The State of Our Nation (Part Three - Decoding the Code)
In August when I last wrote around the subject of the EU Code of Conduct on Business taxation I described how I was struck by a number of parallels between it and the Pirate Code, a term brought back into popular use by the recent ‘Pirates of the Caribbean’ franchise.29 November 2010
In August when I last wrote around the subject of the EU Code of Conduct on Business taxation I described how I was struck by a number of parallels between it and the Pirate Code, a term brought back into popular use by the recent ‘Pirates of the Caribbean’ franchise. My key point was that they both had a set of rules and principles, but no legal force, and both were dependent on the shared need of common parties, whose collective self-interest is served by its observation. I concluded with a tongue in cheek suggestion that the Crown Dependency Governments would be well served by acquainting the EU with the first article from the Pirate Code:-
‘1. Every man has a vote in affairs of moment; has equal title to the fresh provisions, or strong liquors, at any time seized, and may use them at pleasure, unless a scarcity (not an uncommon thing among them) makes it necessary, for the good of all, to vote a retrenchment.’
Since that time, the EU Code Group has continued to consider Jersey’s 0/10 tax regime, and met last week to discuss fully the concerns that had been raised. Jersey’s aim was to gain clarity and understanding of what exactly the issue was, given originally 0/10 had been approved by EU Code Group. Fortunately, the desired clarity was established; less positively, the feedback received from the Code Group has since been reported with inaccurate emphasis and interpretation by Jersey’s detractors, creating misunderstanding and unnecessary uncertainty. At this point, the admirable simplicity of the Pirate Code may no longer be an appropriate comparison, to something which in practice has become quite complex, but at least I can attempt to decode it, and provide some straightforward understanding of what the EU Code Group review could mean for Jersey.
The first key point to make is that it is not correct that the EU’s Code of Conduct group has rejected the principle of 0/10 as some have commented. For example, the recent press release by Guernsey’s government has been interpreted by some to suggest the whole of 0/10 is considered ‘harmful’. The accurate picture is that the Code Group have raised concern regarding just one aspect, an ancillary provision, that affects Jersey-resident individuals who have shareholdings in Jersey companies. Jersey’s government have since confirmed more detail that the EU Code Group was “concerned solely with deemed distribution”. The cipher here is simple – EU Code of Conduct review of 0/10 does NOT mean 0/10 as a whole is being rejected.
The next question requiring consideration is, “is the EU objection to deemed distribution valid?”. The States of Jersey are contesting the point, stating that the deemed distribution provisions that the EU’s Code of Conduct group objects to are part of Jersey’s personal tax system, dealing with the taxation of shareholders, not its business tax treatment of companies, and therefore currently outside of the scope of the Code of Conduct. Put more simply, the answer is ‘no’, or ‘not at the moment’. So perhaps the next question is, “should, or will, the Code of Conduct be extended to cover shareholder taxation?”.
At this point it is important to remind ourselves, that the Code of Conduct applies to all EU Member States, as well as Jersey and the other Crown Dependencies. Therefore extending the Code of Conduct to cover shareholder taxation would be an extension of the current Code of Conduct rules, for everyone. And although the EU’s Code of Conduct group may have issues with the deemed distribution provisions, will the Member States themselves approve this extension of the EU’s powers over their own tax affairs?
Other EU Member States have provisions in their own tax system, which operate in very similar ways to Jersey’s deemed distribution. Even the UK has its ‘IR35’ provisions that tax shareholders on the profits earned by their company – with an effect similar to that which Jersey’s deemed distribution achieves. Nor is it unusual for shareholder provisions like this to apply only to Jersey residents. It is normal, in the EU and internationally, for shareholder taxation to apply only to that country’s residents.
All of these points considered, it is not inevitable that deemed distribution will be disallowed by the Code Group. However it is still worth considering what would happen if deemed distribution in Jersey did have to be changed. If the final decision by the EU Code Group does go against Jersey on deemed distribution, this is a manageable situation, not the disaster that some of Jersey’s detractors will try to portray it as. Firstly, this would not mean a change to 0/10, simply an ancillary provision of it. Secondly, while Jersey’s government would prefer not to have to alter this measure, there are many solutions that could provide similar outcomes. For example, shareholders could instead be taxed only when they take dividends out of their companies or when they enjoy the income of their companies. Most shareholders need to take dividends from their companies as they need an income to cover living costs, and they will be taxed on those dividends when they receive them under existing rules. Even if they do not take dividends straight away, most of them will do so before long, so the Treasury will get its tax even if it is delayed slightly. Jersey could also introduce more targeted measures, like the UK’s ‘IR35’ or other examples from other EU Member States, to reduce the tax loss even further.
So the conclusion, if not exactly simple, is at least clear –the EU Code of Conduct Group is concerned with Jersey’s deemed distribution, not 0/10 as a whole. And if, and only if, deemed distribution is ruled against, there are many alternative provisions already used by EU Member States which Jersey could utilise to continue to provide it’s competitive and stable tax regime.
In my last blog on this matter, I ended with a quote from Jean Monnet, one of the EU’s founding fathers, and for this one, I would instead like to end by considering a description of him, that of “pragmatic internationalist”. I believe Jersey’s approach to the Code of Conduct Review and the potential outcomes, mirrors this style of pragmatic internationalism rather well – we are determined to pursue our right to operate as a world-class international finance centre and we have solutions to ensure we can do so.