The Chief Minister
Policy Council
Sir Charles Frossard House
La Charroterie
St Peter Port

14th July 2009

Dear Sir

1. Executive Summary

1.1. This Report proposes amendments to The Income Tax (Guernsey) Law, 1975, as amended (“the Income Tax Law”).

1.2. The Treasury and Resources Department proposes that the present system of granting relief from tax, to the payer, in respect of payments to charities, only if they are made under Deeds of Covenant, should be replaced with a system under which the payer would receive no relief but, instead, to the extent that the payer makes a donation from his taxed income, the recipient charity (if it is a Guernsey Registered Charity) would be treated as having received a donation net of tax, and as the income of charities is exempt from income tax it would be entitled to reclaim the tax suffered (and this would include donations which are not made under a Deed of Covenant).

It is also proposed that the present limit of £1,500 per annum, that qualifies for relief, be increased to £5,000 per annum in respect of each individual making donations (£10,000 for a married couple).

In respect of donations to Guernsey Registered Charities which are not under a Deed of Covenant, the Department proposes that there will also be a minimum annual contribution level of £500, by an individual (or married couple), before a charity qualifies for repayment.  There would continue to be no minimum level in relation to donations under Deeds of Covenant.

It is also proposed that there would be transitional provisions to ensure the preservation of income tax relief in respect of individuals who, prior to 31 December 2009, have committed to make donations to a Guernsey Registered Charity under a Deed of Covenant.  Deeds entered into, or revised, with effect from 1 January 2010 et seq would, however, not qualify the covenantor for relief.

1.3. In certain circumstances, with effect from 1 January 2008, a tax charge may arise if a company makes loans to certain persons (such as officers, employees and shareholders).

The Income Tax Law provides that where a company, which has made such a loan, subsequently writes off or is deemed to have written off that loan, the recipient of the loan is deemed to have received income in the combined amount of the loan and the tax. Although tax is deemed to have been paid already and the beneficiary of the loan is given an appropriate credit, the Department believes that the Law should be clarified to make it clear that there is no second charge to tax on the write off of the loan.

In addition, the writing off of a loan (which has already been charged to tax when the loan was originally advanced) could in theory give rise to an additional charge to tax because it constitutes a distribution of the company’s profits.  The Department proposes that the legislation be further revised to make it clear that, to the extent that a loan was charged to tax when it was originally advanced, the subsequent writing off of that loan would not give rise to a further tax charge as a distribution or a further obligation on the company to deduct and account for the amount of the tax.

1.4. The Department also proposes an amendment to allow “unilateral tax relief” which, prior to 2008, would have been due to a company, to flow through to a beneficial member when the company’s income is distributed or deemed as distributed.

1.5. The Department currently has responsibility for hearing appeals against assessments, penalties, directions and orders where an income tax return has not been submitted.  All other income tax appeals are heard by the Guernsey Tax Tribunal.

 It is proposed that the Income Tax Law be amended to provide that all income tax appeals will be dealt with by the Guernsey Tax Tribunal.

1.6. The Department proposes updating certain exemptions, within the Income Tax Law, relating to certain payments made by the Social Security Department which have become outdated with the passage of time.

1.7. Following consultation with interested parties, the Department proposes certain amendments to revisions to those parts of the Income Tax Law dealing with the taxation of individuals who are resident but not solely or principally resident for income tax purposes, which were considered by the States in January 2009 (Billet II of 2009 at pages 50 – 54 inclusive).

1.8. At their meeting in April 2009, the States resolved to introduce the concept of limited liability partnerships into Guernsey law.  The Department proposes that the definition of “partnership” in the Income Tax Law be extended to include such bodies.

1.9. The present restriction on an exempt body obtaining exemption from tax (that it cannot hold shares in a Guernsey company unless that company is itself exempt) has become, in most instances, unnecessary.  This provision is principally restricted to collective investment schemes.  The Department is, therefore, proposing that this restriction be removed, albeit with appropriate provisions to ensure that such companies having income which would otherwise be taxable at the company intermediate rate (10%) and company higher rate (20%) would continue to pay tax, at those rates, on such sources of income.

1.10. At their meeting in January 2009, the States resolved to introduce a facility which would allow a company to elect to distribute at least 65% of its trading profits, the effect of which, broadly, would be to remove that company from the deemed distribution regime.  The proposals considered by the States, in January 2009, envisaged that if a company made an election by 30 June 2009, the election should be capable of being valid in relation to 2008 onward.  Subsequent consultation with interested parties, referred to elsewhere in this Report, has resulted in delays in the finalisation of the relevant Regulations.  The Department proposes, therefore, that the Regulations, once made, will provide for such an election to be valid if it is made before 31 December 2009, rather than 30 June 2009.

 In addition the original proposal was that any such election should be irrevocable.  Following further consideration of this aspect of the proposals, the Department proposes that the election should be revocable in the event that control of the company is transferred to another person, or persons.

1.11 At their January 2009 meeting, the States agreed certain adjustments to the provisions of the Law dealing with the capping of the tax liability of individuals.  The Department identified certain tax avoidance opportunities which it proposed be addressed.  The perceived solution, identified by the Department at the time, has proven to be overly complex to legislate for.  As a consequence, the Department now proposes an alternative anti-avoidance provision, which has been formulated following consultation with the Guernsey Society for Chartered & Certified Accountants.

In addition, it is possible that an individual could have a distribution of profits from a company which arose prior to 2008 (and which, as a consequence, under the provisions of the Income Tax Law, carries a tax credit of 20%) which, as a consequence of the operation of the tax cap, that credit could become repayable.  This would amount, in effect, to a repayment of tax for Years of Charge 2009 et seq of income tax that the company had paid in years prior to the introduction of zero/10.  The Department proposes that the Income Tax Law be revised such that, whilst credit for the underlying tax would remain available to the beneficial member receiving the distribution, that credit would not be repayable.

1.12. The Department has made Regulations which, if approved, will prescribe fees payable by gang leaders who make an application to the Director of Income Tax for the grant or renewal of an ETI exemption certificate, and make other minor modifications to the Income Tax (Guernsey) (Employees Tax Instalment Scheme) Regulations 2007.

1.13. Finally, the Department proposes consolidation of the Income Tax Law.

2. Tax relief in respect of donations to charity

2.1. Currently, tax relief is available to an individual who makes payments under a Deed of Covenant in favour of a Guernsey Registered Charity, up to a maximum of £1,500 per annum (£3,000 per annum for a married couple).  A “Guernsey Registered Charity” for this purpose is a charity registered in accordance with The Charities & Non Profit Organisations (Registration) (Guernsey) Law, 2008.  The present limit on donations under Deeds of Covenant, of £1,500, has been in place since 1 January 2001.

2.2. Tax relief is not presently available to Guernsey resident individuals in respect of non-covenanted donations to charities.

2.3. For the purposes of obtaining relief, a Covenant in favour of a charity must be irrevocable for a period exceeding three years.

2.4. Following consultation with the Association of Guernsey Charities the Department proposes that the present system, of allowing relief to the payer but only in respect of limited donations under Deeds of Covenant, be replaced.

2.5. It has been eight years since the present annual contribution limit, for payments qualifying for relief, was set at £1,500.  In the light of that, and with a view to encouraging Guernsey residents to make donations to worthy causes, it is proposed that the limit that each individual may make, during the course of a year, and which would qualify for relief, should be increased to £5,000 (£10,000 for a married couple) with effect from 1 January 2010 (but see paragraph 2.8 below concerning the person who would benefit from that relief).

2.6. The Department also considers it appropriate to extend relief from contributions made under Deeds of Covenant (which many persons wishing to donate to charity may consider to be overly formal and restrictive) to include all donations to Guernsey Registered Charities.  Again, it is proposed that this would become effective from 1 January 2010.

2.7. There are many situations where individuals may, spontaneously, make donations to charity in circumstances where, if they and/or the charity receiving the donation, were required to retain/create documentary evidence to support a claim for relief from income tax, this could create significant administrative difficulties.  A very obvious example would be donations made during street collections, sponsored events, etc.

In addition, if a substantial number of Guernsey residents were, as a consequence of these proposals, treated as making contributions which qualified for relief, that could prove to have a significant (and, at present, immeasurable) impact on the island’s general tax revenues.  Initially, therefore, the Department proposes that there should also be a minimum sum of £500 in total donations for each individual which they would have to make before they qualify for relief, during the course of a year, to any particular Guernsey Registered Charity.

If adopted, the Department will keep under review the impact on general revenues of the extension of the relief under these proposals and, in future years, will propose appropriate adjustments to the minimum and maximum levels referred to above, as is considered appropriate, as part of its budget proposals.

2.8. A more significant variation to the present system, however, is that the Department proposes that, again with effect from 1 January 2010, relief should cease to be available to those who are making donations.  Instead, the recipient Guernsey Registered Charity would be treated as having received a payment which was net of Guernsey tax, so long as the individual making the donation was able to certify to the charity concerned that:

• other than in respect of payments made under a Deed of Covenant, his donations to that charity during that year had exceeded the de minimis level of £500;

• the donations made to that charity, during that year, had been made out of income charged to tax in Guernsey at the individual standard rate of 20%;

• his total qualifying donations to all Guernsey Registered Charities, during that year, did not exceed £5,000 in aggregate; and

• the donation was not made under a Deed of Covenant entered into prior to 1 January 2010.

For the purposes of the above, in the case of a married couple, the de minimis limit would be £500, irrespective of the apportionment between the spouses, and a maximum of qualifying donations of £10,000 (i.e. the amount applicable to two individuals) again irrespective of the apportionment between them.

2.9. On production of the appropriate evidence required by the Director of Income Tax (“the Director”) to support the claim, the charity will then be entitled to reclaim, from the Director, the tax paid by the person making the donation.  For example:

• Mr X makes a donation of £1,000 to a Guernsey Registered Charity and completes a declaration in the format set out at 2.8 above.

• The charity is treated, therefore, as having received the £1,000 as a sum net of tax, which gives an equivalent gross donation of £1,250 (i.e. £1,000 x 80/100).

• The charity would, therefore, be entitled to make a claim, on the Director, for £250 (i.e. £1,250 - £1,000).

2.10. The effect of the above is that the charity receiving a donation receives, in effect, an additional contribution, from the States of Guernsey, equivalent to 25% of the contribution made by the individual donor.

2.11. The Department recognises, however, that some individuals will already have entered into Deeds of Covenant, obligating them to make payments to charities, in the belief that they would, as a consequence, receive relief in respect of their donations.  The Department proposes a transitional provision, therefore, that for any individual who, up to and including 31 December 2009, has entered into a Deed of Covenant such that the donations made under the Deed will qualify for relief for 2009, that person will continue to receive income tax relief, following a claim in his personal income tax return, for the remainder of the life of the Deed of Covenant.  Donations made under such a Deed of Covenant would not then be available for relief to the recipient charity, as proposed under paragraph 2.8 above.

If a Deed of Covenant, in existence at 31 December 2009, is renewed after its expiry, or is amended, on 1 January 2010 or subsequently, it would not qualify the person making the payments for relief.  Any payment made on 1 January 2010, or subsequently, in relation to such a Deed would only be valid for relief to the extent that the charity could claim under the conditions set out above.

3. Loans made by companies which are written off

3.1. Prior to 2008, companies could make loans to third parties (including officers, employees and shareholders) without charging interest, or charging interest at a rate lower than the market rate, without there being any charge to tax.

3.2. With effect from 1 January 2008 and the introduction of the Zero-10 regime, however, the making of a loan (probably interest free) would be a very simple way of avoiding a charge to tax on the distribution of a company’s income, under the Income Tax Law, unless legislation was introduced to prevent such avoidance.

3.3. As a consequence, for 2008 et seq, legislation has been introduced to charge tax, in certain circumstances, where a company makes loans to certain persons (such as officers, employees and shareholders).  In essence, at the point that a company makes a loan which is subject to the legislation, the company is required to account for tax.  The tax is calculated as if the amount lent was net of tax.  This gives an effective tax charge, on such a loan, of 25% (which equates to the individual standard rate of tax of 20% on the grossed up amount of the loan).

3.4. If a loan previously made is written off by a company, the legislation also provides that the recipient of the loan is treated as having received income in the amount of the loan written off and tax paid in respect of that amount (and receives a credit for that deemed tax).  The intention of the provision is to clarify the status of the loan and to crystallise it as "income", not that the loan is taxed once when it is advanced and again when it is written off (because, the recipient being deemed to have paid tax on the writing off of the loan, he is not actually required to make a further payment of tax).

3.5. The Department considers however that the provisions should be clarified to avoid any suggestion that there is a second charge to tax on the loan when it is written off.

3.6. The Department proposes, therefore, that the legislation be revised to provide for the avoidance of doubt that no further charge will arise on the writing off of a loan if tax was paid on the loan when it was originally advanced.

3.7. It could also be argued that when a loan is written off by a company, that constitutes a “distribution” of its profits (as defined in the Income Tax Law) with the result that the company was required to deduct and account for tax on the amount written off, notwithstanding that the loan had already been taxed when it was originally advanced.

3.8. The Department therefore proposes that the Income Tax Law be further revised to provide for the avoidance of doubt that where a loan is written off this would not constitute a taxable distribution, for the purposes of the Income Tax Law, if the loan was taxed when it was originally advanced.

4. Unilateral Relief for Overseas Taxes

4.1. To the extent that a company receives income which is subject to tax in another territory (whether by deduction at source or by direct assessment on the company by an overseas tax authority) if the profits which have suffered that overseas tax were then distributed or deemed as distributed to Guernsey resident beneficial members, and chargeable to tax on those beneficial members, then the credit which would have been available for the company to claim (had it been chargeable to Guernsey income tax in its own name in relation to that overseas income) should be available to the Guernsey resident beneficial members, in proportion to the amount of that income which is distributed, or deemed as distributed, to them.

4.2. There are two principal forms of relief for overseas taxes.

Firstly, there is relief in relation to income received from a territory with which Guernsey has a comprehensive Double Taxation Arrangement (presently this is limited to the United Kingdom and Jersey).

When the zero/10 regime was introduced, a provision was incorporated into the relevant section of the Income Tax Law (section 173) allowing the “flow through” of the overseas tax to the beneficial member, as described above.

In addition, there is relief (limited to three-quarters of the Guernsey effective rate of tax) for other overseas taxes suffered (this is commonly referred to as “unilateral relief”).

Due to an oversight, however, a similar provision was not enacted in relation to unilateral relief.

4.3. The Department proposes that this oversight be corrected and, so as not to disadvantage any potential claimant, further proposes that the amendment should be treated as having effect from 1 January 2008.

5. Income Tax appeals

5.1. Prior to the formation of the Guernsey Tax Tribunal (“the Tribunal”) (in 1992) responsibility for all income tax appeals lay with the, then, Income Tax Authority.

Notwithstanding that there was a right of appeal to the Royal Court, on a point of law, it was considered appropriate, in 1992, that the Tribunal should be formed to hear all income tax appeals other than those that related to assessments, penalties, directions and orders where an income tax return had not been submitted.  These are known as “delay appeals” because they are often instituted where the appellant, not having submitted a tax return, might be perceived to be “buying time” by appealing and thus delaying the enforcement of his liability to tax.  In common parlance, the Tribunal heard “contentious” appeals whilst “delay” appeals continued to be the responsibility of the Income Tax Authority (this responsibility now lies with the Department).

5.2. HM Procureur has advised the Department that, in view of the fact that the Department’s responsibilities extend further than solely matters relating to taxation (unlike the Income Tax Authority) it would be appropriate for the Department to cease to have any responsibility in relation to income tax appeals.  It is also preferable, from a human rights point of view, to have appeals determined by a Tribunal rather than by a political board such as the Department, which might be seen as having an interest in the outcome of the case and thus not impartial.

5.3. HM Procureur’s advice is that responsibility for hearing “delay” appeals should be transferred to the Tribunal but the Income Tax Law should provide that a single Member of the Tribunal could sit for the purpose of hearing “delay” appeals (the requisite number of Members of the Tribunal required for the hearing of “contentious” appeals, namely 3, being unaffected).

5.4. It is also proposed that the opportunity be taken to add a power into the Income Tax Law for the Policy Council (which, under the Income Tax Law, has the statutory responsibility for the administration of the Tribunal) to make Regulations, governing the formal procedure and administration of income tax appeals, to the Tribunal, as it sees fit.  Such regulations would include the ability to make provisions for the costs of an appeal.  At present, these costs are met entirely from public funds and, regrettably, there are a number of instances where a taxpayer has withdrawn an appeal at the last moment, or failed to attend a hearing, after a considerable amount of work has been done on it by both the Clerk, and his support staff, and the Director.  A provision for costs would not deter a genuine appellant, who could recover these if successful, but could deter frivolous or vexatious appeals.

5.5. At the request of the Tribunal, the Department also proposes that the Income Tax Law should be amended so as to allow a Deputy Clerk to be appointed (at present, any short term absence of the Clerk means that a scheduled hearing cannot proceed).

5.6. Finally, it is proposed to make a small procedural change whereby a delay appeal will only be submitted to the Tribunal when the appellant or Director so require, rather than being forwarded immediately to the Tribunal, as currently would be required by the Law.

5.7. The Tribunal has been consulted in relation to the above and has consented to the transfer of responsibility for hearing “delay” appeals from the Department to the Tribunal.

6. Social Security Benefits

6.1. Section 27 of the Income Tax Law renders benefits payable under the Social Insurance Law chargeable to income tax, and then exempts from income tax certain specific payments made by the Social Security Department.  With the passage of time, certain of these exemptions have become outdated and, as a consequence, and after consultation with the Social Security Department, the Department proposes the following amendments:

6.2. In respect of Limited Medical Benefit, which covers the cost of treatment for accidents occurring outside of the work place and only relates to such incidents which took place prior to 1 January 1996, it is proposed that the exemption set out in section 27(2)(d) of the Income Tax Law be repealed.

6.3. In respect of Partial Disablement Benefit, which no longer exists, it is proposed that the exemption set out in section 27(2)(k) of the Income Tax Law be repealed.

6.4. In the interests of brevity, the Department also proposes that the present wording contained in section 27(1) of the Income Tax Law that “... any sum on account of an allowance in pursuance of the provisions of the Family Allowances Law shall be chargeable to income tax ...” and the exemption contained in section 27(2)(l) of “any sum on account of an allowance in pursuance of the provisions of the Family Allowances Law payable in respect of any period commencing on or after the first day of January, nineteen hundred and eighty one” should be replaced by a simple exemption of “any allowance payable under the Family Allowances (Guernsey) Law 1950” in section 40 of the Income Tax Law.

6.5. Finally, section 40 of the Income Tax Law exempts, in paragraphs (u), (v) and (aa) respectively, “any payment of a pension in pursuance of the provisions of the Old Age and Blindness Pensions (Guernsey) Laws 1950 and 1951” and “any payment of outdoor assistance in pursuance of the provisions of the Public Assistance Law 1937” as well as “any pension or allowance payable by the Social Security Department in respect of all injuries or deaths under the War Injuries Scheme approved by resolution of the States on the eighth day of February nineteen hundred and forty six, or by any resolution amending or replacing the same.”  As these exemptions now have no practical application, the Department also proposes that they be repealed.

7. The taxation of individuals who are resident but not solely or principally resident for income tax purposes

7.1. In January 2009, following consideration of the Department’s Report “Miscellaneous Amendments to the Tax Laws” (Billet II of 2009 at pages 49 – 77 inclusive) the States resolved that certain amendments should be made to those parts of the Income Tax Law dealing with the taxation of individuals who are resident but not solely or principally resident for income tax purposes.

7.2. In summary, the States approved revisions to the Income Tax Law, providing that an individual may elect to pay a minimum charge (such election being made on an annual basis) to be accompanied by a declaration that the individual had no Guernsey source income which would be subject to the deduction of tax under section 81A of the Law – essentially income from employment – and that his income from other Guernsey sources did not exceed £125,000.  This declaration would constitute the filing of a tax return for the relevant year of charge and no other income tax return would be required from that individual, as a matter of course.

The Department proposed that the minimum charge be set in the sum of £25,000 (which would be equivalent to the tax on Guernsey source income of £125,000 at the individual tax rate of 20%).

7.3. Subsequent to the States decision of January 2009, the Department has received representations from the Taxation Sub-Committee of the Guernsey Society of Chartered & Certified Accountants (“the Taxation Sub-Committee”) that rather than preventing an individual from paying the minimum charge, in the event that he has income chargeable to tax under section 81A or has income from other Guernsey sources exceeding £125,000, the individual should be permitted to make the election to pay the minimum charge but that such income should continue to be chargeable to tax, with the proviso that the minimum charge of £25,000 would be available to be offset against any resulting tax liability.  (The original proposal, in paragraph 2.1.8 of Billet II of 2009, that an individual making the election would not be entitled to any of the allowances, deductions or reliefs for underlying taxes, in computing his tax liability, that would otherwise have been available to him under the Income Tax Law, would continue to apply.)

7.4. The effect of the above would be that an individual making the election would be required to disclose details of his income from Guernsey sources, such a declaration constituting the filing of a tax return for the relevant year of charge (no other return being required as a matter of course).

7.5. In all other respects, the proposals relating to individuals who are resident but not solely or principally resident for income tax purposes, contained in Billet II of 2009, would be unaffected.

7.6. The Department does not consider that the above proposals, if accepted, would have a negative impact on the island’s general revenues.  Indeed, the removal of the restrictions on who may make the election to pay the minimum charge may result in more individuals doing so, which may have the effect of increasing general revenues.

7.7. As a consequence, the Department proposes that the revisions to the Income Tax Law, originally proposed in Billet II of 2009, be revised to reflect the representations received from the Taxation Sub-Committee, as detailed at paragraph 7.3. above.

7.8. In addition, and once again following representations received from the Taxation Sub-Committee, the Department proposes that the Income Tax Law should make it clear that the minimum charge of £25,000 would be regarded, for the purposes of the Income Tax Law, as a tax rather than a fee.  This is to ensure that an individual paying the minimum charge of £25,000, and who was required to demonstrate that he had been charged to tax in Guernsey in order to receive a credit for the amount paid against his liability to tax in another jurisdiction, should not have that claim denied on the basis that the Guernsey legislation was ambiguous as to whether or not the amount he had paid was a tax.

7.9. Furthermore, it has become apparent that the introduction of the facility for an individual to elect to pay a minimum charge may encourage the “export” of Guernsey bank accounts to other jurisdictions solely for the purposes of ensuring that any interest arising is not a Guernsey source of income (and thus the liability on the income would be covered by the minimum charge).

A similar possibility was encountered when the cap on the level of taxation paid by individuals was extended to Guernsey source income.  To counter that, the legislation provides that, for the purposes of the tax cap, Guernsey bank deposit interest is treated as if it arose from a non-Guernsey source.

To address the same issue in relation to the minimum charge, the Department proposes that, for the purposes of the minimum charge, Guernsey bank deposit interest would be treated as if it was income arising from a non-Guernsey source which had been remitted to the island.

8. Limited Liability Partnerships

8.1. At their meeting on 29 April 2009, the States approved the development of legislation to enable limited liability partnerships to be formed under Guernsey legislation (Billet XI of 2009 at page 760).

8.2. Under the Income Tax Law at present, partnerships are effectively treated as transparent vehicles and the individual partners are assessed and tax is charged on them as individuals.  The Department believes it is appropriate to maintain this treatment for limited liability partnerships.

8.3. To do so will require the addition of the necessary wording to the definition of “partnership” in the Income Tax Law and the introduction of a definition of “limited liability partnership”.

9. Permitting exempt bodies to hold interests in Guernsey companies

9.1. For 2008 et seq, the majority of Guernsey companies are taxable at the company standard rate (0%) with tax only being paid on the profits of those companies when it is distributed to a company’s Guernsey resident beneficial members (or, in certain circumstances, when the profits are deemed as distributed).

9.2. Some companies – principally banks and finance companies – have certain parts of their income taxable at the company intermediate rate (10%). 

9.3. In addition, some companies – principally those carrying on activities regulated by the Office of Utility Regulation and those deriving their income from land and buildings situated in Guernsey – pay tax at the company higher rate (20%).

9.4. For 2008 et seq, however, there remains an, albeit restricted, ability for certain companies or unit trusts to obtain exemption from tax.  This facility is now effectively restricted to collective investment schemes.

9.5. The conditions which a body has to satisfy in order to be exempt from tax are set out in the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989, as amended (“the Ordinance”).

9.6. If an exempt collective investment scheme was to beneficially own another company or, if that other company were a wholly owned subsidiary, that company would also be eligible for exemption from income tax, under the provisions of the Ordinance.

One of the principal conditions of approval is:

“That no investment or other property situated in Guernsey, other than a relevant bank deposit or an interest in another body to which an exemption from tax has been granted under this Ordinance, is acquired or held.”

9.7. The original restriction on exempt bodies holding shares in other Guernsey companies, which were not themselves exempt, was intended to ensure that those “subsidiary” companies would not escape taxation on income which would otherwise have been taxed at 20% (prior to 2008).

9.8. As the Guernsey resident beneficial members of an exempt company are taxable on the income of the company when it is distributed to them and recognising that, under the conditions of the Ordinance, an exempt body can currently beneficially own a company incorporated/registered in another jurisdiction, with that “subsidiary” being granted exemption from tax, the Department considers that where the income of the “subsidiary” company would be taxable at 0%, this prohibition no longer serves any practical purpose.

9.9. When exemption is granted, this is subject to a condition that exemption will apply only for so long as control of the exempt body does not lie with Guernsey residents.  This is to curtail possible exploitation of exempt status for tax avoidance purposes.  The Director would continue to impose this condition if the current prohibition was removed, again to ensure the prevention of avoidance of tax. 

9.10. The Department also considers that the prohibition on the ownership of shares in Guernsey companies, by exempt bodies, could be removed where the company has income taxable at the company intermediate rate (10%) or company higher rate (20%) provided that if the exempt body had beneficial ownership of a company with such sources of income, the “subsidiary” company would only be eligible for exemption from tax in relation to its income which was taxable at the company standard rate (0%).  In this way the “subsidiary” company would continue to be chargeable to tax on any profits taxable at 10% and/or 20%, as at present.

The Department proposes, therefore, that the Ordinance be amended accordingly.

10. Exemption from deemed distribution regime

10.1. In the Department’s Report “Miscellaneous Amendments to the Tax Laws” (Billet II of 2009) referred to in paragraph 7.1 above, the Department set out its proposals for the introduction of a facility to allow a company to be able to make an irrevocable election that it will distribute at least 65% of its trading profits, the consequence of which would be that the company may then be able to avoid the deemed distribution regime in relation to its undistributed income and also benefit from reduced reporting requirements, under the Income Tax Law.

10.2. In addition, the Report contained a proposal (paragraph 2.3.11 at page 62) that:

“where a company is already in existence at the time that the ability to make an election becomes effective, and makes an election prior to 30 June 2009, the election should be capable of being valid in relation to 2008 onward and [the] anti-avoidance provisions [set out in the Department’s Report] would not apply.”

10.3. Following the Resolution of the States to introduce such a facility, the Director received representations from interested parties that certain aspects of the proposal could prove to be unduly onerous in practice (see paragraph 11 below).  Finalisation of the Regulations that would be required to introduce the exemption from the deemed distribution regime has been unavoidably delayed.  As a consequence, the date by which an election would have had to be made, of 30 June 2009, became unachievable.

10.4. The Department proposes, therefore, that, once made, the relevant Regulations will specify that the election referred to above would have to be made by 31 December 2009 rather than 30 June 2009, in order to be valid for 2008 onwards.

10.5. As set out in paragraph 10.1, the Department’s original proposals, considered by the States, anticipated that the election made by a company would be irrevocable.  This was to avoid the inevitable complications, and possibilities of tax avoidance, that may arise if companies were able to elect to distribute at least 65% of their profits for some years and to withdraw that election for others.

10.6. Whilst the owners of a company may make an election in good faith, the fact that such an election is irrevocable may have the consequences of making disposal of that company difficult if the consequences of the election are not attractive to potential purchasers of the company.  This could mean that the making of the election, which is intended to reduce administrative burdens on companies from the zero/10 regime, may ultimately act to the company’s detriment.

10.7. As a consequence, the Department asks the States to agree that, notwithstanding that the original proposal was that the election should be irrevocable, the appropriate Regulations required in order to give effect to the election should provide that where in the course of any company’s accounting period there is a transfer of control, and that company has made an election referred to in paragraph 10.1 above, the company may, before the expiration of 12 months from the date that control of the company was transferred, notify the Director of Income Tax, in writing, that the election should cease to have effect from the date that control was transferred.

10.8. The consequences of the above would be that, from the date of the transfer of control, any undistributed income of the company would, once again, become subject to the provisions of the Income Tax Law relating to deemed distributions.  As a consequence there should be no detrimental effect on States revenues.

11. Tax Capping

11.1. At its January 2009 meeting, the States considered proposals, from the Department, to revise the provisions relating to the limiting of the liability of individuals (“the tax cap”).

11.2. Those proposals incorporated an anti-avoidance provision designed to prevent an individual “rolling up” the profits of a company in which they had an interest with a view to taking a substantial distribution of those profits during the course of a single tax year when the tax cap would apply (with the effect of thus limiting the liability to tax on those profits) (Billet II of 2009 at page 59). 

11.3. The solution proposed by the Department involved limiting the benefit of the tax cap to an individual, in respect of his Guernsey source income (other than bank deposit interest) to those companies which had elected to distribute at least 65% of their profits. 

11.4. Whilst the States resolved to accept the Department’s proposal, it has subsequently proven to be difficult to draft the necessary legislation without introducing overly complex provisions which, in the final analysis, may be limited to a relatively small number of individuals.

11.5. As a consequence, and in consultation with the Taxation Sub-Committee of the Guernsey Society of Chartered & Certified Accountants, the Director has formulated an alternative anti-avoidance provision which will have the combined benefits of protecting the island’s general revenues, will be more straightforward to legislate for and, finally, will be more straightforward to operate in practice.

11.6. Rather than linking the anti-avoidance provision to the necessity for a company to elect to distribute a certain element of its profits, the new anti-avoidance provision concentrates, instead, on the extent to which the profits being distributed originate from a year in which the individual’s income is not already subject to the tax cap.

11.7. The proposal is, therefore, that where a distribution is made by a company of profits from the carrying on of a business in Guernsey, and that distribution is income of a beneficial member for a year of charge to which the tax cap will apply, the following consequences will have effect:

• the amount of the additional tax, if any, that would have been payable by the beneficial member, had those Guernsey trading profits been distributed during the course of the year of charge for which they were assessable on the company would be calculated, and

• that amount of tax would then be payable, by the beneficial member, in the year of charge in which the distribution was made, notwithstanding that the beneficial member’s tax liability for that year of charge is otherwise limited under the tax capping provisions.

11.8. The effect of the above would be to negate any advantage gained by an individual “rolling forward” the profits of a company for distribution in a later year, solely for the purposes of taking advantage of the tax cap.

12. The Income Tax (Guernsey) (Employees Tax Instalment Scheme) (Amendment) Regulations, 2009

12.1. At present the Income Tax (Guernsey) (Employees Tax Instalment Scheme) Regulations 2007 allow the Director of Income Tax to collect unpaid tax through an individual’s wages, by allowing the amount unpaid to be added to the tax required to be deducted under the coding or direction notice.  The taxpayer’s consent is required to use this procedure for amounts in excess of £500.

12.2. The limit of £500 was set some time ago and the mechanism has proved to be a useful process for collecting unpaid tax, the advantage to the taxpayer being that it is collected over the course of a year rather than requiring direct payment.

12.3. The Department proposes that the limit be increased from the current £500 to £1,000, to further facilitate the collection of States revenues.

12.4. For some time, gang leaders who provide services of their gang to a main contractor, usually in the building industry, have been able to obtain gross payment where they can produce an exemption certificate (known as a “gold card”) to that contractor when receiving payment.

12.5. Exemption certificates are issued on application and require the production of a credit card style certificate on which the gang leader’s details, including a photograph, are printed.

12.6. In order to recoup some of the administrative costs required in producing and issuing these certificates, the Department has made amended Regulations which enable the Director to make a charge of £50 for an initial application or an application which is renewed after its expiry date; to encourage early renewal, a reduced fee of £25 if renewal is made before the previous certificate expires.

12.7. The attached Regulations contain the relevant provisions to enable the matters dealt with in the above paragraphs to be introduced.  Section 81A(5) of the Law requires approval by Resolution of the States before these Regulations may have effect.

13. Consolidation of the Income Tax Law

The Department proposes, for ease of reference, that the Income Tax Law, as a whole, be consolidated in order to simplify the burdensome system of identifying sections which has arisen as a consequence of the number of amendments made to the Income Tax Law since its enactment in 1975 (for example, section references such as “section 81A(2)(bA)” could be eliminated).  This is likely to be a major and resource intensive task, both for the Income Tax Office and for the Law Officers, and the Department does not suggest that it should take priority over other tax related work.

14. It is intended that, pursuant to section 1 of the Taxes & Duties (Provisional Effect) (Guernsey) Law 1992, a Projet de Loi enacted to implement the proposals contained in paragraphs 2 – 8 and 11 of this Report shall have effect as if it were a law sanctioned by Her Majesty in Council and registered on the records of the island of Guernsey, as follows:

• Paragraph 2, on and from 1 January 2010.

• Paragraph 3, on and from the date on which the Projet receives States approval.

• Paragraph 4, on and from 1 January 2008.

• Paragraph 5, on and from the date of registration of the Projet.

• Paragraphs 6 and 11, on and from the date of approval of the Projet by the States.

• Paragraph 7, for any year of charge after 2008.

• Paragraph 8, on and from the date of commencement of the Limited Liability Partnership Law.

15. Recommendations

The Department recommends the States to agree:

(a) to revise the Income Tax Law to transfer the benefit of income tax relief in respect of donations to charity from the donor to the recipient (subject to a de minimis contribution of £500 per annum, per charity, by each donor) and to increase the limit of donations that each individual may make and which would qualify for relief to £5,000 (£10,000 for married couples) (with transitional provisions for donations under deeds of covenant entered into prior to 1 January 2010) as set out in paragraph 2;

(b) to revise the Income Tax Law to provide that where a company writes off a loan this would not constitute a taxable distribution to the extent that the loan was taxed when it was originally advanced, as set out in paragraph 3;

(c) to permit the “flow through” of overseas tax suffered by a company, to the beneficial member when the relevant income is distributed or deemed as distributed to the beneficial member, for the purposes of unilateral relief, with effect from 1 January 2008, as set out in paragraph 4;

(d) to transfer the responsibility for the hearing of income tax appeals from the Treasury and Resources Department to the Guernsey Tax Tribunal, as set out in paragraph 5;

(e) to give power to the Policy Council to make Regulations, as it sees fit, concerning the formal procedure and administration of income tax appeals (including provisions relating to the costs of an appeal), as set out in paragraph 5;

(f) to provide for the appointment of a Deputy Clerk to the Guernsey Tax Tribunal and to permit the deferral of notification of a delay appeal, to the Tribunal, until such time as the Director of Income Tax or the appellant so require, as set out in paragraph 5;

(g) to repeal the taxation provisions relating to certain payments made by the Social Security Department which have become outdated with the passage of time, as set out in paragraph 6;

(h) to make certain changes to the regime for the taxation of individuals who are resident but not solely or principally resident for income tax purposes, as set out in paragraph 7;

(i) to extend the definition of “partnership” in the Income Tax Law to include limited liability partnerships (and to introduce a definition of “limited liability partnership” accordingly), as set out in paragraph 8;

(j) to repeal the present restriction on an exempt body holding shares in a Guernsey company, which itself is not exempt (with appropriate provisions to ensure that such companies having income taxable at 10% or 20% would continue to pay tax, at those rates, on relevant sources of income), as set out in paragraph 9;

(k) to replace the date of 30 June 2009 with the date 31 December 2009, in respect of an election for 2008 onwards for the purposes of the exemption from the deemed distribution regime, for company profits, and to provide that an election may be treated as revocable where there has been a transfer of control of a company, as set out in paragraph 10;

(l) to provide for an anti-avoidance provision, in connection with the rules for the limiting of the liability of individuals, as set out in paragraph 11, and to provide that the tax credit which may attach to a distribution made by a company, of its profits which arose prior to 2008, is not repayable;

(m) to approve, under section 81A(5) of the Law, the Income Tax (Guernsey) (Employees Tax Instalment Scheme) (Amendment) (No 2) Regulations, 2009, as set out in paragraph 12 and appended to this Report;

(n) to direct the consolidation of the Income Tax Law, as set out in paragraph 13;

(o) to direct the preparation of such legislation as may be necessary to give effect to their above decisions.

Yours faithfully

C N K Parkinson
Minister