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Tax Review

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The Tax Review is part of a number of workstreams which together seek to ensure the sustainability of the States' finances and public services in light of increasing long-term pressures. These pressures predate, but have been worsened by, the COVID-19 pandemic. The Tax Review forms a key part of the Government Work Plan.

Why is Guernsey's tax system being reviewed?

Guernsey has an ageing population meaning that in the future there will be more people needing the long-term health and care services that the States provide. These pressures have already begun to place pressure on the States' budget and this pressure will continue to grow. About 60% of the money the States spends is in some way linked to the aging of the population. At the same time, as more people reach retirement age, projections suggest a risk of a decrease in Guernsey's working population, whose income tax and social security contributions funds a significant portion of the costs to run and maintain the States' services.

Whilst there are many ways to tackle this problem, such as cutting costs through the Public Service Reform's work to digitise and streamline the States' services or promoting economic growth, no single solution will be enough. All three approaches will be needed and restructuring of Guernsey's tax system needs to form part of the solution. The aim of this Review is to ensure that Government finances are sustainable over the long term and seeks to answer the question 'Is it necessary to increase government revenues, and if so, what is the best way to do it?'.

Where does States Revenue come from?

About two thirds of the money raised by the States comes from income tax and social security contributions, both of which are charged against people's income. Taxes on company profits are the third largest contributor to revenues, comprising about 10% of the total despite the 0% headline rate applied to most companies. All other taxes, such as TRP and duties on fuel, alcohol and tobacco, bring in about 12% of revenues; the rest coming from other income streams such as fees and charges for various services and rents. Unlike most jurisdictions, Guernsey does not currently have a Goods and Services Tax ('GST').

What changes are being considered?

The States is considering changes to existing taxes such as income tax and social security contributions, but it is also looking at other forms of tax such as a health tax or GST. These taxes have different strengths and weaknesses, and the role of the Tax Review is to consider what combination of these represents the best approach to raising revenue considering both the economic and social impact they might have.

A review of corporate tax is happening as a parallel work stream. Guernsey has committed to the OECD's new framework for international tax reform that applies new rules to the taxation of Multinational Enterprises, seeking to address issues that are linked to the increasing globalisation and digitalisation of the economy. It is expected that some changes to the corporate tax system will be needed as a result. At this time, more progress is needed on the international agenda before it will be possible to confirm what this may look like. An assumption has been made by the Tax Review Steering Group that some additional revenue will be raised through changes to the corporate tax system. These changes will need to comply with the Fiscal Policy Framework which sets high level principles for how Guernsey should manage its finances. It includes a limit to the amount of revenue the States can raise from the economy set at 24% of GDP. This was set recognising that we had long term pressures that would need to be paid for and is just over 2% of GDP higher than the current level. This is equal to about £70-£75m.

More Frequently Asked Questions on the Tax Review are available here: Tax Review - Frequently Asked Questions.

The Tax Review Steering Group's recommendations

The Tax Review is being led by members of the Policy & Resources Committee and the Committee for Employment & Social Security, who form the Tax Review Steering Group. The Steering Group have compiled three options describing how the States might raise revenues:

  • Option 1

    •  
      • Apply an income-based health tax at 3%; and
      • Change the Social Security contribution system so that it is fairer and more progressive and use this to raise more money.
  • Option 2

    •  
      • Apply a Goods and Services Tax (GST) that will gradually increase to up to 8% with mitigating measures to protect low-income households;
      • Increase the personal income tax allowance; and
      • Change the Social Security contribution system so that it is fairer and more progressive but without raising any more money.
  • Option 3

    •  
      • Apply a Goods and Services Tax (GST) that will gradually increase to up to 5% with smaller mitigating measures to protect low-income households;
      • Make a smaller increase in the personal income tax allowance; and
      • Change the Social Security contribution system so that it is fairer and more progressive and use this to raise more money.

This Social Security contribution system restructure will ensure that everyone gets access to an allowance on their contributions (like your income tax allowance), and everyone will be assessed on the same definition of income.

Each of the three options include the assumption that additional revenue will be raised through changes to the corporate tax system.

Next steps

The States debated a Tax Review green paper in October 2021 where members expressed a range of views and suggestions.  They agreed that the Policy & Resources Committee should engage further with the community and investigate more options for raising revenue before returning with more detailed proposals in July 2022.

Downloads

Tax Review - Policy Letter

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