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Is corporate tax the answer?

Is corporate tax the answer?

Monday 28 November 2022

Is corporate tax the answer?

Monday 28 November 2022

Guernsey's Policy & Resources Committee says opportunities do exist to raise an additional £10-20 million from company profits, but insist this alone is not enough to plug the expected shortfall in public finances.

The policy letter for reforming Guernsey’s tax system, published today, forecasts that an additional £100m needs to be raised each year, up from an initial estimate of £85m flouted last year.

As part of the overall package of measures, the States will be asked in January to agree that further consultation should occur with the other Crown Dependencies to raise additional revenues from corporates without harming competitiveness or compliance with international obligations.

Currently, taxes on corporate income make up 10% - approximately £50m - of Guernsey’s annual tax take, even considering the 0% headline rate applied to some enterprises under the zero-10 regime.

If approved, P&R should report back to the States no later than November 2023 with proposals for an “alternative corporate vehicle” to tax companies currently within the 0% band to pay 15% income tax to fulfil Environmental, Social and Governance objectives.

“A fixed annual fee to companies that benefit from Guernsey’s regulatory and judicial regimes” will also be examined.


Pictured: The Committee commissioned a report into corporate taxation in the past 12 months. 

Presenting the measures to the media, Deputy Peter Ferbrache, President of the Policy & Resources Committee, said: “A lot of people thought that corporate tax would be our saviour. We went out to Ernst & Young and we asked them to look at what we could do. What could we realistically squeeze from the corporate lemon?

“They told us the most… is £20m. So at the moment that’s the most we’d be likely to increase taxes on corporates for the foreseeable future and we intend to do that… but it’s not going to bridge the considerable gap we’ve shown to you.”

The Committee notes that current contributions to government revenues are “similar to the international average,” and that these taxes “tend to be volatile since they are very sensitive to economic conditions. This means few countries choose to rely on these as their primary source of revenue”.

“Any distributions made from a 0% business to a locally resident share holder are taxable under the 20% personal income tax rate.

“The balance of the shortfall will need to be met by changes in corporate and other taxes, improved economic growth and productivity and spending restraint over a longer time horizon.”


Pictured: International standards for corporate tax are expected to be implemented in the coming years. 

International tax reform

international tax rule changes are being led by the Organisation for Economic Co-operation and Development (OECD), with nearly 150 jurisdictions – including the Crown Dependencies - signing up to the framework in July 2021.

‘Pillar One’ would create new profit allocation rules for the world’s largest 100 global multi-national companies, who might have to re-allocate some to the jurisdictions of their markets and customers. All regulated financial services are excluded from this.

'Pillar Two' would introduce a new framework of taxation where companies falling within the scope of the Pillar Two tax would pay a Minimum Effective Rate of taxation on their global profits, calculated on a country-by country basis. This does not include funds.

The Committee continue to claim that compliance with these rules could generate an additional £10m, and that compliance with Pillar Two is likely to overlap with other structural changes being proposed.

“The first Policy Letter on the Tax Review debated in September 2021 incorporated an assumption that responding to Pillar 2, would contribute an estimated £10m of additional revenue,” it said.

“This assumption remains unchanged at this stage, but final estimates will depend on how these new proposals are applied both here and elsewhere, what opportunities may arise from applying a ‘top-up’ tax to subsidiaries of these businesses present in Guernsey, and how much of this income is already taxed in other jurisdictions.

“Longer term it is possible that the OECD will seek to lower the threshold at which minimum effective tax rates apply to large multinational enterprises (currently global revenues in excess of €750m) and the international pressure on the Crown Dependencies is likely to continue.”


Pictured: The Policy & Resources Committee.

EY’s report also found that introducing a territorial tax system, where international businesses pay taxes to the countries in which they are located and earn their income, would raise a similar amount of revenue for the States as other options.

Whilst the policy letter does not ask for immediate revenue raising from corporate tax measures, it asks for further “extensive engagement” with Jersey, the Isle of Man, and industry parallel to other personal tax and social security changes which could be implemented by April 2025.

“This will take some time as this work is economically sensitive and cannot be done in isolation or without extensive consultation and testing,” it said.

“Given that these opportunities exist, the Policy & Resources Committee recommends a lower revenue raising target of £50m to £60m to be achieved from the measures presented in this Policy Letter.

“It is important to reflect that the Committee entered the corporate tax review in recognition that it may reveal new options, and that at the very least it was important to demonstrate to the community that ‘no stone had been left unturned.”


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