2010 has been a remarkable year for Jersey tax professionals not least because in June we saw the issue of two consultation papers on possible reforms which have major implications for the future of taxation on the island. With so many economic and political factors in play at this stage we can only speculate on what may happen.
The Fiscal Strategy Review is part of a three part plan to tackle the predicted structural budget deficit which could be as much as £100million. The Business Tax Review looks at alternatives to the 0/10 regime in the light of EU re-assessment. As we watch these developments unfold, it is an appropriate time to reflect on the issues raised, and what they potentially mean for the island economy and its inhabitants.
Business Tax Review
The Business Tax Review consultation arises from Jersey’s commitment to review its corporate tax regime to ensure it applies with international standards. It is key to remember that when considering any change to the current (and relatively new) tax regime, the States have committed to adhere to a set of guiding principles which ensure any changes retain our competitive position and are in the best interests of the island and its residents.
Shortly before the consultation was published, it was announced that the EU Code of Conduct Group will review Jersey’s 0/10 tax regime in September. Interestingly, the Guernsey regime is not being reviewed by the Code Group, whereas the Isle of Man regime is. It is hoped that the three islands will broadly move together, but is possible that paths will diverge to some extent in both the timing and nature of any changes.
The consultation makes clear that retaining 0/10, perhaps with some amendments, has not been ruled out, but asks for comment on five alternative options which may be able to preserve our competitive position and also comply with international standards of business. These considerations being:
The Deloitte report that accompanied the Foot Review commented positively on the territorial system. What does this mean? The principle is to tax business profits arising from economic activity and investment income sourced locally, and not profits arising from international activities/sources.
Hong Kong and Gibraltar have a source based tax regime for businesses and there are territorial characteristics in many countries including France and the UK. Although this could preserve the tax neutrality of the international business in the main, such a regime could present difficulties in some business sectors, and the complexity of our business tax system would undoubtedly increase.
In drawing comparisons with other jurisdictions, it is notable that competitive jurisdictions are not under the same level of scrutiny from the EU as the Crown Dependencies. Whatever the outcome of the Business Tax Review, the lack of a level playing field remains a concern.
Personal Tax Review
Whilst the Business Tax Review is centred on the taxation of company profits, this public consultation is focused on possible avenues for raising personal taxes to address the structural deficit. Whilst appreciating the requirement to raise the necessary sums of money for the Treasury, the prospect of raising personal taxes is always a controversial one.
The review is broken down into four areas.
The proposal that caught the attention of the UK national press was the possibility of a 30% tax band for income over £100,000. Unsurprisingly this proposal has caused a great deal of controversy.
This would be a bold move considering the potential impact this would have on higher paid employees and entrepreneurs. The continued success of the local finance industry is dependent upon recruiting highly skilled individuals, many coming from outside the island, their financial contribution enabling Jersey to provide the high quality services that we are all accustomed to.
Although any income tax rise is unpopular, a 50% increase in the income tax rate would seriously damage our ability to attract and retain top talent and business leaders. Considering the risk involved, the introduction of a 30% income tax rate would almost certainly be counterproductive.
Another revenue raising option is to increase GST from 3% to 5%. This would be simpler to implement but as the report illustrates, whilst a proportion of every family’s expenditure includes GST it is actually the lower income families for whom this has greater impact.
One option is to introduce exemptions for certain goods or services, although this would benefit higher as well as lower income households and would add to the cost and complexities of the GST regime. A better answer would be to raise the general rate but provide relief for lower income households.
Internationally there is a trend towards lower corporate tax rates and an increased reliance on indirect taxes such as GST. Whilst Jersey’s GST impacts consumers at all levels, a rate of 5% is still low in comparison with EU and other VAT rates.
As it stands at present there is a social security obligation on wages up to an annual ceiling of £43,752, with employee rates of 6% and employer rates of 6.5%. One suggestion is to increase this ceiling to £115,000. Such a jump would significantly increase employment costs and could threaten to put jobs at risk and reduce Jersey’s attractiveness to business. There are well publicised debates surrounding UK social security that demonstrate the importance of this to business leaders.
However some increase in the ceiling may raise revenues without any notable impact on employment. Meeting somewhere in between £43,752 and £115,000 may be the answer.
Jersey domestic property rates are on average significantly lower than the UK. The current suggestion is a threefold increase to these rates. As with the social security contributions, some increase may be justifiable although one might ask the question as to whether the money raised is general taxation or whether it is earmarked for the purposes originally intended
In summary the best approach would appear to be to introduce a package of measures, but to maintain the rate of tax applicable to individuals at 20%.
It is inevitably unclear at this time what the expected outcome of either consultation documents will mean for people living and working on the island. What is clear is that the consequences will potentially affect business and individuals alike. Balancing international demands with local priorities to meet a budget deficit was never going to be easy. These are definitely interesting times, and the topic of taxation continues to generate passion and debate – and for once this is not just for the Jersey tax professionals!