Proposed reforms to Guernsey's taxation system and to the regulation of pensions business should enhance the island's competitive position as an offshore financial centre
On 22 November 2002, the States of Guernsey Advisory and Finance Committee (A&F) published a Budget Supplement containing the outline of its proposed reform of the island's taxation system. The proposals are still in the planning stage, but have been generally welcomed by the finance industry as they maintain Guernsey's competitiveness as an offshore centre.
The proposals are designed to maintain and enhance the island's competitive position as a financial centre, which in turn supports the economic and social wellbeing of the island in general.
The proposals are intended to address criticism from higher taxing member countries within the Organisation for Economic Cooperation and Development (OECD) and the European Union (EU), who in Guernsey's case, have focused their attention on the use of five business structures:
• Exempt companies.
• International companies.
• International loan businesses.
• Offshore insurance companies.
• Insurance companies.
In each case the structure is given favourable (or sometimes total) exemption from local taxes and are therefore regarded as 'ring-fenced' from the domestic economy. It is argued by the EU member state that such regimes give offshore centres an unfair advantage and reforms, such as those being proposed in the EU Tax Package, are currently being discussed in order to create a level playing field in the context of business taxation. A&F is of the view that the proposals fulfil the requirements of the EU Code of Conduct on Business Taxation and anticipate any reforms that might be implemented following the finalisation of the EU Tax Package.
Other jurisdictions such as Ireland, the Isle of Man, Gibraltar and Jersey, are also reviewing proposals to move to low or zero rated corporation tax, so as to attract a greater share of inward investment. Ireland is proposing a low (12%) uniform rate of corporate tax, whereas the Isle of Man and Gibraltar intend to introduce a general rate of 0% corporate tax with higher rates for businesses in certain sectors, particularly within the finance industry.
The proposals are due to be further developed and refined in consultation with the business community. At present they are set out in a two page summary press release entitled The New Corporate Taxation Strategy; and in greater detail in 'The Statement of Future Corporate Taxation Strategy' which runs to nine pages, (both of which can be viewed in PDF format at http://www.careyolsen.com).
Also presently under consideration are proposals to regulate pension provision in Guernsey. The Guernsey Financial Services Commission established the Pensions Advisory Panel in October 2000 chaired by Carey Olsen Senior Associate, Paul Buckle. The panel issued a consultation document last year, the feedback on which is currently being digested.
The consultation document recognised the significant international pensions business undertaken in Guernsey, usually either through local insurance companies or administered by local trust companies. The consultation document proposals were welcomed insofar as the panel rejected any proposal that comprehensive regulation of occupational schemes, modelled upon the UK Pensions Act, 1995, be introduced. The panel had seen how the Isle of Man Retirement Benefit Schemes Act 2000, which followed the Pensions Act 1995 model, had resulted in a flow of business from the Isle of Man to Guernsey.
The panel instead preferred a proposal that the Guernsey Financial Services Commission be responsible for monitoring compliance of domestic pension arrangements which would need to meet certain minimum requirements. These standards, which inevitably reflect the needs of the domestic social demographics, would not apply to international arrangements.
By confirming that international pension structures in Guernsey could remain flexible without the need to be specifically approved (although employers could always elect to seek approval of a scheme under the Income Tax (Guernsey) Law, 1975) and protecting the interests of members by regulating those that provide pension services either under the regimes regulating insurance providers or professional fiduciaries, the panel has done much to secure the continued attractiveness of Guernsey as a jurisdiction for international employers seeking to establish occupational schemes.
Financial services ombudsman
At the same time as circulating the consultation document on the proposed pension regulations, the Guernsey Financial Services Commission also circulated a consultation document regarding the establishment of a financial services ombudsman to provide a formal non-judicial complaints mechanism for clients of Guernsey's financial services industry. The introduction of such a scheme has been anticipated since the publication of the Edwards Report of November 1998.
Andrew Edwards was commissioned by the UK Home Secretary to conduct a review of financial regulation in the Crown dependencies. The report concluded Guernsey, Jersey and the Isle of Man are in the top division of offshore jurisdictions being well regulated. Edwards, however, did suggest while other offshore centres do not as yet have anything comparable, the Crown dependencies would be well advised to consider establishing an independent financial services ombudsman.
The need for such an ombudsman is widely recognised across the financial services industry in Guernsey to demonstrate to potential clients the willingness of financial services businesses in Guernsey to submit themselves to appropriate scrutiny when, as occasionally is the case, clients are dissatisfied with the service they receive. It is anticipated that the Ombudsman scheme will be introduced later this year.
The existence of a financial services ombudsman may have headed off particularly lengthy and bitter litigation between the protector of a Guernsey law trust and the former trustees of that trust. The litigation was conducted over the course of three years and reached its peak recently in a judgment of the Guernsey Court of Appeal. The litigation is to do with the removal of Guernsey International Trustees Limited (GIT) and its co-trustee Mr Bennett (a director of GIT) as trustee of three trusts for the Virani family of which Mrs Virani was protector.
The essence of the dispute is simple. Following a breakdown of relations, Mrs Virani first asked GIT and Bennett to retire and then later sought to remove them under an express power afforded to her as protector in the three trust deeds. GIT and Bennett resisted, so it seems, because they doubted whether Mrs Virani was exercising her fiduciary power of removal for a proper purpose, and applied to the Court.
There is no need here to run through the lengthy, and as the Appeal Court put it, at times 'interminable', sequence of hearings which took place between 2000 and 2003. However, those litigating in the Guernsey Court, and in particular trustees and their advisers, would do well to note the criticism that was levelled by the Appeal Court both at GIT and its advocates for the stance they adopted, and even against the Court of first instance itself, for its failure to deal decisively with matters which were quite possibly an abuse of process. The moral is that trustees must not, without very good grounds, resist their removal by an application to Court, and risk adverse costs if they do so.
In upholding Mrs Virani's appeal against an order for directions as to the future conduct of the matter, the Appeal Court did make some significant observations on the scope of an outgoing trustee's duties and its rights on vacating a trust. Many of these points may seem issues of longstanding common sense and practice. Nonetheless it is reassuring to see the Appeal Court confirming them in open court. The most significant points were:
• Section 16(4) of the Trusts (Guernsey) Law, 1989 (the Guernsey Trust Law) meant that once a trustee had been properly removed by for instance, a power of removal in the trust deed, the trustee immediately ceased to be a trustee and could not act and charge as a trustee, but retained its rights to 'reasonable security' against future liabilities.
• When assessing 'reasonable security' under Section 39, an outgoing trustee should not be placed in any better position that it would have been had it remained trustee. Hence, on the facts, this meant that as GIT and Bennett were liable for all breaches of trust while trustees, they could not demand an indemnity from its successor which protected them against all claims except gross negligence, wilful misconduct and fraud. Less still, could they insist that the beneficiaries give an unconditional release and indemnity.
• Once removed, a trustee was under a duty to transfer the trust assets as soon as reasonably possible, subject to its rights under Section 39, and until it did so, it retained fiduciary duties as though still a trustee in relation to the trusts assets. It was also under Section 16(5) subject to a duty to do everything necessary to vest the assets in its successor.
• While not strictly a 'liability' under Section 39, a trustee was entitled to its reasonable fees on vacation of the trust if the fees were properly authorised.
• The power of a protector to remove trustees could be a fiduciary one in the protector's hands, but whether for instance the trust deed said otherwise, and whether the protector was itself a beneficiary would be relevant in determining the position.
The Virani saga has not yet run its course and more guidance on how best to effect a trustee's retirement and removal may emerge. For the moment, the Appeal Court's judgment is very helpful in highlighting the dangers that trustees face if they adopt an unduly opportunistic or unreasonable stance by resisting removal where there are no proper grounds to do so.
The decision of the Court of Appeal is to be welcomed in that it confirms the stance that trustees should take when retiring from trusts in favour of other trust service providers. That additional certainty provides comfort to those with dealings with Guernsey resident trustees that when that relationship comes to an end they can expect the trustee to remain thoroughly professional throughout.
Summary of proposals
(1) General rate of income tax payable by Guernsey companies to be reduced from 20% to 0% with effect from 2008.
(2) Certain companies licensed by the Guernsey Financial Services Commission to be taxed at 10% with effect from 2008. This will apply to banks, fiduciaries, insurance managers and fund managers. Domestic and offshore registered insurers are to be taxed at 0%.
(3) The abolition of the Exempt Company and International Company status, with effect from 2008, after which the 0% or 10% rates will apply as appropriate.
(4) Collective investment schemes, including closed-end investment vehicles are to continue to be taxed under current arrangements.
(5) No plans to introduce VAT.
(6) No plans to introduce wealth taxes, inheritance or capital gains taxes.
(7) All registered Guernsey companies to pay annual filing fee set at a rate that is 'competitive in the international market'.
(8) Special rules will be introduced to ensure that Guernsey resident individuals are taxed on a proportion of the profits of a company in which they have a beneficial interest.
(9) Guernsey resident individuals still taxed at 20% and rate to remain the same. The proposals will be debated before the States at a future date. The proposed dated for introduction is 1 January 2008, but competition from other offshore centres and the finalisation and implementation of the EU Tax Package may lead to an earlier date of implementation.
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