Detailed record-keeping is the key to compliance

Friday 10 May 2019

Good corporate governance is a crucial component of new economic substance requirements, according to senior figures at Carey Olsen.

Speaking to more than 200 attendees at the offshore law firm's regulatory and substance conference in Guernsey last week, Counsel Laila Arstall and Senior Associate Chris Hutley-Hurst outlined the key takeaways from the recently published joint guidance document issued by the tax authorities of Guernsey and Jersey.

The introduction of new legislation has come from the EU Council to ensure that companies tax resident in Guernsey, Jersey and other offshore finance centres can demonstrate they have sufficient economic substance in those jurisdictions. A failure to comply with the new legislation could result in enforcement action including substantial penalties and, ultimately, strike-off.

"The expectation is that the island's regulated corporate and trust service providers should be able comfortably to meet the requirements as they reflect the professional standards expected under applicable codes of conduct," said Mrs Arstall. "Yes, there will be some additional responsibilities in terms of demonstrating that you have taken certain steps in practice to meet applicable substance requirements, but any good business should be comfortable with documenting their approach."

In Guernsey, the Director of the Revenue Service has been given powers to enforce the legislation, including the power to enter premises and inspect documents, although the legislation excludes any documents that are legally privileged. What this means in practice is that advice from a law firm (as distinct from guidance or support from other types of service-providers in this area) remains confidential and protected from legal disclosure. 

Mr Hutley-Hurst said it was clear that companies must have detailed records in relation to relevant activities and decisions.

"It comes down to more record-keeping, detailed timesheets for staff so that you can attribute staff time to various clients and having sufficient board and other meetings in Guernsey, along with comprehensive minute taking," he said.

Mr Hutley-Hurst said clients were being advised about a substance register.

"It's not a formal register of the company, rather a summary document so that each time you have a board or committee meeting you note down the time, date and who was present, as well as whether they were physically present when they attended, a summary of what was discussed and whether CIGA occurred. That record keeping is going to be very useful when it comes to doing the tax return in the following year or if the tax return is audited."

The firm has also developed an interactive Taxation and Economic Substance Tool that enables businesses, via a series of questions, to ascertain whether the new economic substance requirements apply to them.

"The tool is designed to be user-friendly. It's perfect for any internal review or preliminary analysis a company may be doing as it takes the user through a series of questions with the ultimate goal of being able to establish whether a company is subject to the substance requirements or not," said Mr Hutley-Hurst.