Statement by Comptroller of Income Tax regarding powers and provisions to counteract tax avoidance

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WRITTEN QUESTION TO THE MINISTER FOR TREASURY AND RESOURCES BY DEPUTY G.P. SOUTHERN OF ST. HELIER

ANSWER TO BE TABLED ON TUESDAY 26th SEPTEMBER 2006

Question

Further to a recent statement made by the Comptroller of Income Tax regarding reassurances of his powers to counteract risks associated with possible increased tax avoidance by Jersey residents following recent changes to Article 9(a) of the Trust (Jersey) Law, would the Minister inform members –

( a ) what the substance of this risk' is and how it is to be counteracted?

( b ) w h e ther the settler reserved powers' referred to elsewhere in the statement pose a risk of possible

greater tax avoidance by non-Jersey residents and, if so, how?

( c ) what consideration, if any, has been given to the possibility of a legal challenge to the actions of the

Comptroller under his strengthened Article 134A' or the proposed tick the box scheme'?

Answer

1. The Comptroller initially made a general enquiry aimedat gaining a fuller understanding as to whether the recent changes to the Trust Law had any impacton the potential for Jersey residents to engagein tax avoidance. His enquiry was interrogative and did not attempttopre-judge that there was such an increased risk of tax avoidance.Thesubsequent debate held shows that Settlor Reserved Powersare not a material issue in assessing the risk of tax avoidanceby Jersey resident settlors of trusts. With orwithout Settlor Reserved Powers,thosedetermined to avoidandevade tax can doso,byavailing themselves of structures available on a global basis, including foreign trusts, which would allow them the opportunity, if they so wished, not to declare such interests and sources of foreign incomeon their JerseyIncomeTax Returns. Such practices amount to tax avoidanceand evasion and exist currently. The key pointforme is whether this additional clause in theTrust Law, whichisaimedat entirely different purposes than that of tax avoidance, unintentionally creates a new set ofmotivesfor tax avoidance and evasion. In my view itdoes not.
2. No. I do not believe that Settlor Reserved Powers pose a riskof greater tax avoidancebyJersey residents. The primary effect ofthe new powers is not to confirm that a settlor may reserve powersin relation to a trust, but to confirm that a trustee whofollows the exerciseof such powers will not be liable for doingso.Trusts that  expressly allow  the  settlor  to  reserve  extensive  powers in relation  to a  trust are  found in many jurisdictions, including most of ourCaribbeancompetitors,manyUS States, including Alaska,Delaware,and Nevada, and jurisdictions that are increasingly ourreal competitors for international work, such asNew Zealand. There is nothing novelin the Jersey proposals, andno reason to anticipate that the introduction of this new article into the TrustLawwillposeany additional risk of tax avoidanceand tax evasion. I also ought to pointout that tax avoidance is legal, and does not constitute a civilor criminal offence, unlike tax evasion,whichis illegal, and which the ComptrollerofIncomeTax will continue to attack vigorously. Tax avoidance is the arrangingof your affairsin a legal mannertoreduceyour exposure or liability to tax. In the words of Lord Tomlin in DukeofWestminister v CIR every man is entitled ifhe can toorder his affairs so that the tax attaching under the appropriate Acts isless than it would otherwise be' Nevertheless, the Comptroller has power,under Article 134A of the IncomeTax(Jersey) Law to makeassessment to prevent avoidance ofJerseyincome tax, asheconsiders appropriate, to counteract such taxavoidanceor reduction of a liability to Jersey income tax ifhe is of the view that the main purpose,or one of the main purposes of a transaction, is to avoidorreduce a Jersey tax liability, and he doessoon a regular and consistent basis throughout every tax year.But a senseof proportion mustbe used in judging whether a transaction shouldbe counteracted. Ifan elderly personwishes to invest some capital into a capital growth bond, forthe prime reason of generating capital growth to ensure that he passes onto his children a greater sum of capital than he otherwise would, rather than keeping his funds in a bank account which attracts interestwhichistaxable,

unlike the capital appreciation on a capital growth bond which does not attract a liability to income tax, the

Comptroller may very well not attack such an avoidance transaction despite the fact that it involves an avoidance of Jersey income tax. Trusts can also be legitimately used for tax avoidance purposes, just as they can be used for wholly altruistic and charitable purposes.

3. Therehasnever been a legal challengeto the Comptrollerin the exercising ofhispowersunder Article 134A. This is because the powers are invoked in a sensible and proportionate manner and I anticipate him continuing to use any increased powers I or the States may wish to grant him in the same manner. However, there mayconceivably, in the future, be a legalchallenge to the exerciseof his increased powers and it will then be incumbent upon the Comptroller to defend the use of his powers in a particular case before the Royal Court. Her Majesty's Attorney General will,of course, examineany draft amendmentto the IncomeTax (Jersey) Law that will bring any new anti-avoidancepowers into law and he will give hisown opinion on the possibility of a challengeagainstthese new powers. But itmust be bornein mind that the States ofJersey, like any other Government, has a very wide margin of appreciation in the area of taxation and that a legislature's assessmentwill be respected in the area of taxationunless it is devoid of reasonable foundation. I have no doubt at all that any proposed powers to be given to the Comptroller to assist him in tackling tax avoidance will be reasonable and will not be capable ofsuccessfulchallengeintheCourts.