Guernsey's decision to opt for a withholding tax regime has been met with criticism, but its supporters argue that it sends a clear message to its global customers that it remains an independent, competitive and flexible centre
Finance centres like Guernsey have had to evolve in recent years from being somewhat introspective ' while also very successful ' to concerning themselves much more with the way that they are perceived externally.
The driver for this change has been the much debated ' and arguably unwarranted ' scrutiny from bodies such as the OECD and the EU, and the need to maintain competitiveness in an increasingly global marketplace.
Challenges to accepted practices which developed over decades to become industry standard have galvanised the perhaps formerly disparate industry sectors within the financial community and have also revealed subtle differences in character and approach from the respective centres, particularly the Crown Dependencies.
EU Savings Tax Directive
In Guernsey's case this is evidenced by the island being first to declare its response to the proposed EU Savings Tax Directive. Yet, this very positive decision by the States of Guernsey Advisory & Finance Committee is fully backed by the island's finance industry.
It is worth emphasising, as this has already been misinterpreted by some media, that Advisory & Finance have made it clear, and Guernsey's financial institutions support this position, that any recommendation to the States to adopt the provisions of the Directive will depend upon several key factors. Not only does adoption depend on the EU Tax Package as a whole being ratified by the member states (and thus embracing the Code of Conduct on Business Taxation and Guernsey's proposed zero corporate tax strategy), but also on the vital principles of a level playing field, not only with EU member states, but also with third country competitors such as Switzerland.
It is particularly important that Guernsey's decision to opt for a retention tax regime is seen in this proper context.
Soon after the island's position was announced, Lord Irvine, the former Lord Chancellor, whose department is responsible for constitutional links between Guernsey and the UK, visited States officials and made a number of helpful comments.
In public statements, Lord Irvine reinforced the quality and self-determination of the finance sector in several key areas. On the subject of the EU Savings Directive he said: 'We are completely understanding of the Guernsey position, that where three other countries, Austria, Luxembourg and Belgium, opted for withholding (retention) tax arrangements, that Guernsey in the interests of the level playing field should have done so.'
On the question of assurances to finance businesses in the island, the former Lord Chancellor stated: 'Guernsey is well capable of looking after itself and is looking after itself extremely well. Its response to recent concerns about the lack of exchange of international agreements in the tax sphere shows that it chose to go its own way. We understand that ' our position is to uphold the special position of Guernsey under Protocol 3 in relation to the European Union, and at the same time to encourage Guernsey to be a well-regulated, responsible, financial part of the world which continues to attract good business and accounts with the highest possible standards of international regulatory and financial practice.'
Lord Irvine also commented on the impact of European legislation: 'I do not see in the foreseeable future that there is any risk to Guernsey's current status and I do not think there is any fact or circumstance that you could actually point to that should show that the UK Government was moving in any different direction.'
a bright future
When the customers of international finance centres like Guernsey are looking for clarity and reassurance on key issues such as taxation and confidentiality, Lord Irvine's remarks are a welcome reminder that the future remains bright for the island's finance sector.
Key competitor international finance centres, such as Luxembourg and Switzerland, are also proposing to adopt a retention tax regime, so the Guernsey authorities are potentially maintaining a competitive level playing field for the island and underlining a clear international positioning for Guernsey's finance sector.
Had Guernsey decided to adopt the automatic exchange option, it would have sent a message to our global customers and potential customers that Guernsey was drawing ever closer to the EU and UK.
The proposed retention tax regime does not rule out an option for customers to choose exchange of information instead, it just gives them that choice if they wish.
It is important to Guernsey that the finance centre is recognised as internationally 'co-operative' following global scrutiny, and that our regulation is recognised as being sound. Automatic exchange of information is an absolute measure and leaves no room manoeuvre if circumstances change in the years ahead. Guernsey has retained flexibility for the future by its decision to follow the retention tax regime in the event of adoption of the EU Directive and the maintenance of competitive criteria.
Historically Guernsey's finance sector has spent a huge amount of time emphasising its reputation for fiscal and legislative separation from the UK and EU. The choice of the retention tax option is about positioning the island as a different kind of finance centre to most EU regimes. This decision keeps Guernsey competitive, and reinforces its marketing strategy for the provision of global financial services.
The latest position is consistent with the outcome of other high profile scrutiny in recent years. The OECD, with its focus on harmful tax practices recognised Guernsey as a cooperative jurisdiction. Again the island agreed to reflect the OECD's principles of exchange of information and transparency, both in a general political commitment and in tax information agreements to be negotiated with individual jurisdictions.
Soon afterwards Guernsey was the first Crown Dependency to demonstrate this commitment when Deputy Laurie Morgan, president of the Advisory & Finance Committee joined Paul O'Neill, US Treasury Secretary in Washington to sign a Tax Information Exchange Agreement between Guernsey and the US. This historic agreement relates to exchange of information on request and in relation to specific enquiries, between the two jurisdictions.
Probity and good standards of regulation had already been endorsed by Andrew Edwards and international organisations such as the Financial Action Task Force and the Financial Stability Forum, and the recognition from the OECD was a further important international endorsement of Guernsey's standards.
Of course Guernsey already had legislation in line with the OECD proposals for exchange of information in respect of criminal tax matters and was in advance of many other jurisdictions in this field, including some OECD member countries.
While in many respects the Edwards Report started a sequence of external scrutiny, the threat of the OECD publication of a so-called 'blacklist' of some 35 jurisdictions crystallised issues for Guernsey's finance sector and created two related concerns for its reputation.
First, the threat of a blacklist of uncooperative so-called tax havens ' best defined as a list of persons or bodies in disfavour ' was itself derogatory.
It raised unwarranted questions about the good reputation of Guernsey as an international finance centre and this potentially disadvantaged the island's competitiveness by the very fact of its discussion in the financial press.
Second, the range of jurisdictions listed, many with lesser reputations than Guernsey, might have led to guilt by association, whereby Guernsey was thought to be less cooperative and less well-regulated than was actually the case.
Guernsey's finance sector does not seek to build a reputation for good governance where none existed before ' for those around the world who use its services are well aware of its quality ' but rather it seeks to defend and enhance its international reputation in the face of international scrutiny, be it by the OECD, EU or IMF.
Reputation, once tarnished, can be difficult to restore and Guernsey's commitment to the OECD process and to successful negotiations over the EU tax package, together with the island's removal from the 'blacklist' was a vital endorsement of the finance sector's importance.
Removal from any OECD blacklist publication both reduced a threat to reputation and created an opportunity for financial services providers to move forward without the hindrance of an unwelcome and somewhat arbitrary classification.
Guernsey remains in the top division of international finance centres, based on its reputation for stability, integrity, innovation and professionalism. It has a finance industry to be proud of and a commitment to the satisfactory negotiated outcome with all external scrutinisers, but always firmly within the principles of a competitive, level playing field.
Guernsey has retained flexibility for the future by its decision to follow the retention tax regime.
Not only does adoption depend on the EU Tax Package as a whole being ratified by the member states, but also on the vital principles of a level playing field.
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