Matters contained in the document Zero/Ten Design Proposal

1240/5(2915)

WRITTEN QUESTION TO THE MINISTER FOR

TREASURY AND RESOURCES BY DEPUTY G.P. SOUTHERN OF ST. HELIER

ANSWER TO BE TABLED ON TUESDAY 6th JUNE 2006

Question

Would the Minister inform members, in relation to the document entitled Zero/Ten Design Proposal' –

( a ) w h e ther the decision to introduce look through' only for investment holding companies but not for

trading companies owned by Island residents will reduce estimated tax yield and, if so, by how much? If not, can the Minister explain why the mechanism was originally chosen?

 ( b ) w h e ther the removal of the requirement to disclose beneficial ownership for Jersey companies

contained in Section 6 has any effect on the Island being well regulated over money-laundering?

( c ) why the decision was taken not to introduce limited or schedular' look through contained in paragraph

10.3.2?

( d ) why the decision was taken not to apply anti-avoidance measures in section 12 and whether this will

result in any impact on fiscal revenue and, if so, to what extent?

( e ) of the impact, if any, of the proposals made in paragraphs 17.2.2 to 17.3.1 and what estimates have been

made, if any, of the tax revenues contained in paragraph 17.6?

( f)  of the de minimis rental level under consideration in paragraph 17.6.3, and what impact, if any, this has

on tax revenues?

( g ) what estimates, if any, have been made of the impact of the exemption on shareholdings below 1%

contained in 19.3.2 on revenues? and,

( h ) what additional resources will be required, if any, in order to make the changes to Article 134A of the

Income Tax (Jersey) Law 1961 effective in tackling avoidance?

Answer

1. There will  be no loss  of the estimated tax yield arising at the personal or dividend level as  all distributions and deemed distributions will eventually be collected byassessment on the individual shareholder. However,there will be a loss of interest that may have accrued on these tax revenuesas there is a timing difference between the receipt of tax revenues under the original look through' proposals, (when tax revenues would have been receivedontotal profits moreorlessas currently), compared tothe revised partial distribution'' proposals which will only tax all undistributed profits for the first year in the fourth year with tax collection in the fifth year and soon.However, part ofthe proposals include a deferred distribution chargewhich equates toanannual interest chargeof4% so that will compensatetosomedegreefor the loss ofinterestwhichmay have accrued on these tax revenues. If the Limited Trading Partnership route is chosen,however, there will be no loss of tax or loss of interest on persona/dividend tax revenues in such instances as such assessmentswillbemadeon a partnership basis' of all profits arising. The original look through' proposals were chosen with partof the rationale being to maximise tax yieldon a current year basis;
2. whereas there is a proposal to remove the requirement for upfront disclosure of beneficial ownership for Jersey  companies to the  Financial  Services Commission, (where a  company is administered  by  a licensed Jersey trust and company service provider), there is noweakeningofthe legal requirementfor the licensed Jersey service provider to know and tokeep that information andforittobe subject to

investigation by the Commission either through the on-site inspection process or through it being specifically

requested by the Commission as circumstances dictate. Indeed, the requirements in this respect are due to be further enhanced shortly through the introduction of a revised Money Laundering Order and related regulatory guidance, which reflect the latest international standards on anti-money laundering. An inability either to demonstrate compliance during an on-site visit or to respond to a specific request for beneficial ownership information would amount to a significant breach of the anti-money laundering requirements and could thus have an impact on the service provider's continuing fit and properness' to hold an ongoing licence under relevant legislation, or lead to the use of a regulatory sanction by the Commission, as well as leaving the firm concerned and its directors open to possible criminal prosecution (as happened in a recent case) The change now being proposed on up-front disclosure is not, therefore, seen to represent a risk to the Island's well founded reputation for being well regulated in terms of anti-money-laundering.

This also fits in with the wider international picture. The OECD in its report on the misuse of corporate vehicles and the FATF in its methodology for assessing compliance with the 40 recommendations on money laundering refer to three options for ensuring that information on beneficial ownership is available - up-front disclosure; regulation of trust and company service providers; and investigatory powers. Up-front disclosure may be attractive when focusing on the formation stage but nowadays the emphasis is much more on the importance of on-going monitoring and in this respect, with Jersey now having a well established track record in the regulation of trust and company service providers, the Island has a very positive story to tell which the proposed change in no way impairs;

3. this would causeanunnecessary administrative andoperationalburden at both professional offices and the Income Tax Office through the preparation and examination of such schedular' look through computations fornon-tradingincome and wouldnotbe a wiseuse of scarce resources;
4. such anti-avoidance measures would be complex andresourceintensive to administer.In any case, the most simpleavoidancemeasureof all for specified financial services companies would beto transfer the assets in question to another competitive jurisdiction and that is not something that I would like to see, as it is muchmore preferable to keep the capital here in Jersey. So it is notsimply a matter of tax but as importantly maintaining the capital base here in Jersey rather than losing it;
5. there are no statistics available to make an estimateof the tax yield that would arise from such an extension of the tax base and that, aswell as the complex legislation that would beneededtoadminister the legislation inquestion, is why this proposal has not been pursued. The very broadand tentative estimate of the tax revenues that may arise from the proposal at paragraph 17.6issome£5 million, although it is bynomeans certain that the proposal in question will cometofruitionas I am still awaiting feedbackon that proposal as I am with all the others;
6. once again, this is a matter that is out for consultation as I do not want to imposeanunnecessary administrative redtape' burden on tenants or letting agents. It is for this very reason that theUnited Kingdom has its owndeminimis rental level of £100 perweek;
7. to subject shareholders with a less than 1% shareholding in public companies to thedeemed distribution charge and the deferred distribution charge would be both administratively onerousaswellas being practically and legally indefensible. Theseshareholders will still be liable, asnow,at the standardrateof 20% onthedividends they receive from these companies.It is notthought that there will be any impact, as compared tothepresent situation, on revenues;
8. there will be no additional resources to police the revised Article 134A as all assessingandaccounts inspection staffat the Income Tax Office already undertake a crucial role in investigating all casesof tax avoidance. There is also a specialist Divisionwhich tackles tax evasion and fraud and those officers will also be involved in policing the new Article 134A provisions. Thenew tick thebox' regime willalso make checkingofindividualtaxpayerIncome Tax Returnsmust easier andtransparent that at present and will assist the Comptrollerand his staff inensuring complete and correct IncomeTax Returns are being made.