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EU on Side of Taxpayers in Offshore Jurisdictions for Once

With their constant drive for the harmonisation of tax practices across Europe, and their all out battle to prevent cross border tax evasion – possibly at the cost of privacy and investment freedom – the EU has surprised many by coming down on the side of the taxpayer for once.

In forcing the Isle of Man and Jersey to review their so-called zero-10 tax regimes to remove the potential for the unfair taxation of resident shareholders of locally based companies, the EU has sought to ensure that these two popular offshore jurisdictions don’t continue to apply one rule to their own taxpayers, and another to foreign taxpayers.

Unfortunately however, poor reporting of this news on both the BBC and Telegraph websites mean that the significance of the EU’s efforts have been completely misunderstood by many!  To just read reports on either website would leave you very confused as to the significance of this news.

The zero-10 tax regime applies to the taxation of businesses in the Isle of Man and Jersey.  Many companies are taxed at 0% corporation tax, with banks and some other companies taxed at either 10 or 20% – making both jurisdictions highly attractive for company incorporation purposes.

Believe it or not, it was not this competitiveness that the EU Code of Conduct Group had a problem with however.  It had a problem with the zero-10 rules when they were combined with both offshore havens’ personal tax rules.

Under these rules, local residents were deemed to have received dividends of 60% of the profits of profit-making local companies in which they owned shares – whether they had actually received such a dividend or not!  They were then taxed on these assumed dividends as part of their personal tax liability.

Initially the authorities on both islands argued that this policy of ‘deemed distribution’ was in place to prevent local resident shareholders from delaying receipt of dividends to defer their tax liability.  However, the EU pointed out that the application of this rule was an unfair tax practice, and gave rise to “harmful effects” – namely the potentially unfair taxation of residents of Jersey and the Isle of Man.

As such practice was in direct conflict with the Code of Conduct on Business Taxation as determined by Europe’s Council of Economics and Finance, the EU stepped in to force Jersey and the Isle of Man to reconsider their positions.

Fortunately both offshore jurisdictions have now agreed to the abolition of this deemed distribution rule from 2012.

This is good news for resident shareholders in both tax havens, and good news for taxpayers in the EU in general as is shows that Europe’s Council of Economics and Finance isn’t just there to prevent positive competitiveness!

However, as stated earlier, the reporting of this story on the BBC and in the Telegraph leaves a great deal to be desired.

The deemed distribution rules are not clarified by either publication; instead readers of the BBC website are led to believe that the issue with zero-10 stemmed from the fact that “local shareholders pay Jersey tax on their profits, while foreign shareholders do not.”  Talk about ‘dumbing down’ and oversimplification of the news.

Readers of the Telegraph were equally baffled by the news that “Jersey shareholders will be taxed in exactly the same way as non-local shareholders – paying tax on the dividend actually received and not on the company’s overall profits.”

Furthermore, according to the Telegraph: “The Jersey government estimated that it would lose about £10 million a year because of the changes.”  Whereas in actual fact what a Jersey Treasury spokesperson really said was that this rule amendment will create “a temporary cash flow issue rather than a reduction in the total tax take… this effect will not be felt until 2013/2014.  The maximum cash flow (or timing) impact is not expected to be more than £10m in any one year.”

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