US President Joe Biden was today due to table proposals for a minimum international corporation tax rate of 15% for multinational firms at a meeting of the G7 group of leading industrial nations in London.
Chief Minister John Le Fondré recently responded to Mr Biden’s proposals by telling the President he should ‘look closer to home’ and pointed to low-tax regimes in states such as Nevada, Wyoming and Mr Biden’s home state of Delaware.
But backing for Mr Biden’s proposal is growing and a published paper the EU Commission, a key body in Brussels, has indicated its support for the introduction of such a rate to prevent giant firms, such as Facebook and Amazon, moving their profits to low-tax jurisdictions to avoid tax.
Both Jersey and Guernsey tax large numbers of companies at a nil rate under their zero-ten systems, with certain sectors paying a 10% or 20% rate.
While the full scope of the proposals are under development, a global flat rate of corporation tax could make it more difficult to attract new business into smaller jurisdictions such as Jersey.
The Organisation for Economic Co-operation and Development, which represents 38 nations, is working on reaching a deal to overhaul the international tax system as part of its ‘base erosion and profit shifting’ project, which aims to tackle companies unfairly declaring profits in other countries to avoid tax.
Two key principles of this work are pillar one – expanding the taxation rights of countries where business activity actually takes place – and pillar two, which involves preventing profits moving to lower-tax jurisdictions through measures such as a minimum global tax rate.
In its Communication on Business Taxation for the 21st Century paper, the EU Commission says that jurisdictions could be added to its blacklist of non-co-operative countries for tax purposes if they do not sign up to pillar two.
‘The commission will propose to introduce pillar two in the criteria used for assessing third countries in the EU listing process, so as to incentivise them to join the international agreement,’ the paper says.
‘This is in line with the EU’s existing approach to use the listing process to promote internationally agreed good practices.’
The EU parliament passed a resolution earlier this year calling for jurisdictions with zero-rate corporation tax to be blacklisted, with the Dutch MEP Paul Tang singling Jersey out during the debate and labelling the Island a ‘tax haven’.
Jurisdictions which are blacklisted could face sanctions and risk reputational damage.
External Relations Minister Ian Gorst said, however, that the OECD’s ‘complex’ proposals on pillar two were ‘limited in scope’, that features of it could align with Jersey’s system and it would not affect the Island’s important funds sector.
‘Pillar two is about ensuring that large multinational enterprises pay agreed minimum effective taxation on cross-border profits. These proposals are limited in scope, focusing on the world’s largest and most globally-mobile companies,’ he explained.
‘The proposals currently under discussion recognise that having strong rules on economic substance, which Jersey already has, is an important part of the solution to these global tax challenges. The proposals also recognise that funds should not be in scope.
‘This means Jersey’s tax system is well placed to continue to adapt to global standards, and Jersey will continue to engage in a proactive way with the OECD, EU and global bodies to combat aggressive tax avoidance and profit shifting.’
The Island introduced laws on ‘economic substance’ – proving companies have real business activity in a jurisdiction – in 2019 in response to the EU threatening to blacklist it.
Alex Cobham, chief executive of the Tax Justice Network campaign group, said that the immediate effect of a global minimum rate could be positive for Jersey but would make it less attractive in the long run for multinational companies.
‘Our modelling shows that the Island would gain revenues if it were to participate in the introduction of the proposed global minimum corporate tax rate.
‘However, the dominant effect over time will be to make profit shifting much less attractive for multinationals,’ he said.
The zero-ten system was introduced in Jersey in 2009 after the EU Code of Conduct Group took the view that the Island’s previous exempt-company-status regime was unfair.
Under that system foreign-registered companies were not taxed as long as they paid a £600 annual fee.
