Jersey’s government has announced that it is to undertake a comprehensive review of its fiscal strategy, focusing both on its system of taxation and also on public spending within the Island. The review is intended to ensure that Jersey has a long-term sustainable framework for ensuring that government expenditure corresponds with taxation and other government revenues.

The review will focus, in particular, on Jersey’s system of corporate taxes, specifically the “zero/ten” system that was introduced in 2006. This system is intended to be compliant with the EU’s Code of Conduct for Business Taxation, which was introduced by the EU’s Counsel of Economics and Finance Ministers (ECOFIN) on 1 December 1997. Indeed, the UK’s Government has assured the government in Jersey that the “zero/ten” system of taxation is compliant with the Code of Conduct, but some unnamed EU member states have suggested to the UK Government that the “zero/ten” system does not fit within the “spirit” of the Code.

The fiscal strategy review is expected to be concluded by early Summer 2010, with any changes to the Island’s system of taxation likely to be debated by the States of Jersey in the late Autumn 2010 budget. Any changes to the system of taxation are unlikely, therefore, to take effect before 2012 at the earliest.

Both Guernsey and the Isle of Man, which also have introduced comparable “zero/ten” systems of corporate taxation, have announced similar reviews of their fiscal strategy. As a result of the substantial fiscal deficits that are forecast in both Guernsey and the Isle of Man, it is likely that changes to their systems of taxation will be more far reaching, as they need to increase their government revenues as a proportion of GDP by a greater amount than in Jersey, where the structural deficit is significantly lower. All three Crown Dependencies have announced that they intend to work together, to minimise opportunities for tax arbitrage between the Crown Dependencies. However, given the different fiscal position within the three Crown Dependencies, it is by no means certain that the three Crown Dependencies will maintain virtually identical systems of corporate taxation.

Whilst the zero/ten system is intended to ensure that Jersey continues to offer a tax-neutral form of company for investment and finance activities, it has created certain anomalies within the Island’s tax system, which hopefully will be addressed during the course of the review.

It seems likely that Jersey’s government will, during the course of the review, seek to engage in discussions with EU member states, not just to ensure that changes arising from the review are accepted by all EU members as being compliant with the Code, but also to identify ways in which Jersey will be able to offer a competitive fiscal package, for example through double-taxation agreements.

For further information on this matter, please contact Robert Christensen (rchristensen@volaw.com), Managing Director of Volaw.