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Newsletter | Articles Reforming Jersey’s Tax System Robert Christensen for Volaw Trust Company On 16 February 2004, following a prolonged period of consultation, the Finance & Economic Committee of the States of Jersey (“the Committee”) published its long-awaited proposals for a reform of the Island’s taxation and government spending policies in a document entitled ‘Facing up to the Future: reforming public spending and taxation to sustain a prosperous and competitive economy’ (see www.gov.je/taxandspending). In large part, the proposed changes are being forced on the Island by the European Union’s Code of Conduct on Business Taxation, under which Jersey is required to abolish what the EU regards as a discriminatory tax regime offered through tax exempt companies and IBCs in the Island: the EU’s position is that Jersey has engaged in harmful taxation competition by permitting non-residents of Jersey to establish tax-exempt companies but not permitting Jersey residents to own them. The Committee therefore proposes to abolish tax-exempt companies altogether and simultaneously to reduce the standard corporate tax rate to zero. The effect of this change will be to remove a very significant part of the Island’s tax revenues. The Committee proposes to make up this gap by: imposing a 10% profits tax on all businesses that are regulated by the Jersey Financial Services Commission (primarily banks, trust companies and investment managers); phasing out personal Income Tax Allowances on a sliding scale on household (2 adults, 2 children) incomes between £80,000 - £150,000 pa from 2005, with no allowances available on incomes above £150,000. Equivalent changes will be made for other household types; introducing a general goods and services tax of 5% in 2007 with exemptions on food and children’s clothing and income support for those on very low incomes; continuing to make efficiency savings in States’ expenditure and limiting the growth in States’ expenditure to 1% less than the RPI; implementing policies that encourage economic growth of approximately 2% per annum; and introducing a form of pay-as-you-earn system for paying tax (to be known as the Income Tax Instalment System) in 2006. The Committee notes that the Island’s financial services industry is “the engine of our economy”, currently generating nearly two-thirds of all the Island’s tax revenues. The proposed changes are, therefore, intended by the Committee to preserve and strengthen the financial services industry, to ensure that the Island remains competitive internationally and to attract companies to invest, do business, employ people and pay tax in Jersey. One proposal considered by the Committee but not included in its proposed measures is the introduction of a payroll tax: however, the Committee’s document does not leave open the possibility of introducing such a tax, if the other measures prove to be insufficient to fill the hole left in government finances by the move to zero corporate taxes. In a nutshell, the Committee’s proposals will over the next few years shift the Island’s tax revenue base from companies to Jersey residents. Whilst this is bound to be unpopular with many residents of the Island, who will have to pay higher rates of taxes if they are to continue to enjoy the level of public services that they have come to expect, the alternatives are far less palatable.