to the zero- ten regime and to direct the Minister for Treasury and Resources to bring forward the necessary legislative changes for debate by the Assembly during 2017".

Correspondingly the work undertaken by the Treasury during 2017 focused on:

• ensuring that the proposed extension of the positive rate of tax to large corporate retailers would not pose a risk to the zero-ten regime; and
• considering the design of the taxation measure that would ultimately be lodged with the Assembly.

As part of this work, the Treasury examined the large corporate retailer taxes introduced in the Isle of Man and Guernsey; seeking the views from the tax authorities in both jurisdictions of their experiences, in particular regarding implementation challenges. The Treasury also discussed, on a confidential basis, the emerging proposals for the design of the taxation measure with the Island's larger accountancy firms.

In addition, despite not being required by the decision of the States, economic and distributional  impact  analysis  was  commissioned  to  inform  the  considerations  of Ministers  and  States  Members  and  the  resulting  conclusions  were  published  in Appendix 11 of the Draft 2018 Budget Statement***. See link below:

*** Draft Budget Statement 2018

Statistical information was provided by the Taxes Office to the Economics Unit under the provisions of Article 13 of the Income Tax (Jersey) Law 1961 in order to assist in the preparation of Appendix 11. The Comptroller of Taxes considers that publishing this information would be a breach of the Oath of Office with regard to the duty to maintain taxpayer confidentiality. Consequently, it is considered Absolutely Exempt Information

under Article 29 (other prohibitions or restrictions) of the Freedom of Information (Jersey) Law 2011.

Following  discussions  at  Council  of  Ministers'  meetings  in  September  2017  the proposed taxation measure was at an appropriate stage in order to undertake closed consultation with those retail companies potentially impacted.

Clear proposals were presented to invited retail companies and representative bodies at two  meetings  on  20  and  21  September  2017,  before  the  draft  Budget  Statement containing  definitive  proposals  was  lodged  on  3  October  2017.  A  copy  of  the presentation is annexed to this reply.

Invitations to the presentations were sent on 15 September by email. The invitation to these meetings is reproduced below:

Dear Sir / Madam, Private and Confidential

As you may be aware in last year's Budget the States Assembly agreed the following proposition:-

"to agree in principle that from 2018 a higher rate of tax on profit should be applied to retail businesses operating in Jersey, whether owned by Jersey resident companies or by non-resident companies, where annual taxable profits exceed a certain threshold (which is to be determined during 2017) providing this does not pose a risk to the zero- ten regime and to direct the Minister for Treasury and Resources to bring forward the necessary legislative changes for debate by the Assembly during 2017".  

Under this proposition the Minister for Treasury and Resources is required to bring forward appropriate tax changes in the forthcoming Budget (scheduled to be lodged on 3 October 2017). The Minister is currently finalising his proposals and is seeking to engage with potentially impacted companies in advance of the Budget being lodged.  

As such officers from the Treasury will be hosting private and confidential briefings on the current proposals on Wednesday 20 September 2017 from 2pm – 3pm and Thursday 21 September 2017 from 2.30pm – 3.30pm at a venue (in town) to be confirmed.  

If you wish to attend one of these briefings please notify [name redacted].

As part of the presentation, there was an invitation to raise any significant policy issues with the Minister for Treasury and Resources.

Where retail companies were unable to attend one of these briefings there was an opportunity to arrange private briefings; one retail company took up the opportunity of a private briefing.

It is also noted that the Budget proposals are lodged with the States Assembly for a period of eight weeks to allow additional time for scrutiny of the Budget proposals by States Members, interested parties and the general public.

The Comptroller of Taxes considers that exposing the names of the retail companies who were invited and/or who engaged with the Treasury would be a breach of the Oath of Office with regard to the duty to maintain taxpayer confidentiality. Consequently, it is considered Absolutely Exempt Information under Article 29 (other prohibitions or

restrictions) of the Freedom of Information (Jersey) Law 2011. The Comptroller notes that few retail companies have openly confirmed or denied whether they are affected by the measure.

Exemption applied

Article 29 Other prohibitions or restrictions

Information is absolutely exempt information if the disclosure of the information by the scheduled public authority holding it –

(a) is prohibited by or under an enactment; (b) is incompatible with a European Union or an international obligation that applies to Jersey; or (c) would constitute or be punishable as a contempt of court.

Members of the Income Tax office are prohibited from disclosing information by virtue of Part 3 and Schedule 1 to the Income Tax (Jersey) Law 1961 whereby the Comptroller (and Deputy ) and Officers of that department take an Oath of Office before the Royal Court which provides, inter alia, that:

"you will not disclose any information which may come to your knowledge in the performance of your duties, except to such persons only as shall act in execution of the said laws and where it shall be necessary to disclose the same to them for the purposes of the said laws, or in so far as you may be required to disclose the same for the purposes or in the course of a prosecution for an offence against the said laws."

Therefore, the information requested is absolutely exempt information under Article 29 of the Freedom of Information (Jersey) Law 2011, because the disclosure of the information by the Scheduled Public Authority holding it is prohibited by or under an enactment."

JEP 2nd March 2018

Assembly's Vote on paragraph (v) of P.90/2017 Amd.(4)

Morrisons' price cuts

Islanders' concerns over the cost of living