Morgan, Talmai: New Tax Regime for Guernsey

  • New Tax Regime for Guernsey by Talmai Morgan
    • After a marathon three days of contentious debate in the States of Guernsey (Guernsey?s Parliament) at the end of June, Guernsey has now resolved to embark on major changes in its taxation system. It is no exaggeration to say that the eventual consequences of these changes will determine not only the future prosperity of the Island but also the very shape and nature of its society.What has Guernsey decided ?
      A Zero Corporation Tax Rate (known in Guernsey as income tax on company profits) from 1 January 2008 other than in respect of specific banking activities which will be subject to taxation at 10%. This is widely known as the ?Zero-Ten? regime.
      This change will have a significant negative impact on Guernsey?s public revenues (a so-called ?Black Hole? problem). Income from other sources will therefore have to be increased. This will happen in two stages. In the first stage, Guernsey will run annual budget deficits funded by the use of up to half of its Contingency Reserve. There will also be increases in the existing rates of indirect taxation and in the amounts raised through social security contributions. Economic growth will also be actively promoted and public sector expenditure will be robustly controlled.
      Having run a deficit budget for three to five years (ie until 2011/2013) and after taking account of international events and specific matters such as how Jersey is affected by its introduction of goods and services tax, Guernsey will then evaluate how to produce an overall budget that delivers a balanced budget.
      Guernsey resident individuals will continue to pay income tax at 20% on assessable income.
      Guernsey resident individual shareholders will be taxed at 20% on the distributed business profits of Guernsey trading companies ( as against on the ?look through? or attribution basis ). Some anti-avoidance measures however including deemed distribution in certain circumstances are likely to be introduced in due course. It is hoped that a distribution-only policy on business profits will encourage inward investment and re-investment.
      In the case of companies making profits from investment and rental activities, the income streams will be taxed on an attribution basis.
      In order to attract extremely wealthy individuals to settle in Guernsey, individual taxpayers will only be liable for the standard rate of 20% income tax on their investment and non-Guernsey trading income up to a defined income ceiling with a maximum tax payable of £250,000 on any individual?s income from such sources.
      Wealth taxes such as Inheritance Tax and Capital Gains Tax will NOT be introduced.
      There will not be a Payroll tax.
      Why is Guernsey embarking on such ?a leap in the dark?? In short, because of the European Union?s Code of Conduct on Business Taxation. Guernsey is not within the EU?s fiscal territory (nor within the EU single market for financial services) but the Code was established to eliminate ?harmful tax measures? in EU member states and their associated or dependent territories. The Code listed a total of 66 measures which it considered harmful. Five regimes were identified in Guernsey as being considered harmful on the basis that the beneficial tax treatment they provide is ?ring fenced? from the domestic economy. We are told by the EU that the existence of a zero or low tax regime is not deemed to be harmful in itself, and that a regime is only deemed to be harmful if preferential rates are made available to non-residents but not to residents. It is understood after exhaustive discussions that Guernsey?s ?Zero-Ten? option is compliant with the Code of Conduct. In the light of these international developments and in order to remain competitive with other jurisdictions that are also having to deal with these challenges, Guernsey has now embarked on what is likely to be an interesting journey.
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