At the time of the last significant change to the tax regimes in the Crown Dependencies (the introduction of economic substance rules), Paul Eastwood was sat behind the Jersey flag in the OECD’s headquarters in Paris. This is because until summer 2019, Paul was the Deputy Comptroller of Taxes for Jersey. With an extensive and varied portfolio, his work included supporting Ministers in the delivery of the Government of Jersey's annual Budget, advising on how to manage the international tax landscape and co-ordinating the drafting of a number of significant changes to the Island’s tax laws, including Jersey's economic substance legislation. Paul has been working in the tax area for nearly 25 years, his decade in Government being sandwiched by stints in professional practice, originally in the London and Jersey offices of another Big-4 firm and now with KPMG in Jersey. As a result, Paul understands better than most the global drivers behind the OECD's new two-pillar solution to reform international taxation rules better than most and offers unique insight and advice to clients in the Crown Dependencies.
Simply put, Pillar 1 seeks to change the international tax architecture, which currently comprises rules originating from the early twentieth century, indicating that to be taxable in a jurisdiction, a business must have a physical presence there or have people who operate in that jurisdiction. Paul reiterates, "In the modern digital world, it's entirely possible for a company to make a lot of profit in a jurisdiction without ever ‘setting foot’ there." As a consequence, Pillar 1 (which forms part of the OECD's BEPS Project (Base Erosion Project Shifting) which commenced in 2015) is adapting these international taxation rules to reflect the digital economy.
Pillar 1 proposes changing the rules so that the very largest global companies can be taxed in the jurisdictions where they are making profits even when they do not have a taxable presence under the current rules. Unsurprisingly the potential reallocation of taxable profits, and thereby tax revenues, between countries has led to an ongoing debate between enthusiastic potential winners and more recalcitrant potential losers; with the US in particular needing to determine the domestic impact and agree the rules through Congress.
For the time being however, based on the rules as currently proposed, the vast majority of businesses in the Crown Dependencies can breathe a sigh of relief as it appears that Pillar 1 will have no impact on them. However, we continue to monitor the proposal as the debate rumbles on in the international community and the US Congress.
On the other hand, Pillar 2, which is designed to ensure that large multinational groups pay 15% tax in each jurisdiction where they operate, is more impactful across the Crown Dependencies, where the standard corporate tax rate is 0%. While alarm bells may be sounding, Paul stresses, "What Pillar 2 definitely does not say is that Jersey, Guernsey, and the Isle of Man need to change their tax regime and introduce a 15% standard corporate tax rate; the Islands are not obliged to do that." Many companies will also seek comfort knowing the proposed rules will only apply to large multinational groups with a global turnover of over 750,000,000 EUR.
So, some may wonder how these rules are proposed to work if the Crown Dependencies are not obliged to impose a 15% corporate tax rate? If, for example, a Jersey company in a large multinational group was subject to tax at 0% on its Jersey profits, the rules propose that other jurisdictions associated with that multinational group would be entitled to tax those profits such that, in effect, the multinational group has incurred tax at 15% on them. Ordinarily it will be the jurisdiction in which the ultimate parent entity is located which will collect this tax, but if it chooses not to do so there are complicated rules which seek to allocate the tax between the relevant jurisdictions.
Paul explains, "So if the Crown Dependencies do nothing, other jurisdictions will be taxing the profits recognised in the Islands. Other countries would be more than happy to levy and collect this tax, boosting the revenues in their exchequers." As a result, the Crown Dependencies are considering the introduction of a domestic top-up tax of 15%, that will apply solely to companies that fall within the scope of the Pillar 2 rules. The option of such a top-up tax is specifically contemplated within the OECD’s rules and if implemented would feed this additional revenue into the domestic treasuries. Paul says, "This requires a great deal of thought as delicate decisions need to be made whenever changing our corporate tax regimes which have delivered tax neutrality in a simple and transparent manner."
Progress continues to be made at the OECD, although as the focus turns to the finer details of the rules it has, unsurprisingly, slowed down, as jurisdictions seek to establish exactly what the rules mean for them. As members of the OECD’s Inclusive Framework each of the Crown Dependencies participates in the discussions which are shaping the rules, but Paul brings a sense of pragmatism; "We do have a seat at the table, but we must be realistic about how much influence our jurisdictions can exert". Nevertheless, he is impressed by the efforts of the teams in the Islands’ governments that have helped to shape the Islands’ responses, “They have been focussed on the key areas of the rules from the Islands’ perspective and spent their political capital well”.
In the past, the Islands’ corporate tax regime alone may have been sufficiently attractive for businesses to relocate to the Crown Dependencies. However, with Pillar 2 eroding an element of this attraction it's more apparent than ever that the Islands need to focus on their other advantages to encourage businesses to stay, and entice future businesses to settle. Paul says, "We need to get passionate about our other strengths, such as being well regulated, having a high quality and experienced workforce and a secure, well respected legal system. Whilst everyone, including Government and the regulator, needs to focus on cutting administration burdens and reducing the cost of doing business".
Impact on businesses
There is a general sense that businesses in the Crown Dependencies and clients of KPMG are beginning to come to terms with the implications but are holding off from reacting until a final package is set in stone. For clients over the 750,000,000 EUR threshold and likely impacted, KPMG has advised local management and helped them to understand the implications. While global consultation is essential, local engagement has been vital for clients to understand the consequences for their operations. As Paul highlights, “I have little doubt that the rules in some form will – eventually – be implemented, Pillar 2 will happen; but this will not mark the end of the Crown Dependencies that some are predicting. Because the Islands do not have to introduce a 15% corporate income tax rate, most of the existing businesses will not be impacted. Whilst for those that are in scope, yes they will have to pay more tax, but that doesn't mean those businesses will automatically relocate outside of the Crown Dependencies."
Large businesses in the Crown Dependencies may have felt dismayed at the news of another round of international tax reform. The headlines, 'OECD impose global corporate tax rate of 15%' may have cast an ominous mood across the minds of corporate entities and the impact this will have on the operation of their business. However, with a clearer understanding of the implications, the better prepared businesses will be. Paul concludes, 'These are important rules that cannot be ignored; the best businesses will seek to engage and understand, and then calmly map out their plans for the future.'