However, Island authorities are likely to face ongoing negotiations over the ‘economic substance’ of businesses administered here, particularly Jersey-incorporated investment and holding companies, a business audience was told on Thursday.
As advised earlier this month by the Channel Islands Brussels Office, final recommendations for the new blacklist are due to be put before EU Finance Ministers tomorrow.
Speaking at a seminar at the Radisson Blu hotel, KPMG’s head of tax, John Riva, explained that in looking for ‘real economic activity’, the EU was primarily thinking in terms of manufacturing and trading companies with substantial employees, premises and annual expenditure; whereas companies setting up in Jersey for management and control purposes did not need to employ people locally or notify profits to the Taxes Office.
He confirmed that Jersey, together with the other UK Crown Dependencies and Overseas Territories, was among the 92 jurisdictions singled out for screening on the basis of good governance, tax transparency and compliance with the Base Erosion and Profit Shifting requirements.
Although the Island was fully compliant with the majority of those criteria, the Island’s zero percent corporate tax rate was a sticking point, he said, because it enabled companies to register without having to provide evidence of any real economic substance.
‘Clearly Jersey will fail this criterion – we have 45,000 registered companies, but at most only 5,000 of them are trading companies, so 40,000 will be investment or holding companies without employees or premises. And because of the zero percent corporate tax rate there is no mechanism to enable the Comptroller of Taxes to scrutinise those companies.’
Nevertheless, Mr Riva said that the UK government had gained EU approval for Jersey’s zero-ten tax regime earlier this year. ‘If we can educate the EU about the type of business we do, we can cope.’
Mr Riva said that the hacking involved in the recent Paradise Papers leak, along with previous leaks, had undoubtedly had an influence on global regulation. He added that blacklisting by the EU would result in increased reporting requirements, higher charges and reputational damage that would drive business away.
The specialist envisaged that as a result of dialogue with the Island’s government, the EU’s Code of Conduct group was likely to demand new legislation before the end of the year. ‘We are committed to working with the EU,’ he said. ‘I would bet that we will not be on the blacklist, but our zero corporate tax rate is an issue. There will be 12 months of dialogue with the EU trying to explain to them what we do.’
He added: ‘For a lot of Jersey companies the real key decisions – investment decisions and trust company decisions – are made by directors in the Island. Jersey has 50 years of experience in this work and there are over 12,000 people in the industry.’
