Number of tax avoidance cases and introduction of GST

1240/5(2102)

QUESTIONS TO BE ASKED OF THE PRESIDENT OF THE FINANCE AND ECONOMICS COMMITTEE ON TUESDAY, 11th MAY 2004 BY DEPUTY G.P. SOUTHERN OF ST. HELIER

Question 1

In response to questions on 30th March 2004, the President informed members that the Comptroller of Income Tax had ruled in 154 cases of tax avoidance under Article 134A of the Income Tax Law in the previous 6 months. Will the President inform members –

( a ) how many cases in total were ruled on in the full year to April 2004 along with the total value involved

under Article 134A?

( b ) the total number of transactions and their total value that were wholly or partially counteracted under the

article? and,

( c ) the total number of transactions and their total value that were allowed under the article? Answer

"(a) 404 cases with a total value of £42.9 million and estimated profits of £5 million were ruled on by the

Comptroller of Income Tax in the full year to April 2004 under Article 134A.

2. 145 transactions with a total valueof £20.1 million and estimated profits of £5 million werewhollyor partially counteracted by the Comptroller under Article 134A.
3. 259 transactions with a totalvalueof £22.8 million wereallowedby the Comptroller and not counteracted by him under Article 134A.

Question 2

In his proposal to introduce a Goods & Services Tax (GST) at 5%, the President has given assurances that those who fall below income tax thresholds will be protected from further financial strain by increases in benefits of the order of £9 – £13.5 million. Would the President inform members –

w hat measures will be put in place to prevent the risk of creating a benefits trap' by such a move as the

incentives of employment relative to benefits are proportionately reduced?

Answer

The Employment and Social Security Committee is in the process of developing a low income support system which will aim to maintain the work incentive by taking an integrated approach to financial support rather than the current piecemeal arrangements where benefits are provided by a number of States Committees. Whilst most beneficiaries are likely to fall outside the Income Tax net, there is at this stage no firm indication of who might or might not benefit. Similarly, figures for increases in costs can at this stage only be indicative, and will be dependent on adequate additional tax revenues to fund them. There is no empirical reason why mitigating the impact of a Goods and Services Tax on low income households should result in a poverty trap' or benefits trap', and indeed it should be the aim of any new income support system in maintaining the incentive to find employment to avoid creating any such traps.

Question 3

In answer to questions on 30th March 2004, the President stated that the Committee was pursuing ways of recovering estimated tax losses of between £20 and £30 million relating to non-finance businesses owned non- locally. Would the President inform members –

( a ) what progress has been made on this issue? and,

( b ) w h e ther this situation places these businesses at a competitive advantage compared with locally

owned non-finance businesses, and, if so, whether this advantage accrues to the £50 million lost tax revenue arising from finance business owned locally and non-locally?

Answer

1. Although nonresidentshareholdersmay live in a variety of jurisdictions, themajority currently reside in the U.K., and we have had discussions with the U.K. authorities for some time now on a possible way forward. We have put forward someproposalswhichwefeelcouldprovide at least a partial solution to the transfer ofcorporate tax revenuesandthese are currently being considered constructively by the U.K.Inland Revenueandothersandweawaitthetechnicalresponse. Whilst wehaveto be realistic, we strongly believe there is a case for a considerable part ofthepotential 'leakage' to berecovered.

N  aturally, there is some sensitivity about such discussions, so I trust members will understand the degree of

circumspection which I have evidenced in my answer. When there is more definite information available this will be published by the Committee.

2. No, a zerocorporation tax treatment for non-locallyownedbusinesses does not confer any competitive advantage over locally owned businesses because they will continue to pay overall thesameamount of tax on the profits they make, butthe tax will arise only in one place, (for examplein the U.K.), rather than shared between two places, (for example Jersey and the U.K.), as is currently the case. That is the technical consequence of zero tax for overseas owned businesses which our current discussions and possible refinementsto the zeroregime are trying to mitigate - in the circumstanceswhich I describe in my preceding answer. I appreciate that this mayappear a less than entirely satisfactory situation for Jersey, and onewhic we are aiming to mitigate, but we need to understand that the Jersey entity itself, or the non-resident shareholder, does not actually benefit.The beneficiaries are therevenue authorities ofother jurisdictions Furthermore, if we get it wrong and impose alternative charges which will not qualify for relief under overseas tax laws we will actually be placing these businessesat a competitive disadvantage in the future, resulting intheirpossible closure and accompanying loss oflocal job opportunities.

U  ltimately this is a  choice between the lesser of evils. If we implement the Committee's proposals  without

any such recovery, then at worst we could lose £80-100 million, of which the maximum loss from non- locally owned, non-financial services businesses would be £25-£30 million. If we do not implement the 0/10% proposals, the overall loss of tax could be in excess of £300m. As I have indicated, the Committee is doing everything possible to reduce the potential tax loss from non-locally owned businesses. We are as concerned about this leakage as anybody else, but nobody has, as yet, come up with a feasible alternative to the Committee's overall proposals regarding corporate taxation.

Question 4

In answer to questions, also on 30th March 2004, the President referred to the economic benefit test established in 1997 under the RUDL. Will the President inform members –

( a ) how this test operates today? and,

( b ) how it will be affected by a move to zero/ten tax?

Answer

1. The Comptroller ofIncome Tax ensures that, when a new non-residentfinancialorother institution wishes to set up in Jersey andthe profits and tax projections detailed in the business plan orotherdocumentation presented to the Comptroller indicates minimalorno tax willbepaid, thereby making the tax contribution insufficient to justify the resources, such as office spaceor staff, that the institution wishesto take upin Jersey, he insists that the minimum tax contributiontobe paid by such an institution on a yearly basis

accords with the economic benefit test, as follows –

£ 1 5 ,000 per annum if no staff involved

£ 2 5 ,000 per annum per employee excluding those for whom a J category housing consent is required

£ 4 0,000 per annum per employee for those for whom a J category housing consent is required

In s t itutions requiring a mix of resources, for example, local and J category staff, will have to pay a

multiple of the above as an annual tax contribution.

2. It is anticipated that the ComptrollerofIncomeTax will continue to use theeconomic benefit test for financial andnon-financial institutions wishing to set up in Jersey even if the 0/10% proposed corporate structure isapproved, although I must stress that no formal decision has been taken on this matter as yet."