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Jersey & Guernsey Law Review – June 2007
OECD AND EU TAX INITIATIVES – AN UPDATE
Colin Powell
Introduction
1 Previous articles in the Law Review have referred to the likely impact of the OECD and EU tax initiatives on the Channel Islands. With the passage of time and with the benefit of experience of the implementation of various measures arising from the initiatives, it is perhaps appropriate to revisit the subject.
2 The reader may find it helpful briefly to be reminded of the essentials of the initiatives, both of the OECD and of the EU. In 1998 the OECD produced a report entitled Harmful tax competition: an emerging global issue. This promoted three broad principles as the key to a global approach to removing “harmful tax practices”, viz -
(i) effective exchange of information;
(ii) transparency;
(iii) non-discrimination.
The report referred both to tax havens and to harmful preferential tax regimes as “harmful tax practices”. In 2000, in a progress report entitled Towards global tax competition the OECD listed the jurisdictions that met the criteria of a tax haven –
(i) no or only nominal taxes;
(ii) lack of effective exchange of information;
(iii) lack of transparency;
(iv) no substantial activities.
3 The tax havens were informed that if they did not enter into a commitment to eliminate harmful tax practices they would be included in a list of uncooperative tax havens and be faced with the threat of what were described as “defensive measures”. In 2001 the decision was taken by the OECD, in which decision the USA played a leading part, to exclude from the commitments any reference to tax rates or tax structure and to focus entirely on information exchange and transparency. In February 2002 Jersey and Guernsey, as well as almost all the “tax havens” listed by the OECD, entered into a public political commitment to support the OECD tax initiative and to do so through negotiating tax information exchange agreements with the OECD Member States. However, there was a general proviso to the effect that the implementation of the commitment depended on the existence of a level playing field embracing all OECD Member States and the main competitor jurisdictions in the provision of financial services (i.e. Hong Kong, China, Luxembourg, Singapore and Switzerland) two of which are also OECD Member States.
4. Secondly, so far as the EU is concerned, in December 1997 the Council adopted a resolution on a Code of Conduct for Business Taxation embracing three aspects: non-discrimination in respect of business taxation, taxation of savings income, and withholding taxes on cross-border interest and royalty payments between companies. At the Feira European Council meeting the Council endorsed a report on the tax package which among other things provided for the adoption of the same taxation of savings income measures in Jersey, Guernsey and other relevant dependent and associated territories of Member States. Both Jersey and Guernsey, pursuing what has been described as a “good neighbour” policy, voluntarily agreed – albeit with some pressure from the United Kingdom – to support the EU in its endeavours. This included agreeing to abide by the principles of the Code for Conduct, and to enter into agreements with the Member States on the taxation of savings income.
Current state of the OECD initiative
5 The OECD initiative has been bedevilled by a failure on the part of the OECD Member States to satisfy the “level playing field” condition attached to the political commitments entered into by Jersey, Guernsey and the other so-called tax havens on the OECD list. In 2000, the OECD set up a Global Forum on Taxation the aim of which has been to determine what is required to achieve a global level playing field in the areas of transparency and effective exchange of information. The “committed” jurisdictions participated in the Forum as equal partners with the OECD Member States, and as a result became known as “participating partners”.
6 As stated in the report agreed at the Global Forum meeting held in June 2004 in Berlin “the underlying objective of the global level playing field is to facilitate the creation of an environment in which all significant financial centres meet the high standards of transparency and effective exchange of information on both civil and criminal taxation matters. This is vital to ensuring that countries can obtain from other countries the information necessary to enforce their own tax laws, to ensuring that financial centres that meet such standards are not unduly disadvantaged by doing so, and to ensuring that financial centres that meet such high standards are and remain fully integrated into the international financial system and the global community.”
7 As further stated in the Global Forum’s Berlin report, “Central to the concept of a global level playing field is that it is fundamentally about fairness. A convergence of existing practices of information exchange to meet high standards would achieve a global level playing field. The convergence of existing practices and information exchange towards these standards thus should be coupled with a process that ensures equity and fair competition which aims to ensure that financial centres that are engaged in meeting the standards of transparency and effective exchange of information are not disadvantaged by countries that are not part of the process and that the latter are not permitted to profit from the promotion of their positions of being outside the process”.
8 The Global Forum decided that it was important to carry out a review of countries’ legal and administrative frameworks in the areas of transparency and exchange of information so as to assess progress towards the level playing field. The OECD report “Tax cooperation: towards a level playing field” published in 2006 includes the outcome of the factual review carried out by the Global Forum. The review covers eighty-two countries. One of the problems with the review is that it is difficult to assess the effectiveness with which the various measures are being implemented by the countries concerned. It is also recognised that the information is only of real value if kept up to date. The OECD is undertaking such an update as of 1st January, 2007.
9 The Global Forum 2006 report, which was adopted by both OECD and non-OECD jurisdictions, summarises the principles of transparency and effective exchange of information as follows –
(a) countries generally cannot exchange information for tax purposes unless they have a legal basis or mechanism for doing so;
(b) information exchange should permit the exchange of information that is foreseeably relevant to the administration and enforcement of domestic tax laws;
(c) exchange of information can be constrained by the application of the dual criminality principle or by a domestic tax interest requirement;
(d) the interests of the requesting country need to be balanced with the interests of both the requested country and any affected third parties. For purposes of the work of the Global Forum this balance is achieved by limiting information exchange to information exchange upon request and by requiring that the information requested be foreseeably relevant to the underlying enquiry or investigation, thus clearly disallowing so-called “fishing expeditions”;
(e) governments would not engage in information exchange without the assurance that the information provided would only be used for the purposes permitted under the exchange mechanism and that its confidentiality would be preserved. Information exchange instruments must therefore contain confidentiality provisions that set out specifically to whom the information can be disclosed and the purposes for which that information can be used;
(f) countries should have the authority to be able to respond to a specific request for information held by banks and other financial institutions. Access to bank information should not be viewed as undermining the legitimate role of bank secrecy and protecting the financial privacy of a bank’s customers;
(g) ownership, identity and accounting information are often needed in a tax enquiry and it is important that countries have the authority to obtain such information;
(h) effective exchange of information requires the existence of reliable information. In particular, it requires information on the identity of owners and other stakeholders as well as information on the transactions carried out by entities and other organisational structures;
(i) ownership and identity information should cover the type of information that other countries might legitimately expect to receive in response to a request;
(j) reliable accounting records should be kept for all relevant entities and arrangements.
10 The Global Forum last met in Melbourne in November 2005. It considered the result of the review, and noted that –
(a) 80 of the 81 countries reviewed reported having legal mechanisms in place to permit the exchange of information in criminal tax matters in certain circumstances;
(b) 65 of the countries reviewed have legal mechanisms in place that permit the exchange of information for both criminal and civil tax matters;
(c) of the countries that are able to exchange information for both civil and criminal tax purposes, the vast majority do not require a domestic tax interest to obtain and respond to a request for information;
(d) 73 of the countries reviewed are able to obtain and provide banking information in response to a request for information related to a criminal tax matter in some or all cases;
(e) 53 of the countries reviewed were able to obtain and provide bank information in response to a request for information related to a civil tax matter in some or all cases;
(f) all countries that are able to exchange information reported having safeguards in place to protect the confidentiality of any information exchanged;
(g) 74 of the countries reviewed reported that ownership information is available for companies and 45 countries reported it was available in respect to partnerships. In most cases, legal ownership information is available. Beneficial ownership information is increasingly available;
(h) 74 of the countries reviewed require accounting information to be maintained by or for companies. Of the 53 countries that have trust law, 43 require trusts to keep accounting records.
11 The Forum concluded that “the review undertaken suggests that both OECD and non-OECD countries have implemented or made considerable progress towards implementing many of the transparency and effective exchange of information standards that the Global Forum wishes to see achieved”. The Global Forum agreed however that there were a number of “next steps” required.
12 All countries were strongly encouraged to take the necessary steps towards a level playing field. In particular -
(a) further progress was required in some countries to address the constraints placed on international cooperation to counter criminal tax abuses;
(b) further progress was required to address those instances where countries require a domestic tax interest to obtain and provide information in response to a specific request for information related to a tax matter;
(c) further progress was required in the area of access to bank information for tax purposes;
(d) further progress was required in some countries to ensure that competent authorities have appropriate powers to obtain information for civil and criminal tax purposes;
(e) most countries have access to legal ownership information of companies, trusts, partnerships, foundations and other organisational structures. However, beneficial ownership information is available in far fewer countries and further improvement is necessary;
(f) countries that do not require the keeping of accounting records for international company regimes are encouraged to review their current policies.
13 In all the above respects countries were requested to report the outcome of their review, and the steps taken to remove the constraints, at the next Global Forum meeting. To facilitate the reporting back of the outcomes of the policy reviews, referred to above, countries were requested to complete a short form by the 31 March 2007.
14 The Forum noted that in some countries the availability of ownership information is further complicated by the fact that responsibility for corporate law is in the hands of political sub-divisions (e.g. the separate States of the USA). Progress in dealing with this matter is expected to be assisted by countries’ implementation of the FATF Recommendations on combating money laundering, but the Global Forum encouraged countries to review their current policies, including those of political sub-divisions, if relevant, and to report the outcome of their review at the next Global Forum meeting. There is no date fixed for this meeting. It is left to the Sub-Group on Level Playing Field Issues, of which Jersey is a member, to continue its work and propose a date for the next meeting of the Global Forum at which the further progress made on the items discussed at the Global Forum meeting in Melbourne would be addressed.
15 It is recognised that the principle of effective exchange of information for civil and criminal tax matters will be implemented for the most part through a process of bilateral negotiations. At the Melbourne Global Forum countries were encouraged to complete their negotiations of tax information exchange agreements, and those countries which had not initiated such negotiations were encouraged to do so. Countries were also encouraged to try to ensure that their bilateral arrangements for effective exchange of information for all civil and criminal tax matters provide benefits for both parties. The Forum is of the view that ensuring that mutual benefits are derived by both parties will further the goal of helping financial centres that meet the high standards set for transparency and effective exchange of information in tax matters to be “fully integrated into the international financial system and the global community”. Further, it is hoped that by providing mutual benefits, greater progress towards the level playing field will be made.
16 The pursuit by each jurisdiction of its own economic interests has been a major feature of the way in which the OECD initiative has been implemented. The non-OECD member countries have insisted that, if they are to enter into tax information exchange agreements with OECD member states in the absence of a global level playing field, some economic benefits must be provided to compensate for the possible “costs” arising from business being lost to jurisdictions that are not so committed to the OECD initiative. The OECD member states for their part have sought to limit the economic benefits provided, and have also sought to ensure a degree of coordination between them in the benefits on offer. One aspect of this has been the view promoted by OECD member states that they will not enter into double taxation agreements with low or zero tax jurisdictions. However, where their economic interests have justified it this principle has been overturned by individual Member States.
17 Concern has been expressed at the way in which a number of countries continue to use the OECD list of tax havens, published in 2000, to justify taking discriminatory action against the jurisdictions on that list. The Global Forum however has recognised that since the list was published positive changes have occurred in individual countries’ transparency and exchange of information laws and practices. The Forum has called upon international bodies to consider providing positive recognition to countries that implement the principles of transparency and effective exchange of information. The OECD has also recognised the need to extend the principles of transparency and effective exchange of information to a number of key jurisdictions (e.g. Hong Kong China and Singapore) that are yet to commit themselves fully to a global level playing field.
18 The OECD initiative also includes identifying and eliminating harmful features of preferential tax regimes in OECD member countries. This has not been extended to non-OECD member countries. The OECD’s 2006 Update on progress in member countries showed that of 47 potentially harmful tax regimes identified in 2000 all but one had been abolished, amended or found not to be harmful. The Luxembourg 1929 Holding Company Regime was the one considered to be harmful. Luxembourg which, with Switzerland, abstained on the OECD Council’s approval of the 1998 report, which also applies to any follow-up work undertaken since 1998, expressed its disagreement with the 2006 update report by again abstaining.
19 There are indications that the OECD Member States are becoming increasingly irritated by the fact that, some five years after jurisdictions entered into a commitment to engage in the negotiation of tax information exchange agreements, relatively few such agreements have yet been concluded. While it can be argued that the failings in this respect rest with the Member States in not being able to produce the level playing field that had been promised, there are some Member States who see the pre-condition of a global level playing field as simply an excuse for not implementing the principles of transparency and effective exchange of information. There has been talk of the Member States revisiting the proposal that so called “defensive measures” should be applied against jurisdictions that have not entered into tax information exchange agreements. The view of the non-OECD member countries however is that the application of any such measures could not be justified so long as such measures were not also applied by the Member States to their own members who have so far failed to commit themselves to exchange of information on request – namely Luxembourg and Switzerland.
Current state of the EU initiative
20 In 1998 the Council of the European Union confirmed the establishment of the Code of Conduct Group to assess tax measures that fall within the Code of Conduct for business taxation. The Group reports regularly on the measures assessed. Work continues in the following areas –
(a) implementation of roll back of tax measures that conflict with the Code;
(b) standstill, whereby those subject to the Code are committed not to introduce new tax measures which are harmful within the meaning of the Code;
(c) further discussion on the future of the Code of Conduct, focussing on extending the work of the Code of Conduct Group within the existing mandate.
21 The arrival of twelve new Member States in recent years, and their membership of the Code of Conduct Group, has tended however to “dilute” the interest of older Member States in opposing all forms of tax competition. Many Member States, and particularly the newer members, have sought to maintain the most competitive corporate tax situation possible in order to attract foreign investment.
22 The Directive on the Taxation of Savings Income came into effect on the 1 July 2005. The prime purpose of the Directive is to provide for the automatic exchange of information in respect of individuals (i.e. excluding companies, and trusts with a few exceptions) who are in receipt of relevant interest income, where those individuals are resident in an EU Member State. However, three Member States (Austria, Belgium and Luxembourg), and a number of the non-EU jurisdictions which have agreed voluntarily to support the EU initiative, have adopted the alternative withholding tax system. The rate of withholding is 15% until 2008, 20% from then until 2011, and 35% thereafter. Of the tax collected 25% remains with the collecting state and 75% is passed on to the states of residence of the account holders. As an alternative to paying the tax, individual account holders can authorise the paying agent concerned to exchange information with their EU state of residence giving details of the interest earned and their name and address. The three EU Member States who have opted for the withholding tax system, are able to do so through a transitional period at the expiry of which they will operate the automatic exchange of information system. The end of the transitional period is not a fixed date, although in principle it is said to be December 2010. In practice it will end when the European Council agrees unanimously that the United States is committed to exchange of information, and when agreements providing for exchange of information on request have been entered into between the EU and all of Switzerland, Liechtenstein, San Marino, Monaco and Andorra.
23 Article 25 of the Preamble to the Directive provides that “the Commission should report every three years on the operation of this Directive and propose to the Council any amendments that prove necessary in order better to ensure effective taxation of savings income and to remove undesirable distortions of competition”. While it may be proposed that changes should be made to the Directive, or possibly a new Directive issued, it may not be easy for amendments to be introduced into the agreements between the EU Member States and non-EU member countries. The Swiss position appears to be that their agreement with the EU provides for no change to the agreement until there is experience of the full working of the arrangements, which includes the application of the 35% rate of withholding tax in 2011. Any attempt to amend the agreements that have been entered into by the associated or dependent territories will require the renegotiation of agreements with twenty-seven individual Member States.
24 When the European Council adopted the Savings Directive in June 2003 it called on the Commission, during the transitional period as provided for in the Directive, “to enter into discussions with other important financial centres with a view to providing for the adoption by those jurisdictions of measures equivalent to those to be applied within the Community”. The five key European Third Countries that have concluded savings taxation agreements with the European Union (Andorra, Liechtenstein, Monaco, San Marino and Switzerland) in doing so committed the Commission to promote the extension of equivalent arrangements to other jurisdictions with important financial services sectors.
25 The Commission’s services have acknowledged the general need to ensure that appropriate action aimed at extending further the territorial coverage of equivalent measures is not delayed so as to prevent undue concern in international competition between financial intermediaries. The Commission is therefore being tasked with exploring the possibility of extending savings taxation arrangements to other important financial centres, thereby extending the level playing field beyond the Single Market, the European continent and even the OECD member countries. However, there is little evidence to date that the jurisdictions concerned, such as Hong Kong China, Singapore and the United Arab Emirates, are showing any enthusiasm for extending any degree of support for the EU tax initiative in the application of the taxation of savings income to interest payments made to individual residents of EU Member States.
26 The experience of the first year of the application of the Directive has shown up some significant differences of approach between individual jurisdictions, and a significant number of outstanding issues concerning the interpretation and the application of the Directive. A number of these issues are well documented in a Report issued by the European Association of Tax Law Professors in 2006. They are also being addressed through a consultative process being undertaken by the Taxation and Customs Union Directorate of the European Commission.
27 At the beginning of 2007 the Commission services established an expert group, composed of key experts from the European trade associations of banking, insurance, investment funds, asset management and related sectors to examine the operation of the Directive from the point of view of the market operators, and to give advice on possible amendments to the legislation. It is expected that in due course – possibly in the fourth quarter of 2007 - this consultative process will extend to discussions with the non-EU jurisdictions that have entered into agreements with the EU or the individual EU Member States on the taxation of savings income. The issues raised in consultation with the expert group, have also been raised by the Commission’s services with the tax authorities of Member States, and include –
(a) the possibility of a better coordination of the current beneficial ownership and identification rule of the Savings Directive with the new provisions on the prevention of money laundering included in the Third Anti-Money Laundering Directive, with a view to prevent conflicting obligations and reduce the administrative burden for paying agents whilst improving the effectiveness of the Savings Directive;
(b) whether it is desirable to introduce in the Savings Directive explicit common rules providing for a proportional attribution of interest payments to the holders of joint accounts, or other jointly owned assets, according to their beneficial ownership, or in equal shares in the absence of such information;
(c) whether some refinements to the Savings Directive could be necessary for dealing with some of the cases when the trustee or fiduciary does not pass interest payments directly to a beneficiary, and the payment of interest is therefore considered not to be made for the immediate benefit of a beneficial owner.
Impact of the initiatives on the Channel Islands
28 The position of the Channel Islands has always been one of support for the principles of transparency and effective exchange of information. In respect of the OECD tax initiative the hesitation to apply the principles rested entirely with the lack of an international level playing field. In respect of the EU initiative, initial thoughts were to favour information exchange rather than adopt a withholding tax. In the event the decision was made to adopt what in the Islands is known as the 'retention tax', a decision influenced greatly by a wish to protect the Island’s competitiveness in the light of the decision of some key competitors to adopt the withholding tax system.
29 One of the key concerns is the impact on competitiveness of the absence of a global level playing field. However, when entering into the political commitments in support of the OECD and EU initiatives, the level playing field principle applied to different groupings of countries according to the initiative being considered.
30 The level playing field required in respect of the OECD initiative, referred to at the time the political commitment was made in February 2002, embraces the Islands’ main competitors of Luxembourg and Switzerland who are OECD members, and Hong Kong China and Singapore who are non-OECD. This level playing field is not in immediate prospect. As a result, an economic benefits package is being sought when negotiating tax information exchange agreements with OECD member states, a package that is expected to be sufficient to offset the “costs” to be incurred in acting ahead of the creation of the level playing field. This aspect will be returned to below when consideration is given to progress in negotiating tax information exchange agreements.
31 The Taxation of Savings Income Agreements that have been entered into with the EU Member States were conditional on the agreed savings tax measures applying from 1 July 2005 to all the EU Member States, the named five European countries, the three UK Crown Dependencies, and the seven dependent or associated territories of EU Member States in the Caribbean to which the Directive on the taxation of savings income refers. This level playing field requirement was met. The signing of these Agreements was not made conditional on the application of the taxation of savings income measures to other jurisdictions such as Hong Kong China and Singapore. It was recognised however that there could be a “cost” incurred in entering into the Agreements with the Member States in that some financial service activities might migrate to those jurisdictions that were not subject to the taxation of savings income measures. This ‘cost’ can be expected to be very much borne in mind if the EU Member States should seek to extend the application of the taxation of savings income beyond that provided for by the present Agreements.
32 The EU Code of Conduct on Business Taxation was accepted without any conditionality concerning its application to territories other than the EU Member States, the Crown Dependencies, and the dependent or associated territories of the Member States. The Code does not apply to the five non-EU European countries that have adopted the savings tax measures. Jersey agreed to roll back a number of so-called harmful tax regimes (e.g. exempt companies) over a period of years, and to adopt a standard rate of tax for all companies of 0% and a higher rate of 10% to certain financial service activities to satisfy the Code of Conduct principle that non-resident owned companies should not be taxed at a lower rate than resident owned companies. This restructuring of the Island’s tax arrangements, although initially unwelcome, has enabled the Island to create a tax regime that remains competitive against the background of a general lowering of corporate tax rates internationally. Arguably, irrespective of the Code of Conduct, these competitive pressures would have led to a lowering of the Island’s corporate tax rate to a figure of about 10%.
The negotiation of Tax Information Exchange Agreements (TIEAs)
33 At the time of writing the position on the negotiation of TIEAs, and the associated economic benefits package required to compensate for going ahead of the creation of a global level playing field, can be summarised as follows –
(a) a TIEA has been entered into with the United States, and this is in force. On the 7 July 2004 the States adopted the Taxation (Implementation) (Jersey) Law 2004 which law enables the States to make regulations implementing agreements with, and obligations owed to, the Governments of other countries and territories regarding or related to taxation. The decision to enter into an agreement with the USA in 2002 was taken on the basis that reinforcing the economic and political relationship between Jersey and the USA was in the Island’s best interests. This remains the case;
(b) countries with which both a TIEA and a benefits package are virtually agreed include the Netherlands, Australia, New Zealand and Germany;
(c) countries with which the TIEA negotiations are virtually complete and where the benefits package negotiations are well advanced include France, Ireland, the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden) and the United Kingdom;
(d) countries with which the TIEA negotiations are well advanced but where the benefits package negotiations are at a relatively early stage include Canada, Italy, and Spain.
34 Aspects of the economic benefits package will vary from jurisdiction to jurisdiction because the fiscal system and policies vary. However, Jersey’s negotiations to date have sought to obtain –
(a) public recognition of Jersey as a jurisdiction that complies with international standards of financial regulation and anti-money laundering/combating the financing of terrorism. Countries are asked to include the following in a Ministerial statement or political declaration –
“Country X and Jersey, through the signing of this Tax Information Exchange Agreement, seek to strengthen and broaden their current economic and trading relationship. Both parties recognise the other’s commitment to comply with international standards of combating money laundering and terrorist financing, and of financial regulation, and to participate in international efforts to combat financial and other crimes including fiscal crime. Country X is pleased to note that in 2003 the IMF found Jersey virtually fully compliant with the then international standards of AML/CFT and financial regulation, upon which independent assessments of equivalence were able to be based. Country X is also pleased to note that Jersey has invited the IMF to undertake a further evaluation to assess compliance with the international standards”;
(b) support for the treatment of the Island that is as favourable as that extended to competing finance centres where EU Directives /Regulations involve Third Country recognition/equivalence. Countries that are EU Member States are asked to include the following in a Ministerial statement or political declaration –
“Country X recognises Jersey’s commitment to a “good neighbour” policy, reflected, inter alia, in the signing by Jersey of an agreement on the taxation of savings income with country X and each of the other EU Member States. Country X will use its best endeavours to ensure that where EU Directives or Regulations include provisions referring to the position of Third Countries, particularly in relation to assessments of equivalence in compliance with EU standards, and access to EU markets, Jersey is treated as fairly and favourably as other Third Countries;
(c) agreement to withdraw any discriminatory tax legislation or practice;
(d) agreement not to include Jersey on any list of tax havens;
(e) removal of elements of double taxation in respect of the taxing of salaries and pensions;
(f) granting of tax relief so that any withholding tax applied to the payment of interest or dividends to entities in Jersey is no less burdensome than for entities in competing jurisdictions;
(g) a mutual agreement procedure in connection with the adjustment of profits for associated enterprises;
(h) a general agreement not to apply prejudicial, restrictive or discriminatory measures against individuals and businesses resident in the Island;
(i) agreement on a most favoured nation approach so that if subsequently another jurisdiction should obtain an economic benefits package which includes elements not made available to the Island, and which adversely impacts on the Island’s competitive position, the package agreed by the Island will be amended to incorporate the additional benefits.
35 Under the terms of an Entrustment from the UK, whereby Jersey has the right to negotiate, conclude, perform and, subject to the terms of the agreement, terminate a TIEA with an OECD Member State, the progressing of the TIEA negotiations involves, in the case of Jersey–
(a) the UK Government being asked to indicate whether there is anything in the text of the TIEA or the accompanying economic benefits package that is unacceptable having regard to the United Kingdom’s international obligations;
(b) the Island’s finance industry being asked to indicate whether in their view any “costs” expected to arise from entering into an agreement for the exchange of information ahead of the Island’s main competitors would be sufficiently compensated for by the economic benefits package offered by the jurisdiction concerned;
(c) following consultation with the industry, a decision by the Council of Ministers as to whether a sufficient case has been made to support the signing of a TIEA;
(d) the TIEA and associated economic benefits package being signed by the Chief Minister and by the relevant Minister for the other country;
(e) the implementation of the TIEA through the making of Regulations for which States approval will be sought, at which time the States also would be asked to ratify the Agreement.
36 Each TIEA requires its own Regulation before it can be brought into force and that Regulation is made in pursuance of article 2(1) of the Taxation (Implementation) (Jersey) (Law) 2004.
37 All the TIEAs negotiated include safeguards against their misuse. For example, any request for information has to be formulated with the greatest detail possible and has to specify in writing –
(a) the identity of the person under examination or investigation;
(b) the period for which the information is requested;
(c) the nature of the information sought and the form in which the requesting party would prefer to receive it;
(d) the tax purpose for which the information is sought;
(e) the reasons for believing that the information requested is foreseeably relevant to tax administration and enforcement of the requesting party, with respect to the person identified;
(f) grounds for believing that the information requested is present in the requested party or is in the possession of or obtainable by a person within the jurisdiction of the requested party;
(g) to the extent known, the name and address of any person believed to be in possession of or able to obtain the information requested;
(h) a statement that the request conforms with the laws and administrative practice of the requesting party, that if the requested information was within the jurisdiction of the requesting party then the competent authority of the requesting party would be able to obtain the information under its laws of the requesting party or in the normal course of administrative practice and that it is in conformity with the Agreement;
(i) a statement that the requesting party has pursued all means available in its own territory to obtain the information, except those that would give rise to disproportionate difficulties.
38 The competent authority of the requested party may decline to assist –
(a) where the request is not made in conformity with the Agreement;
(b) where the requesting party has not pursued all means available in its own territory to obtain the information, except where recourse to such means would give rise to disproportionate difficulties; or
(c) where the disclosure of the information requested would be contrary to public policy.
39 A requested party is also not obliged to provide items subject to legal privilege, or any trade, business, industrial, commercial or professional secret or trade process. A request for information may also be declined if the information is requested by the requesting party to administer or enforce a provision of the tax law of the requesting party, or any requirement connected therewith, which discriminates against a national or citizen of the requested party as compared with a national or citizen of the requesting party in the same circumstances. In addition, the Regulations that provide for the implementation of the TIEA include a right of appeal.
The application of the Agreements on the Taxation of Savings Income
40 On 22 June 2004 the States of Jersey adopted P97/2004 and agreed –
(a) to approve the two model agreements, as set out in the appendix to the report of the Policy and Resources Committee dated 14 May 2004, as the basis of the bilateral agreements on the taxation of savings income to be entered into with each of the 25 Member States of the European Union;
(b) to authorise the President of the Policy and Resources Committee to sign these bilateral agreements or any documents ancillary thereto on behalf of the Island; and
(c) to charge the Policy and Resources Committee to prepare the necessary legislative changes to enable the implementation of these agreements for consideration by the States.
41 The States on 21 June 2005 made Regulations providing for the bringing into effect the bilateral agreements on taxation of savings income entered into with each of the twenty-five Member States of the European Union. Bulgaria and Romania acceded to the European Union on 1 January 2007. To bring agreements with these two countries into effect appropriate amendments were made to the Taxation (Agreement with the European Union Member States) (Amendment) (Jersey) Regulations 2005.
42 The procedure involves the exchange of signed agreements in the language of each of the parties which then allows both parties to start their ratification procedures contemporaneously. The agreements are signed by the Chief Minister in accordance with the States of Jersey Law 2005. The procedures are then completed by the ratification of the agreements by the States, their publication, and the making of Regulations to bring them into force.
43 The agreements with the then 25 EU Member States, which came into force on 1 July 2005, were accompanied by guidance on the application of the agreements issued by the then Policy and Resources Committee. Primarily the guidance notes are aimed at those who are considered paying agents in the Island and who have responsibility for deducting the retention tax from interest payments made to individuals resident in an EU Member State.
44 The text of the agreements follows that of the EU Directive in large part, but with appropriate adaptations and the inclusion of safeguards for the suspension or termination of the agreements if certain events come to pass. In addition, to distinguish Jersey from the EU Member States, and to reflect the fact that the Island is not a part of the European Union and is not subject to the EU Directive, the term “retention tax” is used rather than “withholding tax”. The guidance is intended to offer practical assistance to those who are subject to the agreements. It is not a legal document and does not replace the need to obtain proper legal advice.
45 The agreements inevitably leave questions on points of interpretation. The guidance aims to assist in this process. E.g. –
(a) where an interest payment is credited to a joint account and one of the joint account holders is a resident of an EU Member State the latter will normally be liable to the retention tax. The retention tax may be applied on the basis that interest is allocated equally among the members of the joint account. However, alternative arrangements at the discretion of the paying agent may well be appropriate;
(b) an individual may receive an interest payment for a period of which part is spent as resident outside and part inside the EU. If it is possible to allocate a proportion of the interest received for the period of residence outside the EU, that portion of the interest payment need not be subject to the retention tax. This apportionment, which is at the paying agent’s discretion, can also be adopted when the voluntary disclosure option is chosen in place of the retention tax;
(c) the ultimate aim of the agreements is to enable savings income in the form of interest payments made in the Island to beneficial owners who are individuals resident in an EU Member State to be made subject to effective taxation in accordance with the laws of the latter Member State. The guidance makes it clear that the agreement applies only to individuals who are both resident in an EU Member State and subject to effective taxation in accordance with the laws of the EU Member State. The guidance therefore indicates that it is consistent with the aims of the agreements that the retention tax (or voluntary disclosure of information) will not apply to interest payments made to –
(i) a legal person;
(ii) an entity which is taxed under the general arrangements for business taxation;
(iii) a trust (other than where the beneficiary of the trust concerned has an absolute entitlement to receive the savings income);
(iv) an unincorporated association or society;
(v) an individual where the interest payment arises from negotiable securities issued before 1 March 2001;
(vi) an individual where it is known to the paying agent that the individual benefits in his Member State of residence from an exemption from income tax; or where because of non-remittance of interest to an individual’s Member State of residence no liability to income tax arises in that country of residence.
46 In respect of the first six months that the agreements were in force (i.e. from 1 July 2005 to 31 December 2005) the Member States received retention tax payments from Jersey of some £10 million. The total retention tax paid was some £13 million of which the Island is entitled to retain 25% to cover the cost of administration. Of the £10 million sent to the Member States, the lion’s share (i.e. some two thirds) was sent to the United Kingdom. Some 50,000 clients opted for voluntary disclosure of information rather than pay the retention tax. Of the total interest subject to the arrangements some 60% was accounted for by those opting for voluntary disclosure. Again the majority (some 70%) were UK residents and over 80% of the interest was attributable to them.
47 The total retention tax payment of £13 million, referred to above, can be compared with the tax levied in other jurisdictions applying a withholding or retention tax as follows –
Switzerland - €100 million
Luxembourg - €48 million
Jersey - €19 million
Isle of Man - €16 million
Austria - €13 million
Belgium - €10 million
Guernsey - €6 million
Remainder - €17 million
48 The next payments of retention tax to the EU Member States, and the passing of the information in respect of those who opt for voluntary disclosure, will occur by the end of June 2007 in respect of the full year 2006.
Conclusion
49 It is to be expected that through the OECD and EU tax initiatives, or through bilateral and multilateral agreements, there will be continued efforts to improve transparency and the effective exchange of information on tax matters. This can be linked to the parallel efforts to enhance international cooperation in the fight against money laundering and terrorist financing. Jersey is committed fully to international cooperation and effective information exchange on request. There is no reason to suppose that this commitment is in any way incompatible with Jersey’s role and continuing success as a leading international finance centre. However this will be influenced by whether there will be a global commitment, and a level playing field embracing the Island’s main competitors.
50 The Channel Islands, in pursuit of a ‘good neighbour policy’ continue to support the EU in the application of its taxation of savings income Directive. At the same time the EU's failure to obtain similar support from jurisdictions such as Hong Kong China and Singapore can be expected to have a major influence on any response to future approaches by the European Union to extend the application of the Directive.
51 Furthermore, Jersey continues to honour its commitment to the OECD through the negotiation of TIEAs. However in doing so it will continue to seek to protect its economic interests through the development of an overall economic relationship with the jurisdiction with which the agreement is being entered so that compensating benefits outweigh any economic costs incurred through the continued absence of a global level playing field.
Colin Powell CBE was Economic Adviser to the States of Jersey between 1969 and 1992 and was Chief Adviser to the States of Jersey until December 1998. In 1999 he was appointed Chairman of the Jersey Financial Services Commission. He is also currently Adviser – International Affairs in the Chief Minister’s Department.
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